Annual Financial Report

RNS Number : 9094S

Pacific Horizon Investment Tst PLC

29 September 2014

 

Pacific Horizon Investment Trust PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 July 2014 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 2014 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 2014 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 Limited

Company Secretaries

29 September 2014

Chairman's Statement

Performance

In the year to 31 July 2014, the Company's net asset value per share (NAV) rose 10.4% which compares favourably against the equivalent 4.0% increase in the comparative index, MSCI All Country Asia ex Japan Index (in sterling terms). The share price increased by 13.4% and the discount narrowed from 13.9% to 11.5%.  The Managers' Review provides a more detailed review of the Company's performance along with comment on the various markets in which the Company invests.

The Board is pleased to report a significant improvement in the Company's results.  The Board holds regular discussions with the Managers about the performance of the Company's investment portfolio: it is pleasing to note that the Managers have achieved not only positive returns, but also strong outperformance against the comparative benchmark and the majority of the peer group over the period.

Earnings per share decreased from 1.66p to 1.40p.  The Board is recommending that a final dividend of 1.40p (2013 - 1.50p) should be paid. The ongoing charges of the Company were 1.01% (2013 - 1.15%).

Ewan Markson-Brown was appointed as portfolio manager in March 2014, with Roderick Snell as deputy, when Mike Gush stepped down. The Managers' investment process, philosophy and investment style has remained unchanged. 

Share Buy-backs and Discount

At the 2013 AGM, the Company obtained shareholder approval to implement, at the Board's discretion, a bi-annual tender offer for up to 5% of the Company's shares at a 2% discount to NAV, less costs, in the event that the discount averaged more than 9% during the six month periods to 31 January and 31 July 2014.  Over the first six month period to 31 January 2014, the Company's average discount was 11.3% and the Board implemented a 5% tender offer in April.  The Company's average discount for the six month period to 31 July 2014 was 10.2% and it has been decided to implement a 5% tender offer in respect of that period, applicable to shareholders on the register on 13 August 2014.  Details of how to tender your shares in respect of this 5% tender offer are contained within the Circular accompanying the Annual Report and Financial Statements.

In addition to the bi-annual tender offers, the Company has authority to buy back up to 14.99% of its shares on an ad hoc basis.  The Board uses this authority opportunistically, taking into account not only the level of the discount but also the underlying liquidity and trading volumes in the Company's shares. This approach allows the Board to seek to address any imbalance between the supply and demand for the Company's shares that results in a large discount to NAV; the Board is also mindful that current and potential shareholders require ongoing liquidity.

Through the exercise of both of these authorities, the Company bought back a total of 3,845,850 ordinary shares, representing 5.2% of the issued share capital as at 31 July 2013 during the year, at a cost of £6,966,000.

Subject to receiving the necessary shareholder approval at the forthcoming AGM, the Board intends to renew the bi-annual 5% tender offers, on the same terms as approved at the 2013 AGM, for the six month periods to 31 January 2015 and 31 July 2015.  Shareholders should note that these tender offers will, however, remain at the discretion of the Board and will be subject to prevailing market conditions, so they should place no expectation on these tender offers being implemented as a matter of course.  If such a tender offer is implemented, a separate circular and tender form will be sent to shareholders which will set out the full terms and conditions of the tender offer and the procedure for tendering shares.  At the forthcoming AGM, the Board will also be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares.  Further details on both resolutions are set out in the Directors' Report on pages 22 and 23 of the Annual Report and Financial Statements.

Gearing

The Company utilised a modest amount of gearing towards the end of its financial year by drawing down US$7 million under its credit facility with The Bank of New York Mellon to fund investment in a basket of Korean biotech companies.  At the year end, net gearing was equal to 2% of shareholders' funds.  Gearing was last used in 2006.

Contractual Arrangements

In order to comply with the requirements of the EU Alternative Investment Fund Managers Directive, the Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager ("AIFM") and Company Secretary with effect from 1 July 2014.  The Company's existing investment management agreement with Baillie Gifford & Co has been terminated.  The new management agreement is made on the same commercial terms as the previous agreement with Baillie Gifford & Co.  Under these new arrangements, the Company's portfolio will continue to be managed by Baillie Gifford & Co by way of a delegation agreement between Baillie Gifford & Co Limited and Baillie Gifford & Co.  In addition the Company has appointed BNY Mellon Trust & Depositary (UK) Limited as its Depositary. 

