Annual Financial Report

RNS Number : 9749O

Pacific Horizon Investment Tst PLC

26 September 2013

 

PACIFIC HORIZON INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 July 2013 of Pacific Horizon Investment Trust PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements for the year ended 31 July 2013 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 2013 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co

Company Secretaries

26 September 2013

Chairman's Statement

Performance

In the year to 31 July 2013 the Company's net asset value per share (NAV) rose 5.8% compared to a rise in the comparative index, MSCI All Country Asia ex Japan Index (in sterling terms), of 9.1% over the same period. The share price increased by 4.8% and the discount widened from 13.1% to 13.9%. The Managers' Review below contains a detailed explanation of performance along with thoughts on markets.

Gearing was not used during the year and, at the year end, cash and equivalents were equal to 1.4% of shareholders' funds. Earnings per share decreased from 1.97p to 1.66p. The Board is recommending that a dividend of 1.50p should be paid, the same as last year.

The performance of the Company over the year was unsatisfactory when compared to that of our competitors and against our chosen comparative index. The reasons for this are explained in the Managers' Review. The Board considers that, subject to receiving the necessary shareholder approval at the forthcoming AGM, it is appropriate to introduce a bi-annual tender offer at a 2% discount to NAV, less costs, if the discount averages more than 9% during the six month periods to 31 January and 31 July of each year (or the preceding business day), the discount being calculated by reference to the fair value cum income NAV. Each tender offer would be for up to 5% of the Company's shares and the first such tender would be in respect of the six month period to 31 January 2014. The Board does not believe that the continuous buying back of shares in the market achieves the same benefits for shareholders as a bi-annual tender: it therefore proposes to give shareholders the opportunity to tender shares for sale on a regular basis should they wish to do so. Shareholders should note that these tender offers will, however, remain at the discretion of the Board and will be subject to the prevailing market conditions at the time, so they should place no expectation on these tender offers being implemented. Further details of the proposed tender mechanism are set out in the Directors' Report on page 20 of the Annual Report and Financial Statements. If such tender offers are implemented, a separate circular and tender form will be sent to shareholders following the relevant six month period to 31 January 2014 and 31 July 2014, which will set out the full terms and conditions of the tender offer and the procedure for tendering shares.

During the year the Company bought back a total of 1,080,000 ordinary shares, representing 1.4% of the issued share capital as at 31 July 2012, at a cost of £1,753,000. At the forthcoming AGM, the Board will be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares. This will be done in addition to the proposed tender mechanism as the Board believes that it would be in the overall best interest of shareholders to commit to buying back shares in an opportunistic fashion rather than to just establish and implement a published formula for redemptions. 

The Board holds regular discussions with the Managers about the performance of the Company and the potential consequences of future unsatisfactory results.  The Board is satisfied that the Managers' investment process, philosophy and investment style, with a focus on stock selection rather than top down macro views on sectors and countries, is a sensible strategic approach for investing in the region. Whilst the Board believes that the investment strategy will achieve both satisfactory and much improved results in the longer term, the timing of any improvement is uncertain. 

Management Fee

With effect from 1 April 2013, the annual management fee payable by the Company has been reduced from a flat rate of 1% of net assets to a rate of 0.95% on the first £50m of net assets and 0.65% on the balance. The fee will continue to be calculated and paid on a quarterly basis.  The Board welcomes the Managers' flexibility and willingness to reduce the fee and believes that it will be beneficial to shareholders.   The advent of the Retail Distribution Review emphasisesthe necessity for investment trusts to continue to be competitive with other savings products.

Regulation

The Board has been in discussions with the Managers on how best to address the requirements of the EU Alternative Investment Fund Managers Directive. This came into law in July 2013 although the Company has until July 2014 to comply fully with the legislation. The Directive requires the Company to appoint an Alternative Investment Fund Manager (AIFM) who will be responsible for portfolio and risk management and will be regulated under the Directive. Having taken external advice, the Board is currently of the view that Baillie Gifford is best positioned to act as the Company's AIFM.

Annual General Meeting

This year's AGM will take place on 29 October 2013 at the offices of Baillie Gifford & Co in Edinburgh at 10.45am. The Manager will make a presentation and, along with the Directors, will answer any questions from shareholders. I hope to see as many of you as possible there.

