Pacific Assets Trust

Pacific Assets Trust plc

(the “Company” or the “Trust”)

Unaudited Half Year Report

for the six months ended 31 July 2023

Financial Highlights

Key Statistics

*  Source: Morningstar.

^  Alternative Performance Measure (see Glossary).

¹   UK Consumer Price Index + 6% – the Company’s Performance Objective (see Glossary). Figures for six month periods are calculated on a pro rata basis.

Peer Group Performance

Performance Assessment

The Company’s performance objective, against which the Portfolio Manager’s performance is measured, is to provide shareholders with a net asset value total return in excess of the UK Consumer Price Index (“CPI”) plus 6%, calculated on an annual basis and measured over three to five years.

The Board also monitors the Company’s performance against its peer group. An analysis of the Company’s performance can be found below, in the Chairman’s Statement, and in the Portfolio Manager’s Review.

Peer Group Net Asset Value per Share (Total Return)^

Source: Morningstar. Figures show the value as at 31 July 2023 of £100 invested at the start of the period.

^  Alternative Performance Measure (see Glossary).

¹  The Company’s Performance Objective (see Glossary).

Chair’s Statement

Return

The net asset value (“NAV”) total return for the six months ended 31 July was 0.3% (2022: 0.5%). The NAVs of the five other trusts in our monitored peer group all decreased, with a collective average NAV decline of 9.7% (2022: average decline of 7.3%).

Over longer periods we consider investment return against the UK CPI plus 6%, in that we believe that our largely UK-based investors are seeking to protect their capital in real terms while extracting a premium over their home markets from the faster growing Asian economies. Over the last five years, our annualised return of 7.5% has fallen behind the annualised CPI plus 6% figure of 10.9%. This is of course a result of the rise in inflation in the West, which has persisted into this year and looks likely to take some time to reduce.

While the Board would like to see a higher rate of return from our investments in Asia, we note the negative total return (sterling adjusted) of the MSCI All Country Asia ex Japan Index of -3.3%, as well as the average decline in the net asset values of the Company’s peers, during the period. We are pleased that the Portfolio Manager has been able to protect shareholders’ capital in a period of muted returns from Asian markets.

The Company’s high exposure to India has continued to be helpful to returns: seven of the top ten principal contributors to the return in this six-month period were Indian companies, including CG Power & Industrial Solutions, Cholamandalam Financial Holdings and Tube Investments.

China missed its growth forecasts in July, weakening its economic outlook and this lacklustre performance is reflected in the Company’s principal detractors, which were primarily companies based in China and Hong Kong including Vitasoy, Vinda International and Glodon.

Further analysis of the Company’s performance can be found in the Portfolio Manager’s Review.

Share Price Performance

The Company’s shares traded at an average discount of 6.5% during the period (2022: 10.5%). The share price total return of 3.7% exceeds the Company’s NAV total return of 0.3%, reflecting a narrowing of the share price discount from 8.6% at the Company’s financial year end to 5.5% at the end of July. This improved rating reflects the good relative and absolute performance of the Company.

The Board continues to work on improving investors’ awareness of the Company and the attributes that distinguish it from its competitors, including the Portfolio Manager’s long-held investment approach which focuses on sustainability and capital preservation. Our aim is to improve demand for the Company’s shares which will further reduce the share price discount and, ultimately, place us in a position to grow the Company through the issue of new shares at a premium to NAV.

The Board

During the period, James Williams retired from the Board and I succeeded him as Chair. I would like to thank James for his excellent stewardship of the Company during his time as Chair.

Charlotta Ginman, our Audit Committee Chair, intends to retire at the next Annual General Meeting in 2024. The Board is in the advanced stages of recruiting her successor and hopes to make an announcement in the near future.

The Outlook

Continued high inflation in the UK means that it will be a challenge, in the shorter term, to achieve our objective of exceeding UK CPI plus 6%. However, the long-term outlook for Asian markets looks promising. Asia’s constituent economies are expected to outgrow other regions over the coming years, even if the region remains vulnerable to the shorter-term consequences of recession in the US, uncertainties regarding China’s economic growth and seemingly ever-present geopolitical concerns. India and Southeast Asia have seen stronger earnings growth in their post-Covid recovery and are expected to be the fastest growing economies this decade. Against that backdrop, our Portfolio Manager will continue to build the portfolio from the bottom up, focusing on identifying and selecting companies with successful and experienced management teams, strong balance sheets and sustainable businesses.

