Annual Financial Report

RNS Number : 9913S

Pacific Horizon Investment Tst PLC

20 September 2010

 

PACIFIC HORIZON INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 July 2010 of Pacific Horizon Investment Trust PLC has been submitted electronically to the National Storage Mechanism (which replaced the UKLA's Document Viewing Facility on 1 September 2010) and will shortly be available for inspection at http://www.hemscott.com/nsm.do

The Annual Report and Financial Statements for the year ended 31 July 2010 including the Notice of Annual General Meeting is also available on the Pacific Horizon's page of the Baillie Gifford website at:

www.pacifichorizon.co.uk

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 July 2010 which require to be published by DTR 4.1 is set out on the following pages.

Baillie Gifford & Co

Company Secretaries

20 September 2010

PACIFIC HORIZON INVESTMENT TRUST PLC

Chairman's Statement

Performance

In the year to 31 July 2010 net asset value per share increased by 20.9%, compared to a 17.3% rise in the MSCI All Country Far East ex Japan Index in sterling terms.

Performance over the Company's year was good and can be attributed in main to stock selection. Top contributors to performance were diverse and ranged from Baidu, a Chinese internet company, to Kunlun Energy, a Chinese oil and gas business, and Li & Fung, a premier supply chain management company in the region. Stock picking in the markets of Hong Kong and China was strong, assisted by one of our holdings, Wheelock Properties, being privatised by its parent at a substantial premium. Negative contributors to performance were also varied with Korean and Thai holdings the main detractors. The holdings in some of the more traditionally cyclical businesses such as Hyunjin Materials, a Korean casting and forging business, and Mermaid Maritime, a Thai oil services business, fared particularly badly. The Managers' Overview and the Managers' Portfolio Review contain a more detailed explanation, together with a summary of the performance of the principal markets in which the Company is invested and the Managers' comments on them.

There was no gearing during the year and at the year end cash was equal to 2.2% of shareholders' funds. 

Earnings per share fell by 32.4% to 1.65p from 2.44p for last year. The Board is recommending that a dividend of 1.30p should be paid.

 

Share buy-back

During the year we did not buy back any shares but market conditions may change and it may in the future be to the advantage of shareholders for the Company to repurchase and cancel shares. We will therefore be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares at the forthcoming Annual General Meeting ('AGM'). 

 

Changes to the Board

One new Director has joined the Board during the year. Edward Creasy, who is involved with several insurance businesses at senior level, joined us in March. His addition strengthens the breadth and depth of your Board and I invite shareholders to ratify his appointment at the AGM.

At the conclusion of your Company's AGM I will be resigning as Chairman and standing down from the Board. I do so because having been Chairman since 2004 I believe I have contributed all I can and it is time for a change in the interests of the Company. In the last two years two new Directors have joined the Board and I welcome this infusion of fresh blood and new ideas. I am delighted that the Board has agreed that Jean Matterson will become the Company's next Chairman. She has very relevant skills and experience and I wish her and the Board, supported by our excellent Managers, continued success.

 

Outlook

The starting point for the Asia Pacific region is one of strength with features pointed to at this time last year such as low leverage, accommodating fiscal and monetary policies, ample liquidity and returning consumer and business confidence still in place. At the margin, governments and central banks in a number of countries in which we invest have adopted tighter monetary and fiscal policies. However this is in the face of stronger growth and therefore appears a sensible course of action. Having weathered admirably the most vicious downturn since the Asian financial crisis the region appears well placed to capitalise on the many structural factors that should underpin growth in the years and decades to come. 

Features such as urbanisation, industrialisation, the building of infrastructure, the demographic profile and the prospects of a more active consumer, to name a few, generate a very exciting backdrop for investment. The universe of investible companies is broadening and deepening giving more opportunities to invest in high quality businesses benefiting from the growth potential the region offers. Reinforced by a Board visit earlier this year to companies in mainland China and Hong Kong, your Board and Managers remain optimistic about the long term outlook for the region.

Peter Mackay

Chairman

8 September 2010

Past performance is not a guide to future performance.

