Annual Financial Report

RNS Number : 3952A
Pacific Horizon Investment Tst PLC
28 September 2015
 

Pacific Horizon Investment Trust PLC

 

Annual Financial Report

 

A copy of the Annual Report and Financial Statements for the year ended 31 July 2015 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 2015 including the Notice of Annual General Meeting is also available on 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 2015 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

28 September 2015

 

Chairman's Statement

 

Performance

In the year to 31 July 2015, the Company's net asset value per share (NAV) fell 1.6%; during the same period the Company's comparative index, the MSCI All Country Asia ex Japan Index, decreased 0.9% in sterling terms. The share price increased by 2.2% and the discount narrowed from 11.5% to 8.2%.

For much of the financial year the Company was in a position to report positive absolute returns. It is, however, frustrating to note that weak performance at the end of July, which is the last month of the financial year, resulted in an overall annual loss for the portfolio. The Company's NAV performance was hit particularly hard by falls in the Chinese market in the last ten days of the month.

The Managers' Review on pages 8 to 10 of the Annual Report and Financial Statements provides a more detailed review of the Company's performance along with comment on the various markets in which the Company invests.

Revenue earnings per share decreased from 1.40p to 0.35p, as a result of moving into lower yielding companies. The Board is recommending that a final dividend of 0.35p (2014 - 1.40p) should be paid. The ongoing charges incurred by the Company were 1.02% (2014 - 1.01%).

 

Share Buy-backs and Discount

The Company obtained shareholder authority to implement bi-annual tender offers for up to 5% of the Company's shares at a 2% discount to NAV, less costs, at the Board's discretion in the event that the discount averaged more than 9% during the six month periods to 31 January and 31 July 2014 and 2015. Over the six month period to 31 July 2014 and 31 January 2015 the Company's average discount was 10.2% and 9.9% respectively and consequently the Board made the decision to implement tender offers in October 2014 and April 2015. The Company's average discount for the six month period to 31 July 2015 was 9.6% and it has again been decided to implement a further 5% tender offer, applicable to shareholders on the register on 11 August 2015. Details of how to tender your shares in respect of this 5% tender offer are contained within the Circular accompanying this Report.

Through tender offers implemented in respect of the six months to 31 July 2014 and 31 January 2015, the Company bought back a total of 6,837,299 ordinary shares, representing 9.75% of the issued share capital as at 31 July 2014, at a cost of £14,336,000.

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.

Subject to receiving the necessary shareholder approval at the forthcoming Annual General Meeting (AGM), the Board intends to renew its authority to implement bi-annual 5% tender offers, on the same terms as approved at the 2014 AGM, for the six month periods to 31 January 2016 and 31 July 2016. 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 18 and 19 of the Annual Report and Financial Statements.

 

Gearing

In May 2015 the Company increased its potential exposure to equities through the use of additional borrowings. The US$7,000,000 drawings with The Bank of New York Mellon were repaid and the Company entered into a new credit facility with The Royal Bank of Scotland Plc under which £10,500,000 and US$5,456,850 was drawn down. At the year end, net gearing was equal to 8% (2014 - 2%) of shareholders' funds. Some of the gearing was used to invest in a basket of Korean biotech stocks.

 

Annual General Meeting

This year's AGM will take place on 6 November 2015 at the offices of Baillie Gifford & Co in Edinburgh at 10.45am. 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 have been extremely volatile over the last year and continue to be so. This is despite some encouraging signs of growth from specific companies and selected sectors. The Chinese market moved up sharply in the early part of the year and then fell just as rapidly; this had a negative impact on Hong Kong's Hang Seng index where a number of companies in the portfolio are listed. The Company's other major exposure is to the Korean market where some of the gains were eroded by the weakness of the currency. The Indian investments continue to make progress, albeit more modest than in the previous year. Notwithstanding the recent and continuing volatility, the Directors continue to believe that these markets, and in particular the information technology stocks held within them, offer the potential for good returns.

 

Jean Matterson

Chairman

21 September 2015

 

 

Past performance is not a guide to future performance.