Andrew Impey

Chair

12 October 2023

Portfolio Manager’s Review

Performance

Little information of value can be gleaned from short-term performance but it has been a satisfactory period that is consistent with the medium and longer-term performance of the Company. It is noticeable that the top ten contributors to performance are predominantly listed in India and Indonesia where attractive tailwinds are assisting high quality stewards and franchises to innovate and grow.

It is also noticeable that the largest detractors are mostly listed in Hong Kong, China or Taiwan where economic and geopolitical news has been deteriorating, possibly at an accelerating pace. As mentioned in previous reports we believe that news headlines tend to provide low value, short shelf-life information. As such, articles on the economy or speculations on global trade tensions have no influence on the transactions listed below.

Transactions

We aim to build resilient portfolios of high quality companies with diversified streams of cash flows, which have the ability to grow in value over the long term. High quality companies at reasonable valuations tend not to come along too often. In the absence of such opportunities, we are very comfortable long-term owners of investee companies. Accordingly, the turnover figures on a new names basis tends to be in the low teens which is roughly in-line with our investment horizon of at least five years.

Figure 1 shows the new additions and complete sales during the period.

Figure 1

New Additions

Over the period, we initiated a new holding in Telkom Indonesia (Indonesia: Communication Services). Telkom Indonesia has a strong track record of growth and profitability servicing as the backbone of Indonesia’s digital growth. Telecoms is notoriously a tough industry as there is little in the way of differentiation between what tend to be equally matched players. In Indonesia however, Telkom has significant market leadership in a consolidated market providing them valuable cash flows to reinvest in growth ahead of peers. Telkom is also a unique example of a telecom company which has a robust balance sheet: again differentiating them from most global and local peers. Outcomes such as these do not only provide financial resilience but also exemplify superior governance.

In India we purchased Cyient (India: Information Technology) as we believe the company has set itself on a clear path of improvement under a new and impressive management team. The new CEO, Karthikeyan Natarajan, is focused and determined on building Cyient into a leading provider of outsourced engineering services, globally. We also purchased Triveni Turbines (India: Industrials), India’s leading steam turbine maker, again, with an eye on global expansion. Stewarded by the Sawhney family, Triveni has ambitions to build a simple, focused business in turbines that can compete on a global scale. Triveni’s niche of small turbines is an area that requires long-term, trust-based relationships with customisation of end products and a robust aftermarket presence. These characteristics provide profitable, steady cash generation which help to protect a net cash balance sheet.

Lastly, we purchased Hangzhou Robam (China: Consumer Discretionary). Robam develops, manufactures and sells household electrical appliances where they have established a powerful brand name and a loyal following. Robam’s end markets are experiencing weak demand on the back of muted consumer confidence and a fragile housing market. We do not believe we have any ability to pinpoint bottoms and tops but are convinced by the quality of the stewardship, franchise and the nearly US$1billion of net cash on the balance sheet. Longer term, we believe Robam has the ability to transfer its acumen and brand strength into product categories such as dishwashers where penetration levels leave a long runway for growth.

Complete Sales

The most significant sale during the period was Techtronic Industries (Hong Kong: Industrials). Techtronic is a major player in the power tools space where it has curated world-class brands and led the industry’s evolution towards battery-powered tools. However, we had grown increasingly uncomfortable with the lack of humility and overconfidence portrayed by the management team and how this may feed into greater fragility of earnings going forward.

In India, we sold the Company’s marginal positions in Infosys (India: Information Technology) and Info Edge (India: Communication Services). Both positions were sold to fund higher conviction ideas while maintaining the concentration of the portfolio.

The last disposal to mention was Public Bank (Malaysia: Financials). This was an unusually short time for the Company to hold an investment but this decision was the consequence of our ability to change our minds quickly rather than a shortening of our time horizon. Unfortunately, we believe the economic and competitive dynamics in the industry will provide too strong a headwind for Public Bank to be able to protect and preserve the Company’s capital: despite their admirable track record of conservatism and long-termism.

Other Notable Activity

We added to the Company’s holding in Tech Mahindra (India: Information Technology). We have been long-term holders of the company and increased the position size following the appointment of a new CEO, a 20-year veteran from Infosys, who we believe has the ability and opportunity to drive this franchise to the next level.