PACIFIC HORIZON INVESTMENT TRUST PLC

Managers' Overview

In the year to 31 July 2010 markets in the region have performed well, especially for sterling based investors. The best performing markets in sterling terms were Indonesia and Thailand, both up over 50%. The poorest performing markets in sterling terms were China followed by Vietnam and then Hong Kong. The Chinese A-share market, where we have no direct exposure, was the weakest regional market during the year, falling over 20% in sterling terms. A geographical review can be found under the Managers' Portfolio Review.       

There have been only minor changes in the distribution of assets by geography. Small increases have been made to stocks in India, South Korea and Indonesia funded in the main through reductions in Hong Kong and China, Thailand and the Philippines. By industrial sector, changes have also been relatively minor. The largest increases have been in the Financials and Consumer Goods sectors, with reductions in the Oil and Gas, Industrials and Telecommunications sectors. The reduction in Telecommunications represents a reversal of actions noted a year ago and is as a consequence of the availability of more attractive opportunities in other sectors, while the other changes continue the trends of the previous year. As ever, these changes are driven by the merits of individual stocks and not an overarching top down view. 

The most significant feature of the first half of the Company's year was the continued recovery from the global financial crisis. Most Asian economies, boosted by supportive government policies and strong balance sheets, continued to recover faster than widely expected. Domestic demand has been the key driver of the strong rebound, with both investment and consumption showing strong growth. During the second half of the Company's year there has been a sizeable rebound in trade, with the economies of the region well positioned to benefit from this. In the face of stronger growth it is therefore encouraging to see governments and central banks engaged in incremental tightening of fiscal and monetary policy before excesses arise. Indeed, inflationary pressures, which started to concern earlier in the year, look to have dissipated for now, although several countries could be vulnerable to future price inflation. In aggregate, the strength of the economies of the Asia Pacific Region is commendable and provides a sound base from which the companies in which we invest are able to capitalise on the many positive structural factors underpinning future growth.

Over the past year we have continued to invest in companies with strong growth prospects and sustainable competitive advantages which trade at low valuations relative to their prospects. We have maintained a fully invested position throughout the year and at the end of the year the cash balance was 2.2% of shareholders' funds.

PACIFIC HORIZON INVESTMENT TRUST PLC

 

Managers' Portfolio Review

Hong Kong and China

The Chinese economy has performed well over the past year, showing continued recovery from the low seen in early 2009. As an example, GDP growth in the first two quarters of the calendar year 2010 reached 11.9% YoY and 10.3% YoY respectively. Domestic demand has been strong and will remain the key driver of economic growth. Investment spending remains robust, albeit moderating, whilst consumption has been very healthy, particularly in consumer discretionary areas. More recently, exports have been rebounding, although this has more to do with China's trading partners than internal strength. Against this backdrop the Chinese stockmarkets have been the poorest performers in the Asia Pacific Region and, in particular, the domestic Chinese A-share market has been very weak. It is not easy to explain this weakness. As early as late 2009 the Chinese government started to withdraw some of the stimulus measures, for instance by reining in bank lending, and this was followed in early 2010 with measures to tighten liquidity in the banking system through reserve requirement increases. Since this time the government has been performing a delicate balancing act, aiming to deliver economic growth at the appropriate level without causing the excesses that were so damaging just a few years ago. Careful regulation and tightening in the property market has been a notable feature. Other reasons for the weak stockmarket performance could be continued concerns regarding investment in unproductive capacity, which we do not believe is widespread, and concern about the treatment of foreign companies investing in China, most starkly presented by Google's travails. Whilst these factors have weighed on the market in the short term, they do not in aggregate amount to a serious concern. More recently the government has broken the peg to the US dollar, in place since the onset of the financial crisis. With the economy in good shape there is much to be optimistic about, not least given the buoyant outlook for many of the companies in which we invest.

The Hong Kong stockmarket was also a relatively poor performer, which is unsurprising given its proximity to mainland China and the number of Chinese businesses listed there. It remains one of China's premier financial hubs with further steps to internationalise the Renminbi undertaken during the year. On corporate news we have had good results from two of our larger holdings ASM Pacific Technology, a semiconductor equipment manufacturer, and Li & Fung, a supply chain manager. 