 

Managers' Review

 

Overview

We believe that the Asian region has some of the most exciting markets in the world and that over the next decade three main themes will drive equity returns there: firstly, the growth of the economy as a result of innovation and technological improvement, especially in the two largest economies, China and India; secondly, extensive structural reforms, again mostly in India and China; and lastly, the growth of middle income consumers across the region. Over the course of the Company's financial year, portfolio exposure to these overarching themes has been increased. The growth characteristics exhibited by the holdings are more pronounced and the average company size is smaller, with the overall composition of the portfolio having even less commonality with the index.

The portfolio contains more growth companies which are dependent on innovation for their success. This move has been partly in response to the recognition that global trade and Asian domestic growth rates are slowing, that growth is becoming increasingly scarce, and most evident where it is driven by productivity and innovation.

The active share, which measures the deviation of the portfolio from the comparative index, has risen from 77% to 88%. As the active share increases we would expect not only greater near-term volatility of returns compared to the index but also improved performance. For instance, we are finding that technological change and changing economic structures, (for example, the move within China away from fixed asset investment to services) are disrupting the established business models of companies within many parts of the region.

Through focus on these trends we have found many more interesting opportunities within the medium to smaller companies than in larger companies, and believe strongly that, in growth markets, superior returns should be found within this market sector. Today the Company holds 65% of its investments in smaller and medium sized stocks; this compares to 53% 12 months ago.

Our technology holdings reduced overall performance, as markets concentrated on shorter term slowdowns in demand due to China economic weakness. NAVER was the biggest single detractor as its social media platform was de-rated due to worries over slower near-term growth and the need for more aggressive capital expenditure. We believe that the market currently fails to appreciate the potential comparative return on investment which this business has the ability to generate. The financial and industrial sector held back performance; the rally in Chinese banks had a negative impact on our comparative performance as did moves in Chinese state owned enterprises, areas where we have little or no exposure.

On the positive side, our healthcare investments had a strong year, rising on average 50%, and were the largest single positive contributor. Genexine was the best performing holding up 135%, in the year followed by Viromed. This performance supported our view that this sector is likely to see significant future profitable growth.

Stock selection in Korea was the biggest positive contributor to performance, followed by our limited ASEAN exposure. Hong Kong and China was the biggest relative detractor.

The Company continues with its philosophy of investing in companies with good long term growth prospects. The corporate characteristics we look for include strong growth potential, sustainable competitive advantages, attractive financials and sensible management. In addition, we 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.

 

Investment Background

The last twelve months have been volatile for Asian economies. China has continued to slow in terms of GDP growth, whilst the stock market has been fickle, rising rapidly then falling within the year. The underlying investment environment, however, has been one of continued financial liberalisation, a trend we believe eventually will bring positive returns to investors.

The Chinese government has been active in determining its next five year plan and the trajectory in which it wants the country to head. In particular, we are interested in its 'Manufacturing 2020 plan', the core of which is to build infrastructure for a strong domestic economy: on advanced transport systems (high-speed rail, metro systems, efficient airports); sustainable technologies (new energy cars, new materials), and technologies that will decisively shift China's manufacturers up the value chain (new IT, robots, electronics, high end medical devices). This, we believe, is vitally important as to date manufacturing has been the principal driver of technical innovation, and technical innovation in turn has been the most important source of economic growth in most modern societies. China remains gripped in its transition from the old to the new economies, the former based on industrial commodities and the latter driven by new services and technology. We are heavily invested in the latter and have little exposure to the former.

This transition from an investment-led to an innovation-led Chinese economy significantly influences our investment approach. We have no 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 worldwide demand for commodities in general. We are cautious on the outlook for the heavy industrial sector given significant excess capacity in these areas.

In India, the GDP rate of growth has bottomed and is slowly improving. The new government of Narendra Modi has implemented much needed economic reforms, albeit at a slower speed than some expected. We believe that the reform process in India is one, which by necessity, will stretch over many years. The current government is unusual in an Indian context, in that it has not interfered in the business world; it has reduced its own bureaucracy and in doing so is indirectly helping the economic agenda. India remains in a cyclical and structural recovery with earnings poised to grow substantially and growth likely to outperform the broader region for many years to come.