To control position sizes following a long period of strong performance and to manage the concentration in a few names, we trimmed three of the top ten holdings which are in India: CG Power (India: Industrials), Tube Investments (India: Consumer Discretionary) and Mahindra & Mahindra (India: Consumer Discretionary). These reductions should not be interpreted in any way as a loss of confidence in the long-term prospects of these companies. Other subtractions we made were Elgi Equipments (India: Industrials) for reasons of valuation only and Syngene (India: Health Care) after a meeting with the company in India prompted small concerns about the evolution of the culture.

Outlook

There is evidence that the economy in China is deteriorating and that geopolitical headwinds are strengthening. This may cause heightened volatility especially as we near the election in the US in 2024 which is likely to sharpen US rhetoric and actions against China. Such volatility may provide attractive opportunities to invest in high quality companies that are well placed to contribute to, and benefit from, the many sustainability challenges facing the region and the world. We believe that over the longer term investing in companies with high quality stewards, franchises and financials is the best way of protecting and growing shareholder capital through economic and political cycles.

Stewart Investors

Portfolio Manager

12 October 2023

Contribution by Investment

Contribution by investment for the six months ended 31 July 2023

Top 10 contributors to and detractors from absolute performance (%)

Portfolio Valuation

as at 31 July 2023

Income Statement

for the six months ended 31 July 2023

The Total column of this statement represents the Company’s Income Statement.

The Revenue and Capital columns are supplementary to this and are both prepared under guidance published by the Association of Investment Companies (“AIC”).

All revenue and capital items in the Income Statement derive from continuing operations.

The Company had no recognised gains or losses other than those declared in the Income Statement.

All of the return and total comprehensive income for the period is attributable to the shareholders of the Company.

Statement of Changes in Equity

for the six months ended 31 July 2023

Statement of Financial Position

as at 31 July 2023

Notes to the Financial Statements

1. Basis of preparation

The condensed financial statements for the six months to 31 July 2023 comprise the statements set out above, including the related notes below. They have been prepared in accordance with FRS 104 ‘Interim Financial Reporting’ and the principles of the AIC’s Statement of Recommended Practice published in July 2022, using the same accounting policies as set out in the Company’s Annual Report and Financial Statements for the year ended 31 January 2023.

Going Concern

The Board has considered a detailed assessment of the Company’s ability to meets its liabilities as they fall due, including modelling the effects of substantial falls in markets and significant reductions in market liquidity on the Company’s assets and liabilities. In light of the results of these tests, the Company’s cash balances, the liquidity of the Company’s investments and the absence of any gearing, the Directors are satisfied that the Company has adequate financial resources to continue in operation for at least the next 12 months from the date of approval of these financial statements and that, accordingly, it is appropriate to adopt the going concern basis in preparing these financial statements.

Fair value

Under FRS 102 and FRS 104 investments have been classified using the following fair value hierarchy: Level 1 – Quoted prices in active markets.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data), either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable).

All of the Company’s investments fall into Level 1 for the periods reported.

2. Portfolio Management and AIFM fees*

*  Please refer to the most recent annual report for more details of the management fee structure.

3. Return per ordinary share

The total return per ordinary share is based on the return attributable to shareholders of £1,276,000 (six months ended 31 July 2022: £761,000) and on 120,958,386 shares (six months ended 31 July 2022: 120,958,386 shares), being the weighted average number of shares in issue.

The revenue return per ordinary share is calculated by dividing the revenue return attributable to shareholders of £4,065,000 (six months ended 31 July 2022: £2,030,000) by the weighted average number of shares in issue as above.

The capital loss per ordinary share is calculated by dividing the capital loss attributable to shareholders of £2,789,000 (six months ended 31 July 2022: loss of £1,269,000) by the weighted average number of shares in issue as above.

4. Dividends

5. Investments

The Company received £43,226,000 (period to 31 July 2022: £ 40,306,000; year to 31 January 2023: £67,323,000) from investments sold in the period. The book cost of these investments when they were purchased was £27,210,000 (period to 31 July 2022: £24,662,000; year to 31 January 2023: £46,759,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

During the period the Company incurred transaction costs on purchases of £46,000 (period to 31 July 2022: £30,000; year to 31 January 2023: £87,000) and transaction costs on sales of £86,000 (period to 31 July 2022: £80,000; year to 31 January 2023: £142,000).