There were a number of transactions during the Company's year in Hong Kong and China.  New positions taken include China Life Insurance, the leader in the immature and rapidly growing life insurance industry, Geely Automobile, a leading domestic automobile manufacturer, and Golden Meditech, a niche healthcare business. Following a lengthy pause, the IPO market once again flourished and we have added some new holdings, including China Longyuan Power, a leading wind farm operator in China and SouthGobi Resources, a coal producer. Early in the Company's year we made several sales of lower conviction holdings including China Shipping Development, a shipping company, China Railway Group, a construction business, and Tian An China, a property company.

 

Korea

Relations with its Northern neighbour took a distinct turn for the worse earlier this year with the sinking of a South Korean naval vessel, apparently by the North. Whilst relations have always been somewhat tense, this action is viewed widely as an escalation and cause for concern. We acknowledge the risks, but feel that regional and international political pressures will likely keep the North Korean situation in check. We have made several changes to the Korean holdings over the past year. New purchases have included Hyundai Marine and Fire Insurance, a leading insurance company, Mirae Asset Securities, a leading broker and Hyundai Mobis, an auto parts supplier. The only sale has been the shipbuilder Samsung Heavy Industries.

Taiwan

Progress in removing barriers to full economic integration with the mainland following the landmark cross-strait agreements in April 2009 has been slow. Whilst there was an initial flurry of activity most deals are awaiting regulatory approval and the rate of announcements has moderated. We maintain our view that improving relations between Taiwan and China are likely to generate investment opportunities given time and indeed in late June the signing of the Economic Cooperation Framework Agreement gives cause for optimism. Looking at Taiwan itself, the economy has been rebounding strongly with technology companies bouncing back as external demand has returned. Transactions have included the complete sale of E Ink (formerly Prime View International) as we believe the competitive situation is likely to deteriorate whilst making a new purchase of Phison Electronics, a key beneficiary of NAND Flash memory demand.

Singapore

Of all the countries we invest in, Singapore has shown the sharpest rebound from the downturn.  Q2 GDP growth reached 18.8% YoY, whilst estimates for 2010 have been revised up markedly. Stockmarket performance has been less impressive, although sterling based investors have fared well owing to the strength of the Singapore dollar. Sales have been made of China Milk, a dairy products business, and Jaya Holdings, a niche shipbuilder and a new purchase has been made of SATS Limited, which provides a number of ground services for airlines whilst also expanding into the wider catering market. 

Indonesia

The Indonesian market was a very strong performer during the Company's year, both in local and sterling currency terms. The political environment has been stable and efforts to tackle corruption have continued. The banks in which we have holdings, Bank Mandiri, Bank Rakyat and Bank Negara, a new holding bought during the year, performed strongly in an environment  in which growth was strong and credit quality concerns dissipated. During the year we made a small reduction to PT Telekomunikasi, a leading telecommunications operator.

India

Since the positive election result last year major steps forward have included the further deregulation of the fuel markets, moving more in line with international pricing, a number of indications that new banking licences will be issued sooner rather than later and real steps forward for infrastructure spending. This progress is very encouraging and gives a number of opportunities for private sector companies. Significant changes in the portfolio over the year have included increasing the weighting in Mahindra & Mahindra, a conglomerate with a focus on tractors and automobiles, and a new holding in Patni Computer Systems, an IT services provider. 

Malaysia

The Malaysian market has performed well in both local and sterling currency terms.  Economic performance has been decent, with trade data showing strong sequential improvement, leading to Malaysia being one of the first countries in the region to start monetary tightening. The only significant change to the portfolio over the past year has been the sale of Sime Darby, a state owned conglomerate.

Thailand

Despite question marks over the health of the King and the severe social unrest starting in April Thailand has been the best performing market in local currency terms and the second strongest in sterling terms. The domestic economy has performed well despite the political tensions and this, combined with the cheapest valuations in the region, seems to have caught investors' attention. We have made some small reductions to holdings in Thailand as valuations are now less appealing.

