Pacific Horizon (PHI ) was too late to the party in China at the end of last year, its managers Roderick Snell and Ben Durrant have acknowledged. 

Half-year results for the £511m portfolio of Asia Pacific equities saw the Baillie Gifford managers extend their run of poor performance.

They delivered a net asset value (NAV) return of 3% over the six months to end of January, which compares to a 6.7% rise by the MSCI All Country Asia ex Japan index. The shares slid 4% over the same period and the discount nearly doubled over the period to 14.2%.

It is another disappointing set of results for the trust, which is the only one in its Asia Pacific equity sector to log an NAV and share price decline over three years. The NAV was down 5.9% versus average 7.1% growth by the average trust in the sector. Meanwhile, the shares are down 12.2% against an average 6.8% gain.

The managers blamed their stock picking in both China and South Korea. They were not able to fully participate in the China rally during the fourth quarter of 2024, after the government pledged $1.4trn in economic support for the country, in part to tackle the ailing property market.

Snell and Durrant said they made ‘significant additions’ to Chinese stocks but the longstanding underweight position in Chinese banks weighed on performance. They had previously decided to steer clear of the Chinese banking sector due to concerns over margin pressures, regulatory issues, and state control.

‘While this strategy has been correct long-term, Chinese financials rose nearly 30% in this period, as the government bolstered the economy and the property sector,’ they said.

Snell and Durrant believe that China hit an important inflection point in September. They describe the stimulus plans as being ‘significantly more meaningful than anything seen since the Covid-19 pandemic’.

‘The potential for further market gains is significant, given the low valuations of many high-quality Chinese companies and the substantial household savings accumulated over recent years,’ the duo noted.

Tech stocks disappoint

Samsung Electronics – which is the second largest holding in the portfolio at 5.6% - detracted from performance. Its shares were down 38% over the six-month period as the company ‘fell behind in high bandwidth memory required in hyperscale datacentres’. The duo describe this issue as temporary.

‘Despite this, Samsung remains the global leader in memory chips, has new semiconductor management, and aims to launch next-generation high bandwidth memory this year,’ said Snell and Durrant.

‘Trading below book value, we see it as an attractive long-term investment.’

The managers also acknowledged that stock picks in the technology sector had not paid off.

‘We missed out on Xiaomi’s 135% rise, driven by strong results and market excitement relating to its AI capabilities, while our main holdings, Silergy and SG Micro, faced weak semiconductor demand,’ the duo explained.

During the six-month period, Snell and Durrant trimmed their exposure to India following a market correction. They said the economic outlook for the country remained strong but ‘valuations had become overextended’.

Over the year to the end of January, the weighting to India reduced from 34% to 18.9%.

‘With many companies trading at decade-high valuation multiples, and more than half of the companies we monitor missing earnings estimates in their recently quarterly results, there was a sharp correction in the market, especially in the mid and small cap sectors,’ they said.

The managers describe Vietnam as ‘the best structural growth story in Asia’, thanks to its export manufacturing. While a clampdown on corruption and issues in the property sector have caused volatility in recent years, the duo welcome a political reshuffle. They hope this will herald ‘a period of greater political stability’ and a more business-friendly environment.

Pacific Horizon currently trades on a 12.7% discount to NAV.