We expect the US economy to continue to recover gradually, but at a pace that does not elicit either a strong wage response or a significant tightening cycle. Arguably, any significant rate rises are unlikely for the foreseeable future given the deflationary impact that a slowing China is having on commodity production. We believe that the spread and use of smartphone technology globally will be seen as the defining economic and social change of our era. The positive network benefits of connecting 5 billion people to an instantaneous information system are only just beginning to be realised. For the next few years, much of the global economy will be rewritten and reorganised so that it can be traded over the mobile phone network; the digitalisation and visualisation of the global economy is accelerating.

These changes can be seen in the rapid pace of e-commerce expansion in China and India, the growth in data packets globally and in the rise of rapidly growing new economy companies. We think that Asian economies and companies are able to embrace these trends far quicker than developed markets, for two main reasons: firstly, there is little in terms of existing old economy infrastructure; and secondly, and maybe more importantly, the societal system has not fully developed and become comfortable with old technologies, such as the retail industry in the USA and Europe. Smartphones have expanded the quantity of information, providing vastly better prices and choice of goods and services to the average consumer and making retail activity an electronic process.

A good example of these trends would be the growth of JD.com and its e-commerce offering, its last mile bespoke delivery service is helping its revenue to double from US$18 billion in 2014 towards estimates of US$38 billion by 2016. Part of this rapid growth is due to the Chinese use of social media which allows a much quicker response to and acceptance of new economic and social ideas.

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 include SK Hynix, Advantech and MediaTek.

We highlighted last year that the smaller emerging ASEAN markets were pricing in growth that we believed was unsustainable; as a result, the Company had low investment exposure here. We are 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. ASEAN markets have been weak this year, especially as a result of depreciation of their currencies. Malaysia is the standout candidate where a combination of falling commodity prices has coincided with high level corruption scandals. We believe these countries' credit cycles remain over extended and they do not appear to be benefiting from innovation led growth. The Company's exposure to these markets remains limited.

 

Portfolio Review

Technology companies now account for over 47% of the Company's investments by value. Rather than being a homogenous group, the underlying companies benefit from a number of different commercial advantages. The largest single holding for the Company in the sector is Tencent, the big Chinese gaming, social media and advertising giant - the leader in driving the mobile communications revolution in China with over 1 billion users. During the year we added to our large internet investments, Alibaba, Baidu and Just Dial, which we believe offer tremendous value given their long-term earnings growth. The consumer related internet companies now make up 25% of the portfolio. In our view, each investment demonstrates a combination of strong growth potential, excellent business models and an entrepreneurial management approach.

We bought Sunny Optical, a camera lens specialist for mobile phones and the world's leading camera module maker for the automotive industry. We have been reducing our holdings in Samsung Electronics over worries on the medium-term outlook for its smartphone business as Chinese competition increases. Elsewhere, we bought Himax, a company supplying components to a number of virtual reality headsets, which we expect will come to the market in 2016.

Our holdings in IT service companies have increased slightly and we believe that the need for outsourcing and increased digitalisation will continue to drive top-line growth for innovative Indian companies. In the year we also acquired holdings in Kingdee and Kingsoft, Chinese outsourcing software development companies that are providing innovation to domestic markets.

The financial sector represents another of the Company's largest positions 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 newer holdings like ICICI, where we see the company benefitting from Indian structural growth. 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 Taiwan China Life Insurance. These should all benefit from 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 investments in both China Petroleum and Chemical (Sinopec) and Daewoo Industrial after the reversal in Saudi Arabia policy towards the oil markets. We hold no assets related to the oil and gas industry and in the short-term believe that the market is being revalued at a much lower price. In the long-term, Western oil demand may have peaked due to rapid innovation in the transport industry. In China we are sceptical that the government will allow a gasoline auto industry to grow rapidly due to environmental costs and would expect in the medium-term that China overtakes California as the leader in the electric vehicle industry.

The healthcare sector which we originally invested into last year, was added to, with two additional holdings. Viromed is conducting phase 3 clinical trials into diabetic peripheral neuropathy and critical limb ischemia in the US this year. We invested in Seegene in Korea, the world's leading developer of leading edge diagnostics equipment. We continue to believe that new personalised medicine will have a revolutionary impact upon the pharma industry through the creation of drugs that cure disease rather than just alleviate symptoms. Our healthcare holdings now account for 8% of the portfolio.