Vietnam

The Vietnamese market was one of the weaker performers over the financial year, not helped by two devaluations of the Dong. The economy remains in a precarious situation with concerns about the country's debt levels, the balance of payments and its credit quality all weighing. On a brighter note growth has been resilient and inflation is under control, setting the scene for perhaps a brighter outlook.

Philippines

The Philippines was a strong performer both in local and sterling currency terms. Like other ASEAN markets, the Philippines has performed well since the downturn with economic growth accelerating into 2010 and inflation well under control. A peaceful Presidential election was also a welcome event.

THIRTY LARGEST EQUITY HOLDINGS at 31 July 2010

Name	Country	Business	Value £'000	% of total assets‡
Samsung Electronics	Korea	Semiconductor manufacturer	6,339	4.9
Kunlun Energy Company	HK/China	Oil and gas exploration and production	3,850	3.0
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor manufacturer	3,788	3.0
Hon Hai Precision Industries	Taiwan	Electronic manufacturing services company	3,242	2.5
Parkson Holdings	Malaysia	Department store owner and operator	3,188	2.5
Li & Fung	HK/China	Supply chain management	3,168	2.5
ASM Pacific Technology	HK/China	Semiconductor equipment manufacturer	3,052	2.4
Singapore Exchange	Singapore	Stock exchange	3,033	2.4
CNOOC	HK/China	Oil and gas exploration and production	2,696	2.1
Dongfang Electric	HK/China	Power equipment manufacturer	2,682	2.1
Mahindra & Mahindra	India	Indian conglomerate	2,635	2.0
Hyundai Mobis	Korea	Automotive parts producer	2,373	1.8
Baidu	HK/China	Internet search provider	2,287	1.8
PT Telekomunikasi	Indonesia	Diversified telecommunications provider	2,253	1.8
SATS Limited	Singapore	Airport services provider	2,168	1.7
Kuala Lumpur Kepong	Malaysia	Palm oil producer and refiner	2,062	1.6
ZTE	HK/China	Telecommunications equipment provider	2,017	1.6
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	1,992	1.6
CapitaMall Trust	Singapore	Real estate investment trust	1,991	1.6
Samsung Fire & Marine	Korea	Non-life insurance provider	1,930	1.5
Hang Seng Bank	HK/China	Banking services	1,888	1.5
Renhe Commercial	HK/China	Developer and operator of retail property	1,758	1.4
Pacific Basin Shipping	HK/China	Shipping company	1,713	1.3
Sembcorp Marine	Singapore	Shipbuilder	1,711	1.3
China Life Insurance	HK/China	Life insurance provider	1,674	1.3
Wumart Stores	HK/China	Supermarket operator	1,654	1.3
China Life Insurance (Taiwan)	Taiwan	Life insurance provider	1,651	1.3
China National Building Material	HK/China	Building materials manufacturer	1,625	1.3
Hidili Industry International   Development	HK/China	Coal producer	1,616	1.2
China Petroleum & Chemical   Corporation	HK/China	Integrated oil and gas producer	1,525	1.2
			73,561	57.5

HK/China denotes Hong Kong and China

All stocks are listed overseas.

‡ Total assets less current liabilities.

DISTRIBUTION OF ASSETS

		At 31 July 2010 %		At 31 July 2009 %
Equities:	Hong Kong and China	40.1		43.6
	Korea	14.5		11.3
	Taiwan	11.8		11.4
	Singapore	9.7		10.2
	Indonesia	6.5		5.6
	India	5.9		3.2
	Malaysia	4.7		5.5
	Thailand	3.4		5.0
	Vietnam	1.2		1.0
	Philippines	0.0		1.3
Total equities		97.8		98.1
Net liquid assets		2.2		1.9
Total assets at fair value‡		100.0		100.0

‡ Total assets less current liabilities.

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 the Companies Act 2006. Mr Gerald Smith, who was appointed as a Director of the Company on 1 February 2009, is a partner of Baillie Gifford & Co. Baillie Gifford & Co are appointed as investment managers and secretaries to the Company. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. The fee in respect of each quarter is 0.25% of total assets less current liabilities. The details of the management fee are as follows:

	2010 £'000		2009 £'000
Investment management fee	1,224		814

PRINCIPAL RISKS AND UNCERTAINTIES

As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of maximising capital appreciation, from a focused and actively managed portfolio of investments from the Asia-Pacific region including the Indian Sub-continent. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise short term volatility. Risk provides the potential for both losses and gains. In assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio.

