Half-year Report

RNS Number : 6239A

Schroder AsiaPacific Fund PLC

08 June 2016

 

Half Year Report

Schroder AsiaPacific Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 March 2016 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroderasiapacificfund.com. Please click on the following link to view the document:

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

John Spedding

Schroder Investment Management Limited                                         Tel: [phone]

8 June 2015

Interim Management Report

Chairman's Statement

Performance

I am pleased to report to shareholders in my first statement since my appointment as Chairman in January 2016. The Company's net asset value ("NAV") produced a total return of 11.0% and the share price produced a total return of 12.1% during the six month period to 31 March 2016, compared with a total return of 11.4% for the MSCI All Countries Asia excluding Japan Index in sterling terms over the period.

Much of the return for both the market and the Company's NAV came from a fall in the value of sterling, rather than from performance from the market. Further analysis of performance may be found in the Manager's Review.

Continuation vote

I am also pleased to report that shareholders voted overwhelmingly in favour of continuation for a further 5 year period at the Annual General Meeting held in January 2016. In line with the Articles of Association of the Company, a further continuation vote will be put to shareholders in 2021 and thereafter at 5 yearly intervals.

Gearing

The Company's gearing at the beginning of the period under review was 2.3% and this had increased to 4.9% by the end of the period, averaging 3.6% over that time. The level of gearing continues to operate within pre-agreed levels so that net gearing does not represent more than 20% of shareholders' funds.

Discount management

The Board continues to monitor the discount to which the Company's shares trade on the market and to consider whether purchases of shares should be made on a regular basis. Over the period, the average discount of the Company's shares to NAV was 11.3% to the cum income net asset value, slightly wider than the longer-term 10% target adopted by the Board. A total of 352,000 shares were purchased for cancellation during the period and a further 778,000 shares have been purchased since the end of the period in support of the discount policy. The Board will continue to consider the purchase of shares for cancellation.

Retirement of the Chairman

After serving as Chairman since the Company's launch in 1995, The Hon. Rupert Carington retired at the Annual General Meeting in January 2016. On behalf of the Board, I would like to thank Rupert for his invaluable contribution to the Company over that time.

Outlook

Given the upcoming referendum on the UK's membership of the EU, sterling could continue to be an important part of near-term changes in the Company's NAV. That aside, however, Asia's challenge is finding a new growth path. Many of the factors behind its past success - for example labour cost advantages, China's transformation into an economic powerhouse, and positive demographics - no longer underwrite strong stock markets. Share valuations may be below their historic average, but for many investors the point of Asian equities is rapid growth in corporate profits, and the region has not provided that for a while.

The Manager is reassuring on the outlook for the specific holdings in the portfolio, and on the value in their share prices. Over the Company's 20-year life that has usually turned into outperformance of the benchmark. Another important goal, however, is getting the Company's share price to break out of the range it has been in for the last three years. This probably requires, among other factors, investors to be more confident than they are at the moment that Asia can restart its above-average growth.

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 17 to 19 of the Company's published Annual Report and Accounts for the year ended 30 September 2015. These risks and uncertainties have not materially changed during the six months ended 31 March 2016.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on pages 19 and 20 of the published Annual Report and Accounts for the year ended 30 September 2015, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2016.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules.

Nicholas Smith

Chairman

7 June 2016

Manager's Review

The net asset value per share of the Company recorded a total return of 11.0% over the six months to end March 2016. This was slightly behind the performance of the benchmark, the MSCI All Country Asia ex Japan Index, which was up 11.4% over the same period.

The positive returns recorded by Asian markets over the first half of the Company's financial year were materially enhanced by the weakness of sterling. Underlying markets in general yielded only single-digit returns in local currency terms, Indonesia being the notable positive exception.

It has been a volatile period for the regional markets, particularly during the broader sell-off of global equities seen in January. Global concerns played a part amid growing doubts over economic momentum in developed economies, soft commodity prices and adoption of Negative Interest Rate Policies ("NIRP") in Europe and Japan which did little to inspire confidence. Volatility also reflected worries surrounding the regional outlook, and more particularly a renewed bout of concern over the Chinese economy and currency. The offshore exchange rate for the renminbi moved to a significant discount as investors speculated that a more dramatic adjustment in the currency was in the offing given dwindling foreign exchange reserves, capital flight, faltering exports and further loosening in domestic monetary policy.