The largest country exposures are Hong Kong and China, followed by Korea and then India. The Company retains little exposure to the smaller ASEAN markets. The Chinese/Hong Kong weight increased as we invested in more new economy companies. Our investment exposure to India grew as a result of additions and outperformance, whilst Taiwan was reduced to fund the increase in Hong Kong and China.

 

Environmental, Social and Governance Matters

As growth investors we are looking for companies whose products will benefit from strong future demand. These companies not only have to produce better and cheaper products and services than their competitors but they also have to be alert to the changing nature and views of the societies in which they exist. Companies who do not change, tend to fail either due to falling demand for their product or as a result of government intervention. When we invest we take into account the potential positive and negative impacts our companies have on the world today and how their commercial activities will be perceived in the future.

For our long-term investments to be successful they must add value to society. We see this in a variety of ways: the regenerative biotech companies we own, whose products may allow many people to gain otherwise unachievable medical benefits, our internet companies which provide goods and services to people at prices and quantities previously unobtainable, or our technology holdings that are helping to enable the greatest and most rapid increase in human connectivity and available information in human history.

Lastly, to be rewarded as a shareholder, minority interests must be upheld; we remain careful to make sure our investments are aligned with those of the majority shareholder and owners.

 

Outlook

Recently global markets have sold off violently, precipitated by the Chinese devaluation. This we believe is creating buying opportunities, especially true for the leading markets: US, Internet and Biotech sectors. Commodities and their associated countries remain in deep bear markets with only temporary respite possible. The upside from low oil prices in particular will eventually help the global consumer and help stabilise markets. Given this we feel the portfolio and our companies are well-positioned to benefit from the next upswing and survive the current patch of volatility.

It is our view that there is significant potential for positive returns from the markets in which we invest 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. The Company has taken on 10% gross gearing, at the time of draw down, and we see current volatility in the asset class as an ideal opportunity to add to positions in fast growing companies. Despite the short term volatility that we have experienced over the last twelve months, we believe that our philosophy, process and investment style will reward and benefit our shareholders over the medium to long term.

 


List of Investments as at 31 July 2015

 

 

 

Name

 

 

Country

 

 

Business

 

Value

£'000

% of total

assets‡

Tencent Holdings

HK/China

Internet business

9,057

6.5

Baidu

HK/China

Internet search provider

5,279

3.8

Alibaba Group

HK/China

Online and mobile commerce company

4,622

3.3

Hon Hai Precision Industries

Taiwan

Electronic manufacturing services company

4,067

2.9

Tech Mahindra

India

IT services provider

3,790

2.7

Haier Electronics Group

HK/China

Washing machine and water heater

  manufacturer

3,405

2.4

Just Dial

India

Local search and e-commerce provider

3,382

2.4

China Life Insurance (Taiwan)