The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. During the year to 31 July 2010 no such transactions were entered into.

The Company's Managers may not enter into derivative transactions without the prior approval of the Board.

Currency Risk

The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.

The Investment Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 July 2010	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	47,857	2,709	(150)	50,416
Korean won	18,567	-	35	18,602
Taiwan dollar	15,079	10	178	15,267
Singapore dollar	12,999	-	108	13,107
Indonesian rupiah	8,293	-	8	8,301
Indian rupee	7,586	-	33	7,619
Malaysian dollar	5,981	-	14	5,995
Other overseas currencies	8,783	61	54	8,898
Total exposure to  currency risk	125,145	2,780	280	128,205
Sterling	-	98	(364)	(266)
	125,145	2,878	(84)	127,939

*      Includes net non-monetary assets of £10,000.

At 31 July 2009	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	43,009	1,053	-	44,062
Korean won	12,006	-	6	12,012
Taiwan dollar	12,020	-	232	12,252
Singapore dollar	11,831	926	83	12,840
Indonesian rupiah	5,927	-	7	5,934
Indian rupee	3,416	-	-	3,416
Malaysian dollar	5,781	-	8	5,789
Other overseas currencies	9,841	11	1	9,853
Total exposure to  currency risk	103,831	1,990	337	106,158
Sterling	-	129	(436)	(307)
	103,831	2,119	(99)	105,851

*      Includes net non-monetary assets of £10,000.

Currency Risk Sensitivity

At 31 July 2010, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2009.

	2010 £'000		2009 £'000
Hong Kong dollar	2,521		2,203
Korean won	930		601
Taiwan dollar	763		613
Singapore dollar	655		642
Indonesian rupiah	415		297
Indian rupee	381		171
Malaysian dollar	300		289
Other overseas currencies	445		492
	6,410		5,308

Interest Rate Risk

Interest rate movements may affect directly:

• the fair value of any investments in fixed interest rate securities;

• the level of income receivable on cash deposits;

• the fair value of any fixed-rate borrowings; and

• the interest payable on any variable rate borrowings.

Interest rate movements may also impact upon the market value of investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.

The Company may finance part of its activities through borrowings at approved levels. The amount of any such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value, on the assumption that the share price is unaffected by movements in interest rates.

The cash deposits generally comprise call or short term money market deposits of less than one month which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.

Interest Rate Risk Sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's profit for the year ended 31 July 2010 would increase/decrease by £29,000 (2009 - increase/decrease by £21,000). This is mainly due to the Company's exposure to interest rates on its floating rate cash balances.

Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index. Investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

Fixed asset investments are valued at bid prices which equate to their fair value. A full list of the Company's investments is given on pages 13 and 14 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a list of the 30 largest equity investments by their aggregate market value are contained in the Managers' Portfolio Review Section.

97.8% of the Company's net assets are invested in equities. A 5% increase in quoted equity valuations at 31 July 2010 would have increased total assets and total return on ordinary activities by £6,257,000 (2009 - £5,192,000). A decrease of 5% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.

The Company has the power to take out borrowings, which give it access to additional funding when required.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

• Where the Investment Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question.

• The Company's listed investments are held on its behalf by the Company's custodian, The Bank of New York Mellon (acting as agent). Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board.

• Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

• The creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers.

• Cash is only held at banks that have been identified by the Managers as reputable and of high credit quality.

Credit Risk Exposure

The maximum exposure to credit risk at 31 July was:

	2010 £'000	2009 £'000
Cash and short term deposits	2,878	2,119
Debtors and prepayments	445	350
	3,323	2,469

The maximum exposure in cash during the year was £3,974,000 (2009 - £7,613,000) and the minimum £366,000 (2009 - £278,000). None of the Company's financial assets are past due or impaired.