A degree of stability in the closing months reflected a number of factors. Most critically, the US Federal Reserve signalled a softening in their monetary stance, partly in response to the challenges facing the global economy, and more specifically a number of emerging markets and commodity/energy exposed sectors. The US dollar weakened in sympathy, particularly against the yen despite (or possibly because of) the Bank of Japan's adoption of NIRP. Risk assets including Asian equities, along with commodity and energy prices, have responded positively to the perceived delay to tighter US monetary policy. Dollar weakness undoubtedly helped the People's Bank of China in its efforts to stabilize the currency. It has discouraged capital flight and facilitated policy loosening that has allowed credit to continue to growing substantially in excess of nominal growth.

Indonesian equities offered the best returns over the period, aided by a recovery in the currency, the rupiah. A recovery in the current account, stabilisation in the country's foreign exchange reserves and greater clarity over the reform agenda of President Jokowi supported sentiment. Chinese equities yielded disappointing returns amid slowing growth, falling producer prices, currency pressures, and a raft of corporate developments raising significant questions over corporate governance. Perceptions of a hiatus in the reform programme under PM Modi and bad debt pressure on the banking sector weighed on the Indian equity markets.

Performance and portfolio activity

The Company's total return was slightly behind the benchmark Index return over the period under review. In the underlying portfolio, positive factors included stock selection in China, Hong Kong, Taiwan and Indonesia, partially offset by shortfalls in India and Thailand where regulatory uncertainty and heightened competition impacted our telecom holdings. Country allocation was a negative factor due to the overweighting in India (which performed relatively poorly over the period) and underweights in Indonesia and Malaysia (which performed strongly). Gearing aided returns very modestly.

In terms of activity in the Company's portfolio, net gearing was increased from 2.3% to 4.9% over the period as we sought to take advantage of volatility in regional markets. In terms of country allocation, we reduced the overweighting in India as a number of stocks approached our assessment of fair value, while adding to Taiwan (focusing on information technology and telecoms), Hong Kong, and Korea (although we remain  markedly underweight the latter market). Within emerging ASEAN markets, Thailand remained our principal area of emphasis, while a nil weight to Malaysia was maintained in the Company's portfolio. China remained one of the biggest underweightings and we remain very cautious on financials, real estate and highly geared companies generally. We also prefer taking China exposure via Hong Kong where we remain markedly overweight.

Outlook and policy

Equity markets have been supported by consensus thinking which appears to incorporate a list of positives, although whether they are internally consistent is open to question. One strand is the view that the Federal Reserve has become notably less hawkish on interest rates, due to the previous tightening impact of the stronger dollar and the (probably related) fact that there are fragilities surrounding the global economic picture, most notably in a number of emerging markets.

However, almost in the same breath, the optimists cite signs of a stabilisation in Chinese growth (amid more credit expansion, resilience in foreign exchange reserves and a pick up in residential real estate activity), the easier credit conditions engendered by the weaker dollar, and the recovery in manufacturing sentiment indicators seen across most developed markets and emerging markets.

There are important internal inconsistencies in the above. To hope for both a more dovish Federal Reserve and accelerating global growth is probably wishful thinking, unless of course non-US economic activity can decouple from a slowing US. We view this as a low probability event. We can accept that the recent equity recovery has been underpinned by the reduction in a number of "tail risks" but suspect that the picture remains of equity markets trading in a volatile but essentially sideways pattern for sometime yet. This reflects the conflicting pressures of debt constraints to developed market growth, fading confidence in the policies of central banks outside the United States, normalisation of rates by the Federal Reserve, and equity valuations globally that are neither unduly cheap nor particularly expensive.

This short-term lack of a positive inflection point in global activity coincides with the longer-term framework within which we are operating; that is continued low inflation, debt constraints to growth in the developed world, and a more secular slowdown in the trend of emerging market expansion. The latter is exacerbated by the unwinding of the overinvestment and credit expansion post the Global Financial Crisis, for which China remains the poster child.

