Pacific Assets Trust Plc - Annual Report for the Year Ended 31 January 2024

0203 709 8734

30 April 2024

Company Performance

Performance Summary

1 Source: Morningstar

2 Alternative Performance Measure (see Glossary)

3 The Company’s Performance Objective (see Glossary)

4 See Glossary

Chair’s Statement

Introduction and Results

The net asset value total return for the year ended 31 January 2024 was (1.3)% (2023: +5.7%). While this is a disappointing result relative to the performance objective set by the Board, your Portfolio Manager is to be commended that the Company’s performance over the year was the best of the peer group of four other trusts and an exchange traded fund, all of which also suffered negative returns, with a collective average NAV decline of 9.0% (2023: average decline of 3.0%).

Over longer periods we consider investment return against the UK CPI plus 6% as 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 NAV total return of 7.6% has fallen behind the annualised CPI plus 6% figure of 10.8%. This is a result of the rise and persistence of inflation in Western economies in recent years and we believe that the performance objective remains appropriate.

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 (10.5)%, as well as the strong relative outperformance over the peer group mentioned above. This pleasing relative performance reflects the Portfolio Manager’s emphasis on long term returns and capital preservation. It also reflects, as my predecessor remarked last year, that Asia Pacific markets have not recently delivered the premium return over developed markets, that the asset allocation models suggest should be the case.

Again, the Company’s high exposure to India was helpful to returns: seven of the top ten principal contributors to the return in the year were Indian companies, including CG Power & Industrial Solutions, Tube Investments, and Cholamandalam Financial Holdings. By contrast, China’s weakened economic outlook and lacklustre performance is reflected in the Company’s principal detractors, six of which were companies based in China and Hong Kong including Vitasoy, Glodon and Wuxi Biologics.

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

Sustainability

Shareholders will be well aware that Stewart Investors have long since adopted a sustainable investment strategy and are considered to be amongst the leaders in this field. In selecting the investments that make up the Company’s portfolio, their process aims to generate strong, long-term, risk-adjusted returns by investing in the shares of companies that they consider to be high-quality and particularly well positioned to contribute to and benefit from sustainable development in the Asia Pacific Region.

Pursuant to the Company’s Environmental, Social and Governance (“ESG”) Policy, the Board has chosen to adopt and endorse Stewart Investors’ approach to integrating sustainability into portfolio construction and investee company engagement. This means that, in effect, the Company has a de facto sustainability objective: to achieve long-term capital appreciation by investing in companies which both contribute to, and benefit from, sustainable development, achieving positive social and environmental sustainable outcomes.

Given this long-standing sustainable investment strategy which has been applied in managing the Company’s portfolio, the Company reports against a high standard of sustainability disclosures (Article 9) under the EU Sustainable Finance Disclosure Regulations (“SFDR”) which must be complied with due to the Company being marketed in Ireland. The Company’s annual SFDR Article 9 report, produced by Stewart Investors, begins on page 82 of the Annual Report.

Due to genuine concerns over ‘greenwashing’, in November and after a long delay, the FCA published its Policy Statement on the UK Sustainability Disclosure Requirements (“SDR”), which confirmed that it would be possible for investment companies which met certain qualifying criteria to apply one of four sustainable investment ‘labels’. One of the requirements of the SDR is that any “product” qualifying for a label must have an explicit sustainability objective as part of its investment objective. While sustainability has been and continues to be one of the defining features of Stewart Investors’ strategy, and the de facto sustainability objective is recognised in the Company’s own ESG policy, the Company’s formal, published investment objective does not explicitly reference sustainability.

The Company would therefore need to amend its published investment objective and policy in order to utilise a UK SDR label. The Company’s legal advisers have confirmed that the changes envisaged to explicitly reference sustainability in the objective would be expected to constitute material changes, requiring shareholder