Fair Value of Financial Assets and Financial Liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet:

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of Section 1159 of the Corporation Tax Act 2010 (formerly Section 842 of ICTA 1988) could lead to the Company being subject to tax on capital gains. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of Section 1159 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Operational/Financial Risk - failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.

Discount Volatility - the discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed in note 12 in the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 17 in the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 22 and 23 in the Annual Report and Financial Statements.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent; and

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable laws and regulations, the Directors are responsible for preparing a Directors' Report (including a Business Review), a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Managers section confirm that, to the best of their knowledge:

• the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

PETER MACKAY

8 September 2010

INCOME STATEMENT

	For the year ended 31 July 2010				For the year ended 31 July 2009
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	22,355	22,355		-	(1,017)	(1,017)
Currency (losses)/gains	-	(153)	(153)		-	803	803
Income (note 2)	2,999	-	2,999		3,579	-	3,579
Investment management fee	(1,224)	-	(1,224)		(814)	-	(814)
Other administrative expenses	(293)	-	(293)		(249)	-	(249)
Net return on ordinary activities before taxation	1,482	22,202	23,684		2,516	(214)	2,302
Tax on ordinary activities	(187)	-	(187)		(601)	-	(601)
Net return on ordinary activities after taxation	1,295	22,202	23,497		1,915	(214)	1,701
Net return per ordinary share (note 3)	1.65p	28.36p	30.01p		2.44p	(0.27p)	2.17p

 The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BALANCE SHEET

	At 31 July 2010		At 31 July 2009
	£'000	£'000	£'000	£'000
FIXED ASSETS Investments held at fair value through profit or loss		125,145		103,831
CURRENT ASSETS
Debtors	445		350
Cash and short term deposits	2,878		2,119
	3,323		2,469
CREDITORS: Amounts falling due within one year	(529)		(449)
NET CURRENT ASSETS		2,794		2,020
TOTAL ASSETS LESS CURRENT LIABILITIES		127,939		105,851
CAPITAL AND RESERVES
Called-up share capital		7,829		7,829
Share premium		3,166		3,166
Special distributable reserve		13,233		13,233
Capital redemption reserve		17,964		17,964
Capital reserve		81,125		58,923
Revenue reserve		4,622		4,736
SHAREHOLDERS' FUNDS		127,939		105,851

NET ASSET VALUE PER ORDINARY SHARE	163.42p	135.21p
ORDINARY SHARES IN ISSUE	78,287,002	78,287,002

The Financial Statements of Pacific Horizon Investment Trust PLC (Company Registration No. 2342193) were approved and authorised for issue by the Board and signed on 8 September 2010.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

For the year ended 31 July 2010

	Note	Called-up share capital £'000	Share premium £'000	Special distributable reserve £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2009		7,829	3,166	13,233	17,964	58,923	4,736	105,851
Net return on ordinary activities after taxation		-	-	-	-	22,202	1,295	23,497
Dividends paid during the year	4	-	-	-	-	-	(1,409)	(1,409)
Shareholders' funds at 31 July 2010		7,829	3,166	13,233	17,964	81,125	4,622	127,939

For the year ended 31 July 2009

	Note	Called-up  share capital £'000	Share premium £'000	Special distributable reserve £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2008		7,829	3,166	13,233	17,964	59,137	3,839	105,168
Net return on ordinary activities after taxation		-	-	-	-	(214)	1,915	1,701
Dividends paid during the year	4	-	-	-	-	-	(1,018)	(1,018)
Shareholders' funds at 31 July 2009		7,829	3,166	13,233	17,964	58,923	4,736	105,851

*The capital reserve balance at 31 July 2010 includes investment holding gains on fixed asset investments of £31,504,000 (2009 - £19,716,000).