Valuations round the region are, at least on the surface, cheap relative to history and compared to other markets. However, we see a challenging environment for corporate profits amid continued competitive pressures and beggar-my-neighbour monetary policies from major trading partners/competitors. China remains a key source of event risk. The current bout of investor complacency fails to adequately reflect the fact that there is a renewed surge in credit growth which, while supporting near-term activity, is raising the long-term risks of a more severe slowdown, a surge in bad debts, and loss of control of the currency. The Chinese authorities still have the tools to handle a transition to a new growth model, but the more it is delayed the more difficult the adjustment will become.

Needless to say, we believe this remains an environment where our focus on visible and sustainable growth, sound balance sheets and good corporate management should stand the Company's portfolio in good stead. Capital discipline remains key as companies with stronger balance sheets will be better placed to exploit future investment opportunities. We also continue to see a good number of individual companies in the region reflecting balance sheet strength through positive dividend announcements, accompanied in some cases by share buy-backs.

Schroder Investment Management Limited

7 June 2016

Income Statement

for the six months ended 31 March 2016 (unaudited)

	(Unaudited) for the six months ended 31 March 2016			(Unaudited) for the six months ended 31 March 2015			(Audited) for the year ended 30 September 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss
	-	52,416	52,416	-	74,424	74,424	-	(17,571)	(17,571)
Gains/(losses) on derivative contracts	-	133	133	-	-	-	-	(55)	(55)
Net foreign currency losses	-	(861)	(861)	-	(195)	(195)	-	(1,032)	(1,032)
Income from investments	3,802	-	3,802	4,138	-	4,138	13,597	-	13,597
Other interest receivable and similar income
	1	-	1	-	-	-	2	-	2
Gross return/(loss)	3,803	51,688	55,491	4,138	74,229	78,367	13,599	(18,658)	(5,059)
Investment management fee	(2,330)	-	(2,330)	(2,357)	-	(2,357)	(4,571)	-	(4,571)
Administrative expenses	(448)	-	(448)	(486)	-	(486)	(939)	-	(939)
Net return/(loss) before finance costs and taxation	1,025	51,688	52,713	1,295	74,229	75,524	8,089	(18,658)	(10,569)
Finance costs	(149)	-	(149)	(43)	-	(43)	(116)	-	(116)
Net return/(loss) on ordinary activities before taxation	876	51,688	52,564	1,252	74,229	75,481	7,973	(18,658)	(10,685)
Taxation (note 3)	(234)	(82)	(316)	(213)	(1,155)	(1,368)	(822)	(1,496)	(2,318)
Net return/(loss) on ordinary activities after taxation	642	51,606	52,248	1,039	73,074	74,113	7,151	(20,154)	(13,003)
Return/(loss) per share (note 4)	0.38p	30.56p	30.94p	0.62p	43.18p	43.80p	4.23p	(11.91)p	(7.68)p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no recognised gains and losses other than those disclosed in the Income Statement and Statement of Changes in Equity.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

	for the six months ended 31 March 2016 (unaudited)
	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2015	16,923	100,956	3,221	36,301	8,704	304,540	7,225	477,870
Repurchase and cancellation of the Company's own ordinary shares	(35)	-	35	(944)	-	-	-	(944)
Net return on ordinary activities after taxation	-	-	-	-	-	51,606	642	52,248
Dividend paid in the period (note 5)	-	-	-	-	-	-	(7,101)	(7,101)
At 31 March 2016	16,888	100,956	3,256	35,357	8,704	356,146	766	522,073

	for the six months ended 31 March 2015 (unaudited)
	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2014	16,923	100,956	3,221	36,301	8,704	324,694	4,728	495,527
Net return on ordinary activities after taxation	-	-	-	-	-	73,074	1,039	74,113
Dividend paid in the period(note 5)	-	-	-	-	-	-	(4,654)	(4,654)
At 31 March 2015	16,923	100,956	3,221	36,301	8,704	397,768	1,113	564,986

	for the year ended 30 September 2015 (audited)
	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2014	16,923	100,956	3,221	36,301	8,704	324,694	4,728	495,527
Net (loss)/return on ordinary activities after taxation	-	-	-	-	-	(20,154)	7,151	(13,003)
Dividend paid in the year (note 5)	-	-	-	-	-	-	(4,654)	(4,654)
At 30 September 2015	16,923	100,956	3,221	36,301	8,704	304,540	7,225	477,870