Outlook

The Managers remain focussed on investing in companies that have the potential to grow over the medium to longer term.  The Board remains optimistic about the growth prospects for companies in the region and the ability of our Managers to capitalise on investment in sound companies at attractive valuations.

Jean Matterson

Chairman

13 September 2013

Past performance is not a guide to future performance.

Managers' Review

Overview

Performance relative to the comparative index was disappointing over the period, with much of the underperformance occurring in the first half of the Company's year. This reverses some of the stronger relative performance achieved in the prior year. Consistent with our fundamental, bottom up investment style it is stock specifics that have driven returns, rather than sector or geographic exposures.

In recent periods the Company's investment philosophy has been out of favour with much of the investment community. Companies displaying 'earnings certainty' are particularly attractive safe havens at a time of global economic volatility. The consumer staples sector - a low exposure for the Company - has been a good example of this trend where companies showing healthy albeit unexciting growth have been rerated as investors seek less perceived risk in an uncertain investment environment. The characteristics we look for when investing in companies include strong growth potential, sustainable competitive advantages, attractive financials and sensible management. In addition, we continue to target stocks with very significant long term opportunities, where a wider range of potential outcomes leads to a mispricing of that opportunity. The market tendency to focus on near term uncertainty, rather than look out towards the possibility of very significant cash flow generation over the long term, leads to excellent investment opportunities in some of the highest quality growth companies. It is these companies that have struggled in this period of macroeconomic uncertainty. 

Investment Environment

In general, the economies of the Asia Pacific region have performed well over the last year. Notwithstanding this, investment appetite for the region is fickle as sentiment continues to be heavily influenced by events in the more developed markets. The impact of Federal Reserve Chairman Ben Bernanke's statement regarding the timing of the end of quantitative easing in the US - itself in response to a better performing US economy - highlighted the issue, with markets across the world reacting negatively to the prospect of reduced liquidity, only to rebound as the statement was later clarified. An environment where global liquidity is less abundant is likely to be troublesome for those economies where growth has become excessively reliant on overseas funding to support development.  More significant is the change in expectations regarding the strength of the US recovery and the likely positive impact on the US dollar. A stronger US recovery could be very positive for a wide range of businesses in Asia, especially in the technology sector, where we have been adding exposure. Examples of our technology focussed holdings include the Taiwanese integrated circuit design company MediaTek, Chinese internet business Tencent, Indian IT services business Tech Mahindra and Taiwan Semiconductor Manufacturing (TSMC), a Taiwanese foundry which manufactures semiconductor chips. 

The expected rate and composition of economic growth of China has a significant impact on the investment environment for a large number of companies in the Company's investment universe. Economic growth has moderated and expectations are for this to continue. The newly installed leadership appears comfortable with anything in excess of 7% for the annual rate of GDP growth, which is a healthy level.  Far more important, however, are the consequences of the transition from an investment-led to a consumer-led economy, a slow but necessary process. The Company currently has no holdings in the materials sector, driven by a belief that weakening investment spending from China will likely have a significantly detrimental effect on the demand for commodities in general. We are cautious on the outlook for the high-end property and luxury retail sectors.  These are areas that have benefited hugely from excess profits accruing to a narrow segment of society and the current returns are unlikely to be sustained. Our preference is to invest in those areas likely to benefit from favourable policy, such as Kunlun Energy and Towngas China in the gas industry, or those operating in the internet environment, such as Baidu and Tencent. On this note, the new leadership has clearly demonstrated appetite for reform with further liberalisation of pricing in both the energy and financial sectors.   

Given the technology and export exposure of Korea and Taiwan, these former 'Tiger economies' are well placed to capitalise on a stronger than anticipated recovery from the US. With many of the largest businesses enjoying significant export growth, this may be a very interesting area for investors. North Korea is a wild card, although it has been relatively quiet of late. Although the advent of 'Abenomics' in Japan caused considerable market volatility, particularly given the moves in the currency, we believe that the strength of the competitive advantages commanded by the businesses in which we invest bodes well for their future performance. Finally, in Taiwan, progress on cross strait reforms has continued with mutual easing of banking regulations and ownership restrictions, a positive step over the long term.

