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Turnaround Asia trust scans horizon for unlisted stocks

12 September 2018

Top-performing Asia investment trust Pacific Horizon wants to exploit fund manager Baillie Gifford's growing interest in private companies by seeking shareholder permission to invest up to 10% in unlisted stocks.

Top-performing Asia investment trust Pacific Horizon (PHI) wants to exploit its fund manager Baillie Gifford's growing interest in private companies before they hit the stock market and is seeking shareholder permission to invest up to 10% in unlisted stocks.

Annual results published last week show the £186 million portfolio generated a total return of 13.6% on net assets in the year to 31 July, beating its benchmark, the MSCI All Country Asia ex-Japan index, which returned 6% in sterling terms.

As a consequence shareholders in the investment trust enjoyed a classic re-rating, with the shares moving from a 10% discount below net asset value to a 5% premium above NAV at the end of the period. This generated a total return to them of 26.9%, which is all the more remarkable as it did not include a dividend due to a lack of investment revenue to make a payment possible.

Upping unquoteds

Baillie Gifford manager Ewan Markson-Brown added two unlisted stocks to the listed fund in the period, giving the trust a total of four accounting for 1.6% of its assets.

The first addition was NIO, the electric and driverless car maker backed by Chinese internet giants Baidu and Tencent that is China's rival to Tesla (TSLA.O). Also held by Scottish Mortgage Trust (SMT), Baillie Gifford's flagship that has pioneered investments in unquoted companies, Nio does not intend to be private for long, having last month filed plans to raise $1.8 billion in a flotation on the New York Stock Exchange later this year.

Pacific Horizon also helped JHL Biotech to delist from the stock market in Taiwan with ‘the intention of relisting on another exchange which would give the company access to a larger pool of more sophisticated investors’, said Markson-Brown.

‘As part of the delisting process, we participated in a convertible bond, which gives extra security and return over the pure equity holding. We expect the stock to relist by the end of 2019,’ he said.

The trust's chairman Jean Matterson said the board wanted to increase the manager's freedom to invest off the stock market as it anticipates ‘being shown an increasing number of interesting unlisted investment opportunities, particularly Chinese companies, over the coming years’.

It said Baillie Gifford was upping the resource behind the research and management of unlisted investments, where it currently holds $2 billion in 45 companies around the world.

‘Given the increasing quantum of potentially attractive unlisted investment opportunities…the managers should have the opportunity to invest up to a maximum of 10% of total assets…in unlisted equity opportunities in the Asia Pacific region and Indian sub-continent,’ she said.

Shareholders will be asked to vote on increasing the unlisted portion at their annual general meeting in November.

In the hunt for unlisted companies, Markson-Brown will focus on those benefiting from ‘unprecedented technological change’ that he believes can grow earnings and revenues by around 15% a year for the next five years. However, he warned that this means hunting for high growth investments where the founders have a ‘specific goal, even if it is at the expense of near-term profitability’.

‘If we do not accept the risk and uncertainty that arises from investments such as these, we will miss out on great opportunities,’ he said, echoing arguments by Scottish Mortgage managers James Anderson and Tom Slater.

‘Hence our continued willingness to embrace asymmetric returns – unlimited upside returns and a maximum loss of 100% on the downside…while readily acknowledging that many of our investments will inevitably be less successful.’

Goodbye Baidu

On the public listed companes in the portfolio, Markson-Brown reduced his holding in Tencent (0700.HK) and sold Baidu (BIDU.O) and travel agent Ctrip.com (CTRP.O) as he believed their growth potential was now lower than he first expected.

In keeping with his search for new technologies, and in line with the investment in unlisted NIO, Markson-Brown believes the ‘rapid change’ seen in the global transportation market will ‘make it a fundamentally different industry’ in 10 to 20 years, with China having a ‘scale advantage’ in the electric vehicle market.

To take advantage of China's advances here Pacific Horizon took a new position in nickel producer PT Vale Indonesia (INCO.JK). Nickel is a key component in electric batteries and Markson-Brown said the world was not producing enough of the metal to cope with demand.

‘Total demand for nickel from electric vehicles could equal the whole of the global nickel market today,’ he said.

‘To this end it appears there should be a significant and sustained rise in the price of nickel to meet the additional supply that the market will demand and we believe that Vale Indonesia has the ability to increase production to meet this need.’

Markson-Brown said there was ‘significant potential for positive returns’ from Asia Pacific and that he remained focused on ‘stocks which will benefit from the economic, social, and technological change in evidence across the region’.

He was not concerned about the ‘recent market noise’ around trade wars, a rising dollar, and slowing global growth, which he said were ‘eclipsing the underlying reality’.

‘When the market returns to looking at fundamentals in Asia, it is our expectation that other investors will see what we already see: very healthy, growing economies, with cheap companies and undervalued currencies, creating significant opportunities for long-term financial benefit,’ he said.

Short-term turbulence

Two years ago Pacific Horizon promised to hold a tender offer to buy back up to a quarter of its shares if NAV growth did not beat its benchmark by 1% a year over the next three years. Currently it is well ahead of its July 2019 target with a three-year portfolio return of 85.7%, compared to the Asia Pacific index return of 63.7%.

Improved performance and demand for the shares saw the trust deliver 52% last year and it remains joint top of its AIC Asia Pacific sector over one-year with a 8.1% toal shareholder return.

However, short-term performance has been hit by the sell-off in emerging markets. According to data from Numis Securities, in the past three months the NAV has fallen 15%, double the decline of the index, partly reflecting the extra volatility caused by the 11% gearing - or borrowing - the trust uses to juice long-term returns. The shares currently stand at a 1.5% discount to NAV.

Investment company news brought to you by Citywire Financial Publishers Limited.

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