Statement of Financial Position

at 31 March 2016 (unaudited)
	(Unaudited)	(Unaudited)	(Audited)
	31 March	31 March	30 September
	2016	2015	2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	547,275	567,133	487,181
Current assets
Debtors	1,870	1,732	5,128
Cash at bank and in hand	4,170	8,771	18,763
	6,040	10,503	23,891
Current liabilities
Creditors: amounts falling due within one year	(31,110)	(12,650)	(33,147)
Derivative financial instruments held at fair value through profit or loss	(132)	-	(55)
	(31,242)	(12,650)	(33,202)
Net current liabilities	(25,202)	(2,147)	(9,311)
Total assets less current liabilities	522,073	564,986	477,870
Net assets	522,073	564,986	477,870
Capital and reserves
Called-up share capital (note 6)	16,888	16,923	16,923
Share premium	100,956	100,956	100,956
Capital redemption reserve	3,256	3,221	3,221
Share purchase reserve	35,357	36,301	36,301
Warrant exercise reserve	8,704	8,704	8,704
Capital reserves	356,146	397,768	304,540
Revenue reserve	766	1,113	7,225
Total equity shareholders' funds	522,073	564,986	477,870
Net asset value per share (note 7)	309.15p	333.87p	282.39p

Notes to the Accounts

1.         Financial statements

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditors.

The figures and financial information for the year ended 30 September 2015 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 and which superseded the SORP issued in January 2009.

All of the Company's operations are of a continuing nature.

The Company has adopted Financial Reporting Standard ("FRS") 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", FRS 104 "Interim Financial Reporting" and the amended SORP, all of which became effective for periods beginning on or after 1 January 2015. Some presentational changes are required, following the adoption of these new standards, however there has been no change to the way the Company measures the numbers in the accounts.

The changes to these accounts required by FRS 102, FRS 104 and the amended SORP may be summarised briefly as follows:

•        the reconciliation of movements in shareholders' funds has been renamed "Statement of changes in equity";

•        the balance sheet has been renamed "Statement of financial position";

•        the Company no longer presents a statement of cash flows or the related note, as it is no longer required for an investment company which meets certain specified conditions; and

•        new notes have been included entitled "Called-up share capital", "Financial instruments measured at fair value" and "Events after the interim period that have not been reflected in the financial statements for the interim period".

Other than these changes, the accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2015.

3.         Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The taxation charge comprises irrecoverable overseas withholding tax on dividends receivable, and overseas capital gains tax.

4.         Return/(loss) per share

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	31 March	31 March	30 September
	2016	2015	2015
Revenue return £'000	642	1,039	7,151
Capital return/(loss) £'000	51,606	73,074	(20,154)
Total return/(loss) £'000	52,248	74,113	(13,003)
Weighted average number of Ordinary shares in issue during the period	168,873,716	169,225,716	169,225,716
Revenue return per share	0.38p	0.62p	4.23p
Capital return/(loss) per share	30.56p	43.18p	(11.91)p
Total return/(loss) per share	30.94p	43.80p	(7.68)p

5.         Dividends paid

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	31 March	31 March	30 September
	2016	2015	2015
	£'000	£'000	£'000
2015 final dividend paid of 4.20p (2014: 2.75p)	7,101	4,654	4,654

No interim dividend has been declared in respect of the six months ended 31 March 2016 (2015: nil).

6.         Called-up share capital

	(Unaudited)	(Unaudited)
	Six months	Six months	(Audited)
	ended	ended	Year ended
	31 March	31 March	30 September
	2016	2015	2015
Ordinary shares of 10p each, allotted, called-up and fully paid:
Opening balance of shares in issue	169,225,716	169,225,716	169,225,716
Shares repurchased and cancelled	(352,000)	-	-
Closing balance of shares in issue	168,873,716	169,225,716	169,225,716

7.         Net asset value per share

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 March 2016 of 168,873,716 (31 March 2015: 169,225,716 and 30 September 2015: 169,225,716).

8.         Financial instruments measured at fair value

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 March 2016, all investments in the Company's portfolio were categorised as level (a) in accordance with paragraph 11.27 of FRS 102. That is, they are valued using quoted bid prices in active markets (31 March 2015 and 30 September 2015: same).

9.         Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.

 

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