We noted at this time last year a frustration at a lack of suitable investment opportunities in India. Little has changed at the macroeconomic or political level: growth is disappointing relative to potential, the twin deficits are an issue and politics is an area fraught with tensions. India's central bank had been cutting rates aggressively in 2013 but more recently has  tightened liquidity in an attempt to protect its currency, which is now at the weakest level it has been over the past two decades. Valuations are, however, starting to look much more attractive, particularly for those businesses that have significant dollar earning streams and which are likely to perform better should the US continue to recover. 

The other challenge we highlighted last year was the investor euphoria surrounding some of the smaller emerging ASEAN markets, particularly in light of the Company's low exposure here. We have been resolute in our view that, in the absence of social and political reform, these economies are doing little more than storing up problems for the future. Foreign investment flows have added additional 'froth' to both debt and equity valuations which, in our view, makes the better performing companies, despite their fundamental attractions, look expensive. Over the past year the Philippines has been a very strong performer, but other ASEAN markets have been less impressive, particularly Indonesia which only rose 5.9% in sterling terms (11.3% in local currency terms), lagging the Asia Pacific Region as a whole by a sizeable margin.

Portfolio Review

Technology companies now account for over one third of the Company, a function of the number of exciting opportunities for investment in this sector. Rather than being a homogenous group, the underlying companies benefit from a number of different commercial advantages. The largest single holding for the Company is Samsung Electronics, a company that has invested billions of dollars over many years and is now benefiting from the success of its Galaxy range of smartphones and tablets. It is perhaps the only credible competitor to Apple's iPhone and iPad, underlining the progress the business has made over the past decade. Other globally competitive holdings include TSMC, the world's largest foundry business, and Hon Hai Precision Industries, the world's largest electronic manufacturing service provider. It is difficult to imagine a home anywhere in the developed world that does not contain at least one product that has passed through the facilities of one of these two companies. Other holdings that are beneficiaries of the success of these technological developments include SFA Engineering, a factory automation and logistics systems manufacturer, Global Display, a technology component manufacturer and ASM Pacific Technology, a semiconductor equipment manufacturer. A second group of companies in the technology sector are the internet businesses Baidu, Tencent and NHN. The investment merit of the internet has been reflected in the portfolio for a number of years, and stems from strong growth potential, excellent business models and entrepreneurial management teams. A new addition to the technology holdings during the year has been the Indian IT service providers Tech Mahindra and HCL Technologies. Both are likely to benefit as investment spending in Western markets starts to increase after a number of unproductive years. Another technology company to appear in the top ten list of holdings is MediaTek. This business is benefiting from many of the same opportunities as Samsung Electronics and TSMC, particularly the global shift to mobile computing, although the difference is that this company caters for lower end customers in developing markets.

Financials is the next largest sector, although the Company holds no banks in a number of the larger countries - China, Korea and Taiwan - where we feel returns are likely to be structurally challenged or depressed for many years.  Holdings are again focused on the merits of the individual companies, be it the turnaround potential that new management brings at Federal Bank or the very long duration growth opportunity available from Renminbi liberalisation at Bank of China (Hong Kong).  Insurance is an altogether more exciting prospect for us; the Company holds significant positions in Korean insurers Samsung Fire & Marine and Hyundai Marine and Fire, Chinese insurer Ping An and China Life Insurance (Taiwan).  These should all benefit from a number of fundamental social and economic changes in the coming years, such as demographics, increased financial sophistication, increasing wealth and consequent development of the insurance markets to provide mitigation for the increased risks to which a more wealthy society is exposed. 

The overall shape of the portfolio has not changed significantly since last year. The largest country exposures are Hong Kong and China, followed by Korea and then Taiwan. The Company retains little exposure to the smaller ASEAN markets. The weighting in India has increased from 3.3% to 9.1% during the year as opportunities have arisen. By sector, aside from the largest two sectors discussed above, there have only been minor changes; excessive valuations amongst companies in the consumer sectors have led to a reduction and, as previously mentioned, there are now no holdings in the materials sector. The turnover level has increased from the very low levels reported last year, with 14 new holdings purchased and 18 sold over the period. The number of holdings in the portfolio has again been managed down to 65, which is an appropriate level for a higher conviction strategy. 