Annual General Meeting

This year's AGM will take place on 30 October 2014 at the offices of Baillie Gifford & Co in Edinburgh at 3.30pm.  The Managers 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

Asian markets continue to make progress, with a particularly strong performance from India following the election.  Stocks in many of the geographic areas in which the Company invests appear better value than in many developed markets and the Board is optimistic that the Managers can capitalise on the growth prospects in the region over the medium to long term through an unchanged strategy of selecting sound companies at attractive valuations.

Jean Matterson

Chairman

12 September 2014

Past performance is not a guide to future performance.

Managers' Review

Overview

The Company performed strongly over the last twelve months; net asset value increased by 10.4% in sterling terms whilst performance relative to the comparative index, which increased by 4.0%, was also good.  Much of the outperformance occurred in the first half of the year, especially during November and December 2013. Consistent with our fundamental, bottom up investment style, it is individual investments within the portfolio rather than specific sector or geographic exposures that have driven enhanced returns for our shareholders.

In recent years, the Company's philosophy of securing investments in companies with good long term growth prospects has been out of favour. Investment in companies displaying 'earnings certainty' is seen as a particularly attractive safe haven at a time of global economic volatility. A good example of the consequences of this approach has been the outperformance of investments in the consumer staples sector - a low exposure for the Company - where companies showing healthy, albeit unexciting, growth have been re-rated as investors seek less perceived risk in an uncertain investment environment. In contrast, our approach to investment is very different; the corporate characteristics we look for include strong growth potential, sustainable competitive advantages, attractive financials and sensible management. In addition, we continue to target stocks with what we consider to be very significant long term opportunities for enhanced future profitability, where a wider range of positive potential outcomes may lead to current mispricing.

Evidence over the last twelve months suggests that the relative attraction of so-called safe haven 'steady earnings' stocks appears to be waning as the market realises that the macro-economic environment may not be as bad as previously thought. This is leading to a positive re-rating of many of the companies we hold. This move by the market to reconsider companies with greater potential for long term growth, notwithstanding a more volatile earnings outlook, comes at an opportune time, as many companies are exhibiting rapid earnings increases.

Investment Background

The last twelve months have been volatile for Asian economies. China has gone through a significant slowdown in GDP growth, leading to a stalled economy in the first quarter of 2014, before the current rebound. In India, despite slowing GDP growth, the election of Narendra Modi was viewed positively by the markets and contributed to improving expectations on reform and the future growth of its economy. In the first half of last year, talk of tapering by the Federal Reserve led to a "temper tantrum" by stock markets and a strong sell-off of equities and currencies of the so-called "fragile-five", Indonesia, Turkey, Brazil, South Africa and India.

We expect the US economy to recover gradually but at a pace that does not elicit either a strong wage response or a significant tightening cycle. We note that the US current account deficit has continued to contract within this economic upcycle, an unusual event which may indicate an economic renaissance for the US, especially in the energy and manufacturing sectors. This would affect the rest of the world in two ways; firstly, a shrinkage of dollars available to facilitate global trade and, secondly, a deceleration of US imports. This may have been the cause of the very weak export growth from Asia over the last twelve months; however, we are anticipating gradual improvement here. More importantly, from the perspective of our portfolio, we see the potential advent of a new global capital expenditure cycle, one both focused on technology investment rather than fixed assets and driven by the exponential growth in data usage due to smartphone penetration and the resultant changes in consumer behaviour.

Our technology holdings should be well-placed to benefit from such a development. 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 the economic growth of China has a significant impact on the investment environment for a large number of companies in our investment universe. Here, economic growth has slowed considerably and expectations are for this to continue for the next few years.  The Chinese government has embarked on a reform drive that we believe will, in the medium term, have profound effects on the economy and region. It seems that China's recent approach to generating economic growth, one of moving underutilised assets into more efficient production processes, i.e. farm labourers into manufacturing workers, is having less of a positive impact. There is potential for a new model of growth to develop, one of commercial and industrial transformation based on R&D, creative industries and innovation. It appears that the Chinese government recognises the necessity of these changes, although the existence of large vested interests will make the move from a state-run asset heavy growth model to a private sector innovation growth model slow and difficult. Despite these issues, many companies will benefit from such a shift in emphasis. Historically, stock markets have tended to reward companies and economic systems where it is believed pro-market reforms are being implemented.