Taiwan

Life insurance provider

3,149

2.3

NAVER

Korea

Internet company

3,073

2.2

Federal Bank

India

Commercial bank

2,927

2.1

JD.com

HK/China

Online direct sales company

2,914

2.1

SK Hynix

Korea

Electronic component and device

  manufacturer

2,869

2.1

ICICI Bank

India

Retail and corporate bank

2,709

1.9

Mahindra & Mahindra

India

Conglomerate

2,584

1.9

HCL Technologies

India

IT services provider

2,569

1.8

Advantech

Taiwan

Computer manufacturer

2,440

1.8

Jumei International Holding

HK/China

Online retailer of beauty products

2,363

1.7

MediaTek

Taiwan

Integrated circuit design house

2,228

1.6

Seegene

Korea

Develops molecular diagnostic reagents

2,200

1.6

Samsung Fire & Marine Insurance

Korea

Non-life insurance provider

2,149

1.5

CJ E&M

Korea

Media and entertainment business

2,083

1.5

Geely Automobile

HK/China

Automobile manufacturer

2,067

1.5

Qunar Cayman Islands

HK/China

Provides travel product information

1,950

1.4

Naturalendo Technology

Korea

Biotech company specialising in R&D

1,950

1.4

Taiwan Semiconductor Manufacturing

Taiwan

Semiconductor manufacturer

1,943

1.4

Cheil Industries

Korea

Leading lifestyles solutions company

1,942

1.4

Sunny Optical Technology

HK/China

Optical related products

1,907

1.4

Koh Young Technology

Korea

3D inspection machines

1,876

1.3

Kingdee International Software

HK/China

Develops and sells enterprise management

  software

1,843

1.3

Dragon Capital Vietnam Enterprise

  Investments

Vietnam

Vietnam investment fund

1,814

1.3

Hermes Microvision

Taiwan

Electron beam inspection tool manufacturer

1,790

1.3

Container Corporation of India

India

Transportation services

1,774

1.3

Indusind Bank

India

Commercial bank

1,756

1.3

Mahindra CIE Automotive

India

Provider of forging parts for trucks

1,602

1.2

Shiram Transport Finance

India

Hire purchase finance for trucks

1,589

1.1

Orion Corp

Korea

Consumer conglomerate

1,566

1.1

Mindtree

India

IT services provider

1,546

1.1

W H Group

HK/China

Port processing company

1,532

1.1

Interpark

Korea

Internet-based shopping mall

1,531

1.1

Samsung Electronics

Korea

Electronics company

1,509

1.1

Genexine

Korea

Biopharmaceuticals

1,496

1.1

Techtronic Industries

HK/China

Power tool manufacturer

1,467

1.1

Dalian Wanda Commercial Properties

HK/China

Commercial property developer

1,459

1.0

Viromed

Korea

Biomedical research

1,447

1.0

China Vanke

HK/China

Residential property development company

1,348

1.0

Kingsoft

HK/China

Software company

1,340

1.0

Info Edge

India

Internet based service company

1,324

0.9

Phison Electronics

Taiwan

Semiconductor products

1,311

0.9

Persistent Systems

India

Provides outsourced software product

   development

1,282

0.9

Delta Electronics

Taiwan

Power supplies and video display product

  manufacturer

1,278

0.9

CAR Inc

HK/China

Car rental company

1,272

0.9

Himax Technologies

Taiwan

Develops and markets semiconductors

1,265

0.9

Legend Holdings

HK/China

Investment holding company

1,241

0.9

Bioneer

Korea

Biotechnology business

1,229

0.9

China Taiping Insurance International

HK/China

Insurance underwriter

1,209

0.9

SK Telecom

Korea

Telecoms operator

1,201

0.9

Pharmicell

Korea

Biopharmaceutical business

1,051

0.8

Nagacorp

HK/China

Hotels, restaurants and leisure

1,047

0.8

Sarine Technologies

Singapore

Develops  measurement systems for

  diamond grading

1,038

0.7

Johnson Electric Holding

HK/China

Electric motor manufacturer

1,007

0.7

Infosys

India

Software developer

978

0.7

Brilliance China Automotive

HK/China

Manufacture and sale of minibuses and

  automotive components

969

0.7

Haiwin Technologies

Taiwan

Automation equipment manufacturer

951

0.7

Theragen Etex

Korea

Pharmaceutical business

872

0.6

Green Cross Cell

Korea

Electric component manufacturer

776

0.6

Crystalgenomics

Korea

Biotechnology services

753

0.5

Hyundai Marine and Fire Insurance

Korea

Non-life insurance provider

539

0.4

Airtac International Group

Taiwan

Automation equipment manufacturer

379

0.3

Huadin Power International

HK/China

Electric utility

187

0.1

Elec and Eltek International

Singapore

Circuit board manufacturer

71

0.1

Philtown Properties*

Philippines

Property developer

0

0.0

Total Investments

 

 

135,133

97.1

Net Current Assets

 

 

4,034

2.9

Total Assets



139,167

100.0

 

HK/China denotes Hong Kong and China

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

*      Denotes unlisted investment.