Outlook

We recognise that recent performance has been unsatisfactory. We are nonetheless convinced that our philosophy, process and investment style constitute the correct strategic approach to deliver strong performance in the future. We strongly believe that changing investment style is one of the most dangerous traps to fall into when performance has been disappointing and we do not want to make this mistake. The portfolio is invested in a group of attractive businesses that we believe will generate superior returns over the long term. Good operational performance at a number of our holdings has yet to be rewarded in share price terms and the market's dislike of uncertainty has resulted in a number of our holdings appearing severely underpriced. We are confident that our long term, fundamental approach to investing will yield very acceptable results for shareholders.

Past performance is not a guide to future performance.

THIRTY LARGEST EQUITY HOLDINGS at 31 July 2013 (unaudited)

Name	Country	Business	Value £'000	% of total assets‡
Samsung Electronics	Korea	Electronics company	8,568	6.4
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor manufacturer	6,858	5.1
Kunlun Energy Company	HK/China	Energy business	4,495	3.3
BOC Hong Kong (Holdings)	HK/China	Commercial bank	3,979	3.0
China Mobile	HK/China	Wireless telecommunications provider	3,974	3.0
Tencent Holdings	HK/China	Internet business	3,947	2.9
Baidu	HK/China	Internet search provider	3,840	2.9
Hyundai Mobis	Korea	Automotive parts producer	3,629	2.7
CNOOC	HK/China	Oil and gas exploration and production	3,212	2.4
MediaTek	Taiwan	Integrated circuit design house	3,160	2.3
Tech Mahindra	India	IT services provider	3,112	2.3
Hyundai Glovis	Korea	Logistics company	2,954	2.2
China Life Insurance (Taiwan)	Taiwan	Life insurance provider	2,851	2.1
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	2,747	2.1
Reliance Industries	India	Oil and gas exploration and production	2,741	2.0
Towngas China	HK/China	Gas distributor	2,659	2.0
ASM Pacific Technology	HK/China	Semiconductor equipment manufacturer	2,592	1.9
China Petroleum & Chemical       Corporation	HK/China	Integrated oil and gas producer	2,490	1.8
Samsung Fire & Marine	Korea	Non-life insurance provider	2,452	1.8
Singapore Exchange	Singapore	Stock exchange	2,166	1.6
Security Bank	Philippines	Commercial bank	2,048	1.5
CIMB Group	Malaysia	Commercial bank	1,993	1.5
Hon Hai Precision Industries	Taiwan	Electronic manufacturing services company	1,977	1.5
Airtac International Group	Taiwan	Automation equipment manufacturer	1,861	1.4
M1	Singapore	Wireless telecommunications provider	1,851	1.4
Orion Corp	Korea	Consumer conglomerate	1,844	1.4
Hiwin Technologies	Taiwan	Automation equipment manufacturer	1,804	1.3
SATS Limited	Singapore	Airport services provider	1,790	1.3
Ping An Insurance	HK/China	Life insurance provider	1,783	1.3
Ascendas Real Estate	Singapore	Real estate investment trust	1,752	1.3
			91,129	67.7

HK/China denotes Hong Kong and China

‡ Total assets less current liabilities.

DISTRIBUTION OF ASSETS

		At 31 July 2013 %	At 31 July 2012 %
Equities:	Hong Kong and China	33.7	33.3
	Korea	19.5	20.7
	Taiwan	16.6	15.4
	India	9.1	3.3
	Singapore	8.7	9.8
	Thailand	3.0	3.8
	Malaysia	2.5	5.2
	Vietnam	2.2	1.9
	Indonesia	1.9	2.9
	Philippines	1.5	2.1
Total equities		98.7	98.4
Net current assets		1.3	1.6
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 of the Companies Act 2006.