This transition from an investment-led to an innovation-led Chinese economy significantly influences our investment approach. The Company has limited holdings in the materials sector at present, driven by a belief that weakening investment spending from China will likely have a 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 current returns are unlikely to be sustained; we have seen weakness in these areas and expect more problems to come. Our preference is to invest in those areas likely to benefit from this economic shift, such as Sinopec and Towngas China in the gas industry, where State Owned Enterprise reform is already occurring, or those operating in the internet environment, such as Baidu, JD.com and Tencent.

Over the past year India has undergone the greatest change of perception in any country within our investment universe. In August 2013, the currency was in freefall as the market fretted about the deficits in the national budget and in foreign trade, and the failure of the political system to facilitate growth. Today, the currency has appreciated mildly whilst the stock market is at an all-time high following the election of India's first pro-reform majority government since independence in 1947. Here, we believe the economic and political outlook is highly favourable for companies and stock investors, both from a cyclical, given the steep declines in growth over the last two years, and a longer-term perspective. Historically, the first three years of a new government in India have tended to be highly positive for stock market returns and we believe that the current improving economic environment is conducive for such a scenario.

We see the rise of mobile communications use in Asia as an enabler in breaking down previous barriers to entry for many companies, increasing competition and forcing all companies to have a digital strategy. Given the technology and export focus of Korean and Taiwanese industry, these former 'Tiger economies' are well placed to capitalise on the regional corporate need to upgrade technology systems. Companies that should be beneficiaries of this include SK Hynix, Advantech and Phison.

The other challenge we highlighted last year was investor euphoria surrounding some of the smaller emerging ASEAN markets; as a result, the Company has low investment exposure here. We remain 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, look expensive despite specific investment attractions. We believe these countries' credit cycles are over extended and they do not seemingly benefit from the innovation led growth, which is where we believe there are fundamental investment opportunities. The Company's exposure to these markets remains limited.

Portfolio Review

Technology companies now account for over forty percent of the Company's investments by value, a function of the number of what we consider to be 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 in successful innovation over many years. During the year we bought SK Hynix, the world's second largest producer of DRAM (memory chips) behind Samsung. 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.

A second group of technology companies comprise of the internet businesses Baidu, Tencent, JD.com, Naver, Sohu, Yukou, Just Dial and Jumei International Holdings. These make up the largest absolute industry weight within the portfolio at 16%. Internet holdings have been part of the portfolio for a number of years.  In our view, each investment demonstrates a combination of strong growth potential, excellent business models and an entrepreneurial management approach.

A new addition to the technology holdings has been JD.com, the largest Chinese B2C retailer which also has one of the strongest logistics networks within the country. In India, we have bought into Just Dial, an internet local search engine which has the potential to dominate the online market for smaller and medium sized national enterprises. Another technology company 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 its focus is on lower end customers in developing markets.

The financial sector represents the Company's second largest position although we do not hold banks in a number of the larger countries - China, Korea and Taiwan - where we feel returns are likely to be challenged or depressed for many years.  In line with our investment approach, holdings are focused on the merits of the individual companies, be it the turnaround potential that new management brings at Federal Bank or new holdings like ICICI, where we see the return of a structural growth story.  Insurance is an altogether more exciting prospect for us; the Company holds significant positions in the Korean insurers Samsung Fire & Marine and Hyundai Marine & Fire and in 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.

In the energy sector we sold our investment in Kunlun Energy, previously one of our largest holdings, as worries over Chinese anti-corruption investigations stymied the investment case and the shares were subsequently de-rated.

The overall shape of the portfolio has not changed greatly over the last year, although we have been increasing weightings in areas where we believe significant opportunities exist for investment outperformance, for instance in India. 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.  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 further reductions in this part of the portfolio.

We have also bought our first significant holdings in the healthcare market, Naturalendo in Korea which produces a patented health drug recently launched in the US market, and a number of Korea biotech companies where we see significant potential. These investments represent a higher than normal level of volatility in both their share price and future revenue and profit generation potential; the risk of short-term losses is high. These holdings were funded using a small amount of gearing, for which we used our current borrowing facilities.