 

Distribution of Portfolio

 


At 31 July

2015

%

At 31 July

2014

%

Equities:

Hong Kong and China

35.6

28.8

 

Korea

23.1

28.0

 

India

21.3

15.3

 

Taiwan

15.0

18.7

 

Vietnam

1.3

1.2

 

Singapore

0.8

5.2

 

Thailand

-

1.2

 

Indonesia

-

0.6

Total equities

97.1

99.0

Net current assets

2.9

1.0

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 25 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.

 

Investment Management Fee

 

An Investment Management Agreement between the Company and Baillie Gifford & Co Limited; the Alternative Investment Fund Manager (AIFM) and Company Secretaries, sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Qualifying Directors. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. Compensation fees would only be payable in respect of the notice period if termination were to occur sooner. The Board is of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence on performance. The annual management fee is 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:

 

2015

£'000


2014

£'000

Investment management fee

1,032


1,029

 

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 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 2014 and 31 July 2015 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 2015

 

 

Investments

£'000

 

Cash and deposits

£'000

 

 

Loans

£'000

 

Other debtors and creditors*

£'000

 

 

Net exposure

£'000

Hong Kong dollar

32,357

13

- 

21 

32,391 

Korean won

32,112

-

- 

5 

32,117 

Indian rupee

29,812

-

- 

89 

29,901 

US dollar

20,278

4,032

(3,497)

4 

20,817 

Taiwan dollar

19,536

-

- 

133 

19,669 

Singapore dollar

1,038

-

- 

- 

1,038 

Thai baht

-

-

- 

- 

- 

Indonesian rupiah

-

-

- 

- 

- 

Total exposure to currency risk

135,133

4,045

(3,497)

252 

135,933 

Sterling

-

16

(10,500)

(279)

(10,763)


135,133

4,061

(13,997)

(27)

125,170 

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

 

 

 

 

At 31 July 2014

 

 

Investments

£'000

 

Cash and deposits

£'000

 

 

Loans

£'000

 

Other debtors and creditors*

£'000

 

 

Net exposure

£'000

Hong Kong dollar

32,882

756

- 

- 

33,638 

Korean won

40,565

-

- 

7 

40,572 

Indian rupee

22,117

-

- 

73 

22,190 

US dollar

10,835

335

(4,146)

(6)

7,018 

Taiwan dollar

27,159

166

- 

284 

27,609 

Singapore dollar

8,195

-

- 

44 

8,239 

Thai baht

1,004

-

- 

- 

1,004 

Indonesian rupiah

918

-

- 

- 

918 

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.

 

Currency Risk Sensitivity

At 31 July 2015, 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 2014.

 

2015

£'000


2014

£'000

Hong Kong dollar

1,620


1,682

Korean won

1,606


2,029

Indian rupee

1,495


1,110

US dollar

1,041


351

Taiwan dollar

983


1,380

Singapore dollar

52


412

Thai baht

-


50

Indonesian rupiah

-


46


6,797


7,060

 

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 2015 amounted to £4,061,000 (2014 - £1,274,000), 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

2015

£'000


2014

£'000

Floating rate bank loan  - sterling denominated

                                       - US$ denominated

10,500

3,497


-

4,146


13,997


4,146

 

Maturity Profile

2015

Within

1 year

£'000


2014

Within

1 year

£'000

Repayment of loans

13,997


4,146

Interest on loans

111


16


14,108


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 2015 by £99,000 (2014 - decrease of £29,000). 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.

108.0% (2014 - 102.0%) of the Company's net assets are invested in quoted equities. A 5% (2014 - 5%) increase in quoted equity valuations at 31 July 2015 would have increased total assets and total return on ordinary activities by £6,757,000 (2014 - £7,184,000). 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

2015

£'000


2014

£'000

Bank loan

13,997


4,146

 

The Company has a £20 million one year uncommitted, unsecured floating rate revolving credit facility with The Bank of New York Mellon and a one year £14 million multi-currency revolving credit facility with The Royal Bank of Scotland Plc. At 31 July there were outstanding drawings of £10,500,000 and US$5,456,850 at interest rates of 0.97188% and 0.68625% per annum under The Royal Bank of Scotland Plc facility (2014 - US$7,000,000 at 1.5326% per annum under The Bank of New York Mellon facility). 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:

2015

£'000

2014

£'000

Cash and short term deposits

4,061

1,274

Debtors and prepayments

276

431


4,337

1,705

 

The maximum exposure in cash during the year was £9,615,000 (2014 - £8,148,000) and the minimum £150,000 (2014 - £230,000). None of the Company's financial assets are past due or impaired (2014 - 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 2015

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Listed equities

135,133

-

-

135,133

Total financial asset investments

135,133

-

-

135,133

 

 

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

 

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 Business Risk, 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 - failure of Baillie Gifford's 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. Baillie Gifford have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other third party providers are reviewed by Baillie Gifford 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 renew the authority to implement tender offers.