MANAGEMENT FEE ARRANGEMENTS

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. With effect from 1 April 2013, the annual management fee was reduced from a flat rate of 1% of net assets to a rate of 0.95% on the first £50m of net assets and 0.65% on the balance. Management fees are calculated on a quarterly basis. The details of the management fee are as follows:

	2013 £'000		2012 £'000
Investment management fee	1,246		1,282

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 on an ongoing basis.

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 2013 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. The Company had no borrowings in the year to 31 July 2013 or 31 July 2012.

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 2013	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	41,448	1,193	62	42,703
Korean won	26,192	-	3	26,195
Taiwan dollar	22,488	200	166	22,854
Singapore dollar	12,118	-	79	12,197
Indian rupee	11,745	6	64	11,815
US dollar	7,144	105	-	7,249
Thai baht	3,325	-	157	3,482
Malaysian ringgit	3,383	-	-	3,383
Indonesian rupiah	2,477	2	8	2,487
Other overseas currencies	2,511	-	-	2,511
Total exposure to  currency risk	132,831	1,506	539	134,876
Sterling	-	67	(305)	(238)
	132,831	1,573	234	134,638

*      Includes net non-monetary assets of £9,000.

At 31 July 2012	Investments £'000	Cash and deposits £'000	Other debtors and creditors* £'000	Net exposure £'000
Hong Kong dollar	39,539	1,630	-	41,169
Korean won	26,773	-	3	26,776
Taiwan dollar	19,886	258	150	20,294
Singapore dollar	12,908	-	183	13,091
Indian rupee	3,260	7	20	3,287
US dollar	6,117	-	(3)	6,114
Thai baht	4,335	-	-	4,335
Malaysian ringgit	6,704	154	16	6,874
Indonesian rupiah	3,729	2	-	3,731
Other overseas currencies	3,744	-	19	3,763
Total exposure to  currency risk	126,995	2,051	388	129,434
Sterling	-	10	(347)	(337)
	126,995	2,061	41	129,097

*      includes net non-monetary assets of £14,000.

Currency Risk Sensitivity

At 31 July 2013, 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 2012.

	2013 £'000		2012 £'000
Hong Kong dollar	2,135		2,058
Korean won	1,310		1,339
Taiwan dollar	1,143		1,015
Singapore dollar	610		655
Indian rupee	591		164
US dollar	362		306
Thai baht	174		217
Malaysian ringgit	169		344
Indonesian rupiah	124		186
Other overseas currencies	126		188
	6,744		6,472

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, (assuming that the Company's share price is unaffected by movements in interest rates).

The Company's total interest rate risk exposure at 31 July 2013 amounted to £1,573,000 (2012 - £2,061,000), comprising of its cash and short term deposits.

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 analysis below has 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 (2012 - 100 basis points) and all other variables were held constant, the Company's total net assets and total return on ordinary activities for the year ended 31 July 2013 would increase/decrease by £16,000 (2012 - 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 10 and 11 in the Annual Report and Financial Statements. In addition, a geographical analysis of the portfolio and an analysis of the investment portfolio by broad industrial or commercial sector are shown on page 12 of the Annual Report and Financial Statements

98.6% (2012 - 98.4%) of the Company's net assets are invested in quoted equities. A 5% (2012 - 5%) increase in quoted equity valuations at 31 July 2013 would have increased total assets and total return on ordinary activities by £6,640,000 (2012 - £6,349,000). 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. All liabilities are repayable on demand at a consideration equal to the carrying value shown in the financial statements.

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 SA/NV (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 exposure to credit risk at 31 July was:

	2013 £'000	2012 £'000
Cash and short term deposits	1,573	2,061
Debtors and prepayments	554	409
	2,127	2,470

The maximum exposure in cash during the year was £3,467,000 (2012 - £2,638,000) and the minimum £25,000 (2012 - (£67,000)). 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.

Investments

As at 31 July 2013	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	131,292	1,516	-	132,808
Unlisted equities	-	-	23	23
Total financial asset  investments	131,292	1,516	23	132,831

As at 31 July 2012	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	126,972	-	-	126,972
Unlisted equities	-	-	23	23
Total financial asset  investments	126,972	-	23	126,995

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the preceding tables provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

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 could lead to the Company being subject to tax on capital gains.