Outlook

It is our view that there is significant potential for positive returns from our region over the coming years. Our focus remains on investment in individual stocks which will benefit from the economic, social and technological changes which are in evidence across the region. We believe that our philosophy, process and investment style will reward our shareholders over the medium to long term.

Thirty Largest Equity Holdings at 31 July 2014

Name	Country	Business	Value £'000	% of total assets‡
Tencent Holdings	HK/China	Internet business	9,039	6.2
Samsung Electronics	Korea	Electronics company	8,120	5.6
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor manufacturer	6,712	4.6
Baidu	HK/China	Internet search provider	4,568	3.1
Tech Mahindra	India	IT services provider	4,450	3.1
Hon Hai Precision Industries	Taiwan	Electronic manufacturing services company	4,129	2.9
MediaTek	Taiwan	Integrated circuit design house	3,785	2.6
Naver	Korea	Internet company	3,664	2.5
Hyundai Glovis	Korea	Logistics company	3,636	2.5
China Petroleum & Chemical Corporation	HK/China	Integrated oil and gas producer	3,593	2.5
Hiwin Technologies	Taiwan	Automation equipment manufacturer	2,904	2.0
Reliance Industries	India	Oil and gas exploration and production	2,854	2.0
SK Hynix	Korea	Electronic component and device   manufacturer	2,779	1.9
Federal Bank	India	Commercial bank	2,703	1.9
CNOOC	HK/China	Oil and gas exploration and production	2,632	1.8
Samsung Fire & Marine	Korea	Non-life insurance provider	2,600	1.8
Airtac International Group	Taiwan	Automation equipment manufacturer	2,575	1.8
China Life Insurance (Taiwan)	Taiwan	Life insurance provider	2,528	1.7
Haier Electronics Group	HK/China	Washing machine and water heater   manufacturer	2,520	1.7
Advantech	Taiwan	Computer manufacturer	2,451	1.7
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	2,451	1.7
Towngas China	HK/China	Gas distributor	2,401	1.7
Hyundai Mobis	Korea	Automotive parts producer	2,307	1.6
Mahindra & Mahindra	India	Conglomerate	2,285	1.6
ASM Pacific Technology	HK/China	Semiconductor equipment manufacturer	2,279	1.6
HCL Technologies	India	IT services provider	2,234	1.5
JD.Com	HK/China	Largest online direct sales company in   China	2,162	1.5
Galaxy Entertainment Group	HK/China	Casino operator	2,159	1.5
Just Dial	India	Offers a search engine to users throughout   India	2,036	1.4
Mindtree	India	IT services provider	1,942	1.3
			100,498	69.3

HK/China denotes Hong Kong and China

‡ Total assets less current liabilities, before deduction of borrowings.

Distribution of Portfolio

		At 31 July 2014 %	At 31 July 2013 %
Equities:	Hong Kong and China	28.8	33.7
	Korea	28.0	19.5
	Taiwan	18.7	16.6
	India	15.3	9.1
	Singapore	5.2	8.7
	Thailand	1.2	3.0
	Vietnam	1.2	2.2
	Indonesia	0.6	1.9
	Malaysia	-	2.5
	Philippines	-	1.5
Total equities		99.0	98.7
Net current assets		1.0	1.3
Total assets‡		100.0	100.0

‡ Total assets less current liabilities, before deduction of borrowings.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 24 of 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

In order to comply with the Alternative Investment Fund Managers Directive, with effect from 1 July 2014 the Company has terminated its investment management agreement with Baillie Gifford & Co and has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager and Company Secretary. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The notice periods and management fee are unchanged under these new arrangements. 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:

	2014 £'000		2013 £'000
Investment management fee	1,029		1,246

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.

Details of the Company's investment portfolios are shown below and in note 9 of the Annual Report and Financial Statements. The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. During the years to 31 July 2013 and 31 July 2014 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 2014	Investments £'000	Cash and deposits £'000	Loans £'000	Other debtors and creditors* £'000	Net exposure £'000
Korean won	40,565	-	-	7	40,572
Hong Kong dollar	32,882	756	-	-	33,638
Taiwan dollar	27,159	166	-	284	27,609
Indian rupee	22,117	-	-	73	22,190
Singapore dollar	8,195	-	-	44	8,239
US dollar	10,835	335	(4,146)	(6)	7,018
Thai baht	1,004	-	-	-	1,004
Indonesian rupiah	918	-	-	-	918
Other overseas currencies	-	-	-	-	-
Total exposure to  currency risk	143,675	1,257	(4,146)	402	141,188
Sterling	-	17	-	(288)	(271)
	143,675	1,274	(4,146)	114	140,917

* Includes net non-monetary assets of £13,000.