CASH FLOW STATEMENT
		For the year ended 31 July 2010			For the year  ended 31 July 2009
	Note	£'000	£'000		£'000		£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	7			1,153			2,886
TAXATION
Corporation tax paid		(140)				(632)
TOTAL TAX PAID				(140)			(632)
FINANCIAL INVESTMENT
Acquisitions of investments		(30,596)				(39,589)
Disposals of investments		31,751				34,763
NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT				1,155			(4,826)
EQUITY DIVIDEND PAID	4			(1,409)			(1,018)
INCREASE/(DECREASE) IN CASH				759			(3,590)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
Increase/(decrease) in cash in the year				759			(3,590)
MOVEMENT IN NET FUNDS IN THE YEAR				759			(3,590)
NET FUNDS AT 1 AUGUST				2,119			5,709
NET FUNDS AT 31 JULY				2,878			2,119

NOTES
1.	The financial information for the year to 31 July 2010 and has been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 July 2009. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. The Company has no loans. In accordance with the Company's Articles of Association, shareholders have the right to vote on the continuation of the Company every five years, the next vote being in 2011. The Directors have no reason to believe that the continuation resolution will not be passed next year. After making enquiries and considering the future prospects of the Company and notwithstanding the above, the financial statements have been prepared on the going concern basis as it is the Directors' opinion that the Company will continue in operational existence for the foreseeable future. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
			2010 £'000				2009 £'000
2.	Income
	Income from investments		2,999				3,559
	Interest receivable		-				20
			2,999				3,579
			2010 £'000				2009 £'000
3.	Net return per ordinary share
	Revenue return		1,295				1,915
	Capital return		22,202				(214)
	Total return		23,497				1,701
	Weighted average number of ordinary shares in issue		78,287,002				78,287,002
	Net return per ordinary share figures are based on the above totals for revenue and capital and the weighted average number of ordinary shares in issue each period. There are no dilutive or potentially dilutive shares in issue.
			2010	2009		2010		2009
						£'000		£'000
4.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 4 November 2009)		1.80p	1.30p		1,409		1,018
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 (formerly Section 842 of ICTA 1988) are considered. The revenue for the year available for distribution by way of dividend  is £1,295,000 (2009 - £1,915,000).
	Dividends paid and proposed in respect of the financial year:
	Proposed final dividend per ordinary share (payable 1 November 2010)		1.30p	1.80p		1,018		1,409
	If approved, the proposed final dividend of 1.30p per ordinary share for the year ended 31 July 2010 will be paid on 1 November 2010 to shareholders on the register at the close of business on 8 October 2010. The ex-dividend date is 6 October 2010. The Company's Registrars offer a Dividend Reinvestment Plan and the final date for elections for this dividend is 13 October 2010.

NOTES (Continued)
5.	The Company had no borrowings at 31 July 2010 or 31 July 2009.
6.	The Company has authority to allot shares under Section 551 of the Companies Act 2006. The Board has authorised the use of this authority to issue new shares at a premium of not less than 5% in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the years to 31 July 2010 and 31 July 2009 no shares were issued. The Company has authority to buy back its ordinary shares. The authority was last renewed at the Annual General Meeting on 2 November 2009 in respect of 11,735,221 shares (equivalent to 14.99% of its issued share capital at that date).  In the year to 31 July 2010 no ordinary shares were bought back. As a result at 31 July 2010 the Company's authority to buy back its own shares remains unchanged at 11,735,221 ordinary shares.
			2010 £'000		2009 £'000
7.		RECONCILIATION OF NET RETURN BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
		Net return on ordinary activities before taxation	23,684		2,302
		(Gains)/losses on investments - securities	(22,355)		1,017
		Currency losses/(gains)	153		(803)
		Amortisation of fixed interest book cost	-		(326)
		(Increase)/decrease in accrued income	(52)		39
		Increase in debtors	(10)		-
		Increase/(decrease) in creditors	70		(6)
		Realised currency (loss)/gain	(153)		803
		Overseas tax suffered	(184)		(140)
		NET CASH INFLOW FROM OPERATING ACTIVITIES	1,153		2,886
8.	The Company incurred transaction costs on purchases of £90,000 (2009 - £84,000) and on sales of £83,000 (2009 - £79,000).
9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2010. The financial information for 2009 is derived from the statutory accounts for 2009, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2009 and the 2010 accounts, their report for both years was unqualified and did not contain a statement under Section 495, 496 and 497 of the Companies Act 2006. The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held at 11.00am on Monday 25 October 2010.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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