The Managers monitor compliance with the provisions of Section 1158. Baillie Gifford's Business Risk & Internal Audit and Regulatory Risk Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

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 Managers have a comprehensive business continuity plan which facilitates continued operations of the business in the event of a service disruption or major disaster. 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. In addition, the Board is seeking shareholders' approval at the forthcoming Annual General Meeting to be given the authority to implement regular tender offers.

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 11 and the reserves 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 14 in the Annual Report and Financial Statements. Shares may be issued and/or repurchased as explained on pages 19 and 20 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). 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.

The work carried out by the Auditor does not involve any consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

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 net return 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

Jean Matterson

Chairman

13 September 2013

INCOME STATEMENT

	For the year ended 31 July 2013			For the year ended 31 July 2012
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains/(losses) on investments	-	7,229	7,229	-	(5,919)	(5,919)
Currency (losses)/gains	-	(51)	(51)	-	89	89
Income (note 2)	2,967	-	2,967	3,234	-	3,234
Investment management fee  (note 3)	(1,246)	-	(1,246)	(1,282)	-	(1,282)
Other administrative expenses	(314)	-	(314)	(302)	-	(302)
Net return on ordinary activities before taxation	1,407	7,178	8,585	1,650	(5,830)	(4,180)
Tax on ordinary activities	(165)	-	(165)	(159)	-	(159)
Net return on ordinary activities after taxation	1,242	7,178	8,420	1,491	(5,830)	(4,339)
Net return per ordinary share (note 4)	1.66p	9.62p	11.28p	1.97p	(7.71p)	(5.74p)

 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 2013		At 31 July 2012
	£'000	£'000	£'000	£'000
FIXED ASSETS Investments held at fair value through profit or loss		132,831		126,995
CURRENT ASSETS
Debtors	554		409
Cash and short term deposits	1,573		2,061
	2,127		2,470
CREDITORS Amounts falling due within one year	(320)		(368)
NET CURRENT ASSETS		1,807		2,102
TOTAL NET ASSETS		134,638		129,097
CAPITAL AND RESERVES
Called up share capital		7,397		7,505
Share premium		3,166		3,166
Special distributable reserve		6,499		8,252
Capital redemption reserve		18,396		18,288
Capital reserve		93,569		86,391
Revenue reserve		5,611		5,495
SHAREHOLDERS' FUNDS		134,638		129,097

NET ASSET VALUE PER ORDINARY SHARE	182.01p	172.01p
ORDINARY SHARES IN ISSUE	73,972,002	75,052,002

The Financial Statements of Pacific Horizon Investment Trust PLC (Company Registration Number.02342193) were approved and authorised for issue by the Board and signed on 13 September 2013.

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

For the year ended 31 July 2013

	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 2012		7,505	3,166	8,252	18,288	86,391	5,495	129,097
Net return on ordinary activities after taxation		-	-	-	-	7,178	1,242	8,420
Shares purchased for cancellation	7	(108)	-	(1,753)	108	-	-	(1,753)
Dividends paid during the year	5	-	-	-	-	-	(1,126)	(1,126)
Shareholders' funds at 31 July 2013		7,397	3,166	6,499	18,396	93,569	5,611	134,638

For the year ended 31 July 2012

	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 2011		7,693	3,166	11,020	18,100	92,221	5,150	137,350
Net return on ordinary activities after taxation		-	-	-	-	(5,830)	1,491	(4,339)
Shares purchased for cancellation	7	(188)	-	(2,768)	188	-	-	(2,768)
Dividends paid during the year	5	-	-	-	-	-	(1,146)	(1,146)
Shareholders' funds at 31 July 2012		7,505	3,166	8,252	18,288	86,391	5,495	129,097

*The capital reserve balance at 31 July 2013 includes investment holding gains on fixed asset investments of £39,822,000 (2012 - £36,971,000).