At 31 July 2013	Investments £'000	Cash and deposits £'000	Loans £'000	Other debtors and creditors* £'000	Net exposure £'000
Korean won	26,192	-	-	3	26,195
Hong Kong dollar	41,448	1,193	-	62	42,703
Taiwan dollar	22,488	200	-	166	22,854
Indian rupee	11,745	6	-	64	11,815
Singapore dollar	12,118	-	-	79	12,197
US dollar	7,144	105	-	-	7,249
Thai baht	3,325	-	-	157	3,482
Indonesian rupiah	2,477	2	-	8	2,487
Other overseas currencies	5,894	-	-	-	5,894
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.

Currency Risk Sensitivity

At 31 July 2014, 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 2013.

	2014 £'000		2013 £'000
Korean won	2,029		1,310
Hong Kong dollar	1,682		2,135
Taiwan dollar	1,380		1,143
Indian rupee	1,110		591
Singapore dollar	412		610
US dollar	351		362
Thai baht	50		174
Indonesian rupiah	46		124
Other overseas currencies	-		295
	7,060		6,744

Interest Rate Risk

Interest rate movements may affect directly:

¾ the fair value of any investments in fixed interest rate securities;

¾ the level of income receivable on cash deposits;

¾ the fair value of any fixed-rate borrowings; and

¾ 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 interest rate risk profile of the Company's financial assets and liabilities at 31 July is shown below.

Financial Assets

The Company's interest rate risk exposure on its financial assets at 31 July 2014 amounted to £1,274,000 (2013 - £1,573,000), 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.

Financial Liabilities

The interest rate risk profile of the Company's financial liabilities and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31 July are shown below.

Interest Rate Risk Profile

	2014 £'000		2013 £'000
Floating rate bank loan - US$ denominated	4,146		-

Maturity Profile

	2014 Within 1 year £'000		2013 Within 1 year £'000
Repayment of loans	4,146		-
Interest on loans	16		-
	4,162		-

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.

An increase of 100 basis points in interest rates, with all other variables being held constant, would have decreased the Company's total net assets and total return on ordinary activities for the year ended 31 July 2014 by £29,000 (2013 - increase of £16,000). This is mainly due to the Company's exposure to interest rates on its floating rate bank loan and cash balances. A decrease of 100 basis points would have had an equal but opposite effect.

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 of 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 contained in the Strategic Report of the Annual Report and Financial Statements.

102.0% (2013 - 98.6%) of the Company's net assets are invested in quoted equities. A 5% (2013 - 5%) increase in quoted equity valuations at 31 July 2014 would have increased total assets and total return on ordinary activities by £7,184,000 (2013 - £6,640,000). 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. The Company's current borrowing facility is detailed below and the maturity profile of its borrowings are set out above. Under the terms of the borrowing facility, borrowings are repayable on demand at their current carrying value.

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's current borrowing facility is detailed below.

Borrowings Falling Due Within One Year

	2014 £'000		2013 £'000
Bank loan	4,146		-

The Company has a £20 million one year uncommitted, unsecured floating rate revolving credit facility with the Bank of New York Mellon. During the year the Company drew down US$7 million under the facility at a rate of 1.5326%, maturing on 23 September 2014. It is anticipated that the loan will be rolled over on maturity. The main covenant relating to the loan is that borrowings should not exceed 20% of the Company's net assets value. There were no breaches in the loan covenants during the year.

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:

¾ 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.

¾ 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.

¾ 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.

¾ 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.

¾ 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:

	2014 £'000	2013 £'000
Cash and short term deposits	1,274	1,573
Debtors and prepayments	431	554
	1,705	2,127

The maximum exposure in cash during the year was £8,148,000 (2013 - £3,467,000) and the minimum £230,000 (2013 - £25,000). None of the Company's financial assets are past due or impaired (2013 - none).

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. Short term borrowings have a fair value equal to par.

Investments

As at 31 July 2014	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Listed equities	143,675	-	-	143,675
Total financial asset investments	143,675	-	-	143,675

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

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.

