This week I’m focusing on Baillie Gifford’s Asian (Asia Pacific ex-Japan but including India) investment trust, Pacific Horizon (PH).
For quite a while, PH languished near the bottom of the performance tables for Asia funds. This time last year, it ranked last in its peer group, trailing by some margin.
Now though, things have changed. Over 12 months PH’s net asset value (NAV) is up 12.9%, making it top of its peer group and nicely ahead of the 2.2% average return for all Asia Pacific ex-Japan trusts.
In addition, its discount has been narrowing, against the peer group trend, so the share price is up 16.1% compared to a 2% rise for the average competing fund.
Shareholders in PH will be hoping this return to form is sustainable.
The underperformance had a knock-on effect on PH’s popularity. It shrank through buy-backs and tenders and is now one of the smallest funds in its peer group, with a market capitalisation of £125 million and gross assets of £140 million – though fortunately still large enough to be viable.
How long it can maintain this though is open to question, as in October 2013 it instituted a semiannual tender offer for 5% of its share capital, at a 2% discount to NAV, which is triggered if the average discount over the past six months to 31 July or 31 January has exceeded 9%.
Over the six months to 31 January 2014, the average discount was 11.3% and so a tender was conducted in March and April this year. Almost 48% of PH’s shares were tendered so the fund shrank by 5%.
Today, the discount is 11% and the discount since 1 February has ranged between 12.1% and 6.8%. I reckon it is touch and go whether another tender will be triggered at the end of this month.
PH is not the only fund to sign up to this form of discount control. The trouble with this arrangement is that a full take-up of the tender offer is pretty much guaranteed each time it is triggered.
Who wouldn’t opt to sell their shares at an 9% or 10% premium to the current mid-price? After all, you could always buy back in again.
PH should, of course, be buying back shares during each six-month period to ensure the tender is not triggered, but the last time it repurchased shares outside of the tender was 23 October 2013.
The trust says it undertakes buyback shares opportunistically but has not done so since it has implemented the semi-annual tender offers.
In March this year, Baillie Gifford changed the manager of the fund (after consulting the board), transferring responsibility for PH to Ewan Markson-Brown from Mike Gush.
Gush had been in place for five years, having taken on the job from Gerald Smith, in 2009.
When he stopped running the fund it had beaten its benchmark index (the MSCI All Country Asia ex Japan index) over the previous five years but was lagging most of the peer group over that period.
However, as I said previously when talking about Electra, looking at performance periods that start around the depths of the credit crisis can be misleading as the funds with the most volatile portfolios will shine.
Choosing the start of a performance measurement period can make a big difference to comparative performance (ask anyone working in the marketing department of an asset manager).
Unfortunately for Gush, over the five years to 31 July 2013, the end of PH’s last accounting year, it underperformed its benchmark in share price terms in every year and underperformed in NAV terms in three out of five. The chair described the performance as ‘unsatisfactory’ in the September 2013 statement and this might have sealed Gush’s fate.
Markson-Brown joined Baillie Gifford in September 2013. Prior to this he was senior vice president for emerging market equities at Pimco Europe, and before that managed Asian equities at Newton.
Comparing the portfolio at the end of May 2014 to the end of March, there has been little change. The weighting in Hong Kong & China, lumped together in PH’s factsheets, has fallen from 32% to 26.4% and the weighting in India has increased from 11% to 15.7% (but some of that might be down to performance as India bounced following Modi’s election).
Also, Chinese gas company Kunlun Energy has dropped out of the top 10 holdings to be replaced by Naver, the Korean equivalent of Google. It is possible there has been a wholesale change to the portfolio outside the top 10 holdings but that is probably unlikely.
The team that generates investment ideas for Markson-Brown is unchanged and it still includes Gush.
If, as I believe, revamping the portfolio is not driving improved performance, what is?
I think we are seeing a slight shift in sentiment towards the growth stocks Baillie Gifford’s style favours and away from the slow and steady stocks that investors turned to in the face of economic uncertainty.
The biggest question mark for investors in PH is over the sustainability of that switch. Already we have seen some profit taking in the technology and biotech sectors, and doubts still exist about the strength of the Chinese economy.
The board must be hoping the fund’s improved performance will have a beneficial impact on PH’s discount.
However, I think good performance will need to persist for some time before the fund can attract many new shareholders. Meanwhile, I would be in the market, buying back shares to ensure the semiannual tenders are not triggered.
James Carthew is a director at Marten & Co