CASH FLOW STATEMENT
		For the year ended 31 July 2013			For the year  ended 31 July 2012
	Note	£'000	£'000		£'000		£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	8			1,218			1,547
FINANCIAL INVESTMENT
Acquisitions of investments		(28,464)				(18,009)
Disposals of investments		29,688				20,899
Realised currency (loss)/gain		(51)				89
NET CASH INFLOW FROM FINANCIAL INVESTMENT				1,173			2,979
EQUITY DIVIDEND PAID	5			(1,126)			(1,146)
NET CASH INFLOW BEFORE FINANCING				1,265			3,380
FINANCING
Shares bought back	7	(1,753)				(2,768)
NET CASH OUTFLOW FROM FINANCING				(1,753)			(2,768)
(DECREASE)/INCREASE/ IN CASH				(488)			612
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS
(Decrease)/increase in cash in the year				(488)			612
MOVEMENT IN NET FUNDS IN THE YEAR				(488)			612
NET FUNDS AT 1 AUGUST				2,061			1,449
NET FUNDS AT 31 JULY				1,573			2,061

NOTES
1.	The financial information within this preliminary announcement has been extracted from the unaudited financial statements for the year to 31 July 2013 and has been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 July 2012. In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. 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 continuance of the Company, every five years, the next vote being in 2016. The Directors have no reason to believe that the continuation resolution will not be passed in 2016. 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.
		2013 £'000		2012 £'000
2.	Income
	Income from investments	2,967		3,234
3.	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. With effect from 1 April 2013, the annual management fee was reduced from a flat rate of 1% of net assets to a rate of 0.95% on the first £50m of net assets and 0.65% on the balance. Management fees are calculated on a quarterly basis.
		2013 £'000		2012 £'000
4.	Net return per ordinary share
	Revenue return on ordinary activities after taxation	1,242		1,491
	Capital return on ordinary activities after taxation	7,178		(5,830)
	Total net return	8,420		(4,339)
	Weighted average number of ordinary shares in issue	74,625,072		75,638,600
	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.

			2013	2012	2013		2012
					£'000		£'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 2 November 2012)		1.50p	1.50p	1,126		1,146
	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 are considered. The revenue for the year available for distribution by way of dividend for the year is £1,242,000 (2012 - £1,491,000).
	Amounts paid and proposed in respect of the financial year:
	Proposed final dividend per ordinary share (payable 4 November 2013)		1.50p	1.50p	1,110		1,126
	If approved, the proposed final dividend of 1.50p per ordinary share for the year ended 31 July 2013 will be paid on 4 November 2013 to shareholders on the register at the close of business on 11 October 2013. The ex-dividend date is 9 October 2013. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for elections for this dividend is 18 October 2013.
6.	The Company has a £20 million uncommitted revolving credit facility with The Bank of New York Mellon. There were no borrowings in the year to 31 July 2013 or 31 July 2012.
7.	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% to net asset value 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 2013 and 31 July 2012 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 31 October 2012 in respect of 11,250,295 shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 July 2013 a total of 1,080,000 (2012 - 1,880,000) ordinary shares with a nominal value of £108,000 (2012 - £188,000) were bought back at a total cost of £1,753,000 (2012 - £2,768,000). At 31 July 2013 the Company had authority to buy back a further 10,170,295 ordinary shares.
				2013 £'000				2012 £'000
8.		RECONCILIATION OF NET RETURN BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
		Net return on ordinary activities before taxation		8,585				(4,180)
		(Gains)/losses on investments		(7,229)				5,919
		Currency losses/(gains)		51				(89)
		Decrease in accrued income		39				319
		(Increase)/decrease in other debtors		(17)				6
		Decrease in creditors		(48)				(228)
		Overseas tax suffered		(163)				(200)
		NET CASH INFLOW FROM OPERATING ACTIVITIES		1,218				1,547
9.	The Company incurred transaction costs on purchases of £69,000 (2012 - £31,000) and on sales of £71,000 (2012 - £68,000), being £140,000 (2012 - £99,000) in total.
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2013. The financial information for 2012 is derived from the statutory accounts for 2012. Those accounts have been delivered to the Registrar of Companies. The Auditors have reported on the 2012 accounts, their report was unqualified and did not contain a statement under Section 495, 496 and 497 of the Companies Act 2006. The statutory accounts for 2012 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
11.	The Report and Accounts will be available on the Company's page on the Managers' website www.pacifichorizon.co.uk on or around 26 September 2013‡.
‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

- ends -

 

END

 

 

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