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

Other risks faced by the Company include the following:

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment companies, the UKLA Listing Rules and the Companies Act could lead to the Company being subject to tax on capital gains, suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Baillie Gifford's Internal Audit and Compliance 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 Risk - risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Managers' Business Risk and Internal Audit Departments provide regular reports to the Audit Committee. The Board also reviews the Managers' Report on Internal Controls and the reports by other key service providers are reviewed by the Managers on behalf of the Board. In addition, 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.

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 renew the authority to implement tender offers.

Gearing Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

Political Risk - although Pacific Horizon is an English Company, the Board is aware that the outcome of the Scottish Referendum Vote, which is unknown at the date this report was approved, introduces elements of political uncertainty which may have practical consequences; developments will be monitored closely and considered by the Board and Managers. The Referendum is only one of a variety of political risks facing the Company which are considered by the Board on a regular basis.

Capital Management

The capital of the Company is its share capital and reserves as set out in note 13 of the Annual Report and Financial Statements together with its borrowings (see above). The objective of the Company is to invest in the Asia-Pacific region (excluding Japan) and in the Indian Sub-continent in order to achieve capital growth. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on page 19 of the Annual Report and Financial Statements. The Company has the ability to buy back its shares (see pages 22 and 23 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in note 12 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loan which are detailed above.

Alternative Investment Fund Managers (AIFM) Directive

In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM's remuneration policy is available from Baillie Gifford & Co Limited on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) will be made available in due course.

The Company's maximum and actual leverage (see Glossary of Terms on page 51 of the Annual Report and Financial Statements) levels at 31 July 2014 are shown below:

Leverage Exposure

	Gross Method	Commitment Method
Maximum limit	2.50:1	2.00:1
Actual	1.03:1	1.03:1

Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration 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 Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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:

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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 also responsible for preparing a Strategic Report, Directors' Report, 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 of the Annual Report and Financial Statements confirm that, to the best of their knowledge:

¾ the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾ the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

¾ the Strategic 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

12 September 2014

Income Statement

	For the year ended 31 July 2014			For the year ended 31 July 2013
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	13,723	13,723	-	7,229	7,229
Currency losses	-	(388)	(388)	-	(51)	(51)
Income (note 2)	2,550	-	2,550	2,967	-	2,967
Investment management fee (note 3)	(1,029)	-	(1,029)	(1,246)	-	(1,246)
Other administrative expenses	(342)	-	(342)	(314)	-	(314)
Net return before finance costs and taxation	1,179	13,335	14,514	1,407	7,178	8,585
Finance costs of borrowing	(6)	-	(6)	-	-	-
Net return on ordinary activities before taxation	1,173	13,335	14,508	1,407	7,178	8,585
Tax on ordinary activities	(154)	-	(154)	(165)	-	(165)
Net return on ordinary activities after taxation	1,019	13,335	14,354	1,242	7,178	8,420
Net return per ordinary share (note 4)	1.40p	18.32p	19.72p	1.66p	9.62p	11.28p

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 2014		At 31 July 2013
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		143,675		132,831
Current assets
Debtors	431		554
Cash and short term deposits	1,274		1,573
	1,705		2,127
Creditors
Amounts falling due within one year (note 6)	(4,463)		(320)
Net current (liabilities)/assets		(2,758)		1,807
Total net assets		140,917		134,638
Capital and reserves
Called up share capital		7,013		7,397
Share premium		3,166		3,166
Special distributable reserve		-		6,499
Capital redemption reserve		18,780		18,396
Capital reserve		106,437		93,569
Revenue reserve		5,521		5,611
Shareholders' funds		140,917		134,638
Net asset value per ordinary share		200.95p		182.01p
Ordinary shares in issue		70,126,152		73,972,002

Reconciliation of Movements in Shareholders' Funds

For the year ended 31 July 2014

	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 2013	7,397	3,166	6,499	18,396	93,569	5,611	134,638
Net return on ordinary activities after taxation	-	-	-	-	13,335	1,019	14,354
Shares purchased for cancellation (note 7)	(384)	-	(6,499)	384	(467)	-	(6,966)
Dividends paid during the year (note 5)	-	-	-	-	-	(1,109)	(1,109)
Shareholders' funds at 31 July 2014	7,013	3,166	-	18,780	106,437	5,521	140,917

