Quarterly Shareholder Update Q 1 January - 31 March 2020 1
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Pacific Assets Trust plc Quarterly Shareholder Update Q 1 January - 31 March 2020 1 Image location: Mumbai This document is a financial promotion for Pacific Assets Trust plc (the “Trust”) only for those people resident in the UK for tax and investment purposes. Investing involves certain risks including: • The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested. • Emerging market risk: emerging markets may not provide the same level of investor protection as a developed market; they may involve a higher risk than investing in developed markets. • Currency risk: the Trust invests in assets which are denominated in currencies other than pound sterling; changes in exchange rates will affect the value of the Trust. • The Trust’s share price may not fully reflect net asset value. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. For an overview of the terms of investment, risks, returns and costs and charges please refer to the Key Information Document which can be found on the Trust’s website: www.pacific-assets.co.uk. If you are in any doubt as to the suitability of the Trust for your investment needs, please seek investment advice. 03 Contents 04 COVID-19 11 Feature - Companies supporting the fight 05 Significant Trust against COVID-19 changes 12 Trip report - India 07 Commentary - Active versus passive investment 14 Other news in achieving sustainable - Implementing SDG 12: development Responsible Consumption and Production 09 Company profile - Modern Slavery and Human - Marico Trafficking Statement 2020 10 Proxy voting 15 Portfolio update Investment objective The Trust’s Investment Objective is to achieve long-term capital growth through investment in selected companies in the Asia Pacific region and the Indian sub-continent, but excluding Japan, Australia and New Zealand (the ‘Asia Pacific Region’). Up to a maximum of 20% of the Trust’s total assets (at the time of investment) may be invested in companies incorporated and/or listed outside the Asia Pacific Region (as defined); at least 25% of their economic activities (at the time of investment) are within the Asia Pacific Region with this proportion being expected to grow significantly over the longer term. Q1 Update 2020 Pacific Assets Trust plc 04 COVID-19 The current environment and impact Amidst the horror of daily accumulating behaviours are too early to predict but it is statistics on illness and fatality, it risks appearing plausible that spending patterns and attitude to irreverent to echo that overused idiom ‘business debt will be more cautious in the future. as usual’. This is not a usual time. It is a complex and harrowing period but we are confident that The re-establishment of global health is paramount we are well placed to carry out our investment and it invites reproach to count the cost of this process and philosophy: which aims to preserve pandemic. However, we are mindful that global and grow shareholders’ wealth by investing in debt is increasing while a powerful handbrake is high quality companies on behalf of the Trust. being applied to cash generation. This is an On a practical basis we have been committed to unsustainable combination and we are even more flexible working, including remotely, for many wary of the risks, including national service, facing years and we are adept at multi-location meetings some or all of our companies. Currently, we are from decades of investment trips. As such there reassured that a number of the companies held in 4 has been minimal disruption to our investment the Trust have net cash balance sheets - there are process from home confinement. sizeable buffers here to help weather storms. Over the last thirty years there has been a long catalogue On a philosophical basis, nothing has changed, of misfortunes impacting Asian markets and we and we continue to prefer high quality companies aim to invest with stewards who have a proven boasting strong cash-flows and robust balance history of successfully navigating such storms. sheets. These characteristics frequently become more popular during times of stress. It is early COVID-19 Shareholder Letter days and this time could be different but initial In April we published a shareholder letter on the signs tentatively suggest that this historical pattern impact of COVID-19 on investment returns in Asia 5 could repeat. It has already been a destructive time which you can access on the Trust’s website . globally (the MSCI AC World Index fell by 16.0% in 1 sterling terms ) and in Asia (the MSCI AC Asia 1 2 Source: FactSet, Index data is net of tax. For full ex-Japan Index fell by 12.8% in sterling terms ), discrete performance please refer to page 15. since the beginning of the year. 2 As footnote 1. During this awful period signs are that many 3 Source: https://trends.google.com/trends/ mind-sets have changed. Google search statistics explore?q=recession indicate that interest in the word ‘recession’ has 4 Net cash: a company’s total cash minus total more than quadrupled3. Meanwhile conservative liabilities when discussing financial statements. politicians have embraced big government and 5 Source: https://www.pacific-assets.co.uk/ investors have sought safety over risk. The trust-information/articles-and-insights/covid-19- longevity of these changes and the implications for and-investment-returns-in-asia/ Pacific Assets Trust plc Q1 Update 2020 05 Significant Trust changes Image location: Japan During the quarter we were able to buy two new with some companies such Kasikornbank in high quality companies for the Trust. Shenzhen Thailand and Square Pharma in Bangladesh Inovance is a privately owned and managed indiscriminately sold down to very attractive engineering firm listed in Shenzhen. The valuations. The volatility was so great the founding partners trained at Emerson and started equity markets in Bangladesh and Sri Lanka Inovance in 2003 specialising in industrial were closed and circuit breakers were tested in automation and electric vehicles. They have many equity markets around the region. While instilled an excellent engineering culture and this is unwelcomed it is not unexpected and the spend 10%6 of their sales on innovating new patient capital provided by the Trust makes it products. Unlike many of their competitors they easier to withstand and take advantage of have a prudent balance sheet and good cash such developments. generation. Though there is a risk to them We also trimmed the position size of ten collecting receivables from their customers which companies in the Trust over the period. The most benefit from state subsidies. prominent of these were OCBC in Singapore The second company we are pleased to initiate a where we felt prospects for profitable loan growth holding in for the Trust is Astral Poly Technik. had diminished and Unicharm in Japan in order Since its incorporation in 1996 by Sandeep to control the position size. We reduced E.Sun Engineer the company has garnered an enviable Financial after strong performance and with the reputation amongst Indian plumbers as the leading prospect of a challenging macro environment. We brand of CPVC (chlorinated polyvinyl chloride) also reduced Delta Electronics and Chroma ATE pipes. Today, Astral is the only licensee of the which have similarities to the new purchases in Bendale brand of Lubrizol and they are building a the Trust, Shenzhen Inovance and Pentamaster. powerful cash generative business in adhesives. We were extremely sad to make the complete The track-record of profitability and financial divestments of Manila Water and BPI in the probity is excellent and we think the risk of Philippines. We have partnered with the Ayala periodic cyclical slowdowns is countered by a family for decades and have great respect for the long runway for growth from a large wonderful contribution they have made in the addressable market. development of the Philippines. However, the political climate has changed and the relationship In addition to these new purchases we were also with the government is now quite acrimonious. able to add to some of our existing holdings at This combined with higher gearing led us to lower valuations. conclude that the risk reward ratio was no longer in our favour. There was extreme volatility during the quarter Q1 Update 2020 Pacific Assets Trust plc 06 The outlook for the health of people and economies in Asia is extremely uncertain. Many western economies have effectively shut down. Hopefully this will pass quickly but these economies house many of the customers for Asian companies. Consequently, we expect order and payment delays and possibly cancellations. Over the last decade debt has been rising across individuals and institutions in Asia thereby making the region more vulnerable to a demand halt. Domestic consumption may also be challenged as employment prospects deteriorate and consumption is deferred. Against this, the lower price of oil, interest rates and domestic currencies are a necessary but possibly insufficient elixir until orders recommence. Sadly this is not the first time that Asia has experienced a shock and we are fortunate that many of the companies we own have vivid memories of difficult times. As such they are prepared with a robust balance sheet and enviable cash generation. This not only allows them to weather any economic storm but also take advantage of any capital allocation opportunities that may arise.