Leverage 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 leverage 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.

 

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 note 11 of the Annual Report and Financial Statements). 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 6 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 pages 21 and 22 of the Annual Report and Financial Statements. The Company has the ability to buy back its shares (see pages 18 and 19 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 in note 11 of the Annual Report and Financial Statements.

 

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 52 of the Annual Report and Financial Statements) levels at 31 July 2015 are shown below:

 

Leverage Exposure

Gross

Method

Commitment

Method

Maximum limit

2.50:1

2.00:1

Actual

1.11:1

1.11:1

 

 

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

21 September 2015

Income Statement

 

 

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

 

4,337 

 

1,705 

 

Ordinary shares in issue


63,288,853


70,126,152

 

 

 


Reconciliation of Movements in Shareholders' Funds

 

For the year ended 31 July 2015

 

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 2014

7,013 

3,166 

- 

18,780 

106,437 

5,521 

140,917 

Net return on ordinary activities after taxation

- 

- 

- 

- 

(660)

231 

(429)

Shares purchased for cancellation (note 7)

(684)

- 

- 

684 

(14,336)

- 

(14,336)

Dividends paid during the year (note 5)

- 

- 

- 

- 

- 

(982)

(982)

Shareholders' funds at

31 July 2015

6,329 

3,166 

- 

19,464 

91,441 

4,770 

125,170 

 

For the year ended 31 July 2014

 


Cash Flow Statement

 

 

Notes

 

1.

The Financial Statements for the year to 31 July 2015 and has been prepared on the basis of the same accounting policies set out in the Company's Annual Report and Financial Statements at 31 July 2014.

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.

 



31 July 2015

£'000


31 July 2014

                £'000

 

2.

Income

 


 

 


Income from investments

1,886


2,550

 



1,866


2,550

 



 

3.

Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed by the Company as its Alternative Investment Fund Manager (AIFM) and Company Secretary with effect from 1 July 2014. The investment management function has been delegated to Baillie Gifford & Co. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. The annual management fee is 0.95% on the first £50m of net assets and 0.65% on the balance. Management fees are calculated on a quarterly basis.

 



31 July 2015

£'000


31 July 2014

£'000

 

4.

Net return per ordinary share

 


 

 


Revenue return on ordinary activities after taxation

231 


1,019

 


Capital return on ordinary activities after taxation

(660)


13,335

 


Total net return

(429)


14,354

 


Weighted average number of ordinary shares in issue

 

66,526,663 


 

72,777,640

 



31 July 2015

31 July 2014

 

31 July 2015

£'000

31 July 2014

£'000

 

5.

Ordinary Dividends

 

 

 

 

 


Amounts recognised as distributions in the year:





 


Previous year's final (paid 5 November 2014)

1.40p

1.50p

982

1,109

 


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 £231,000 (31 July 2014 - £1,019,000).

 



31 July 2015

31 July 2014

 

31 July 2015

£'000

31 July 2014

£'000

 


Amounts paid and proposed in respect of the financial year:

 

 

 

 

 

 

 

Proposed final dividend per ordinary share (payable 11 November 2015)

0.35p

1.40p

222

982

 


If approved, the recommended final dividend of 0.35p per ordinary share for the year ended 31 July 2015 will be paid on 11 November 2015 to shareholders on the register at the close of business on 16 October 2015. The ex-dividend date is 15 October 2015. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for elections for this dividend is 21 October 2015.

 

 

- ends -

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
FR PGUUUBUPAGGR

Companies

Pacific Horizon Inv Trust (PHI)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today