For the year ended 31 July 2013

	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 (note 7)	(108)	-	(1,753)	108	-	-	(1,753)
Dividends paid during the year (note 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

Cash Flow Statement

	For the year ended 31 July 2014		For the year ended 31 July 2013
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities		889		1,218
Financial investment
Acquisitions of investments	(38,780)		(28,464)
Disposals of investments	41,909		29,688
Net cash inflow from financial investment		3,129		1,224
Equity dividend paid (note 5)		(1,109)		(1,126)
Net cash inflow before financing		2,909		1,316
Financing
Shares bought back (note 7)	(6,966)		(1,753)
Bank loans drawn down	4,124		-
Net cash outflow from financing		(2,842)		(1,753)
Increase/(decrease) in cash		67		(437)
Reconciliation of net cash flow to movement in net (debt)/funds
Increase/(decrease) in cash in the year		67		(437)
Translation difference		(366)		(51)
Increase in bank loans		(4,124)		-
Exchange movement on bank loans		(22)		-
Movement in net (debt)/funds in the year		(4,445)		(488)
Net funds at 1 August		1,573		2,061
Net (debt)/funds at 31 July		(2,872)		1,573

Notes
1.	The financial statements for the year to 31 July 2014 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 31 July 2013. 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.
		2014 £'000		2013 £'000
2.	Income
	Income from investments	2,550		2,967
		2,550		2,967
3.	In order to comply with the Alternative Investment Fund Managers Directive, with effect from 1 July 2014 the Company has terminated its investment management agreement with Baillie Gifford & Co and has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager ("AIFM") and Company Secretary. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The notice periods and management fee are unchanged under these new arrangements. 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 the 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.
		2014 £'000		2013 £'000
4.	Net return per ordinary share
	Revenue return on ordinary activities after taxation	1,019		1,242
	Capital return on ordinary activities after taxation	13,335		7,178
	Total net return	14,354		8,420
	Weighted average number of ordinary shares in issue	72,777,640		74,625,072
	The 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 during the year. There are no dilutive or potentially dilutive shares in issue.

		2014	2013	2014 £'000	2013 £'000
5.	Ordinary Dividends
	Amounts recognised as distributions in the period:
	Previous year's final (paid 4 November 2013)	1.50p	1.50p	1,109	1,126
	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 is £1,019,000 (2013 - £1,242,000).
		2014	2013	2014 £'000	2013 £'000
	Amounts paid and proposed in respect of the financial year:
	Proposed final dividend per ordinary share (payable 5 November 2014)	1.40p	1.50p	982	1,110
	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 one year uncommitted floating rate revolving credit facility with The Bank of New York Mellon. During the year the Company drew down US$7 million under the facility at a rate of 1.5326%, maturing on 23 September 2014.
7.	The Company has authority to buy back up to 14.99% of its shares on an ad hoc basis and to implement bi-annual tender offers for up to 5% of its shares in the event that the discount averaged more than 9% during the six months periods to 31 January and 31 July 2014. The Board implemented a 5% tender offer in April in respect of the tender period to 31 January 2014. Through the exercise of both of these authorities the Company bought back a total of 3,845,850 (2013 - 1,080,000) ordinary shares at a total cost of £6,966,000 (2013 - 1,753,000) during the year. The nominal value of these shares was £384,000 and represented 5.2% of the issued share capital at 31 July 2013. At 31 July 2014 the Company had authority to buy back a further 10,910,168 ordinary shares. The Company also has authority to allot shares under Section 551 of the Companies Act 2006. In the years to 31 July 2014 and 31 July 2013 no shares were issued.
8.			2014 £'000		2013 £'000
	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
	Net return on ordinary activities before finance costs and taxation		14,514		8,585
	Gains on investments		(13,723)		(7,229)
	Currency losses		388		51
	(Increase)/decrease in accrued income		(157)		39
	Decrease/(increase) in other debtors		12		(17)
	Decrease in creditors		(9)		(48)
	Overseas tax suffered		(136)		(163)
	Net cash inflow from operating activities		889		1,218
9.	The Company incurred transaction costs on purchases of £65,000 (2013 - £69,000) and on sales of £97,000 (2013 - £71,000), being £162,000 (2013 - £140,000) in total.
10.	The Report and Accounts will be available on the Company's page on the Managers' website www.pacifichorizon.co.uk on or around 29 September 2014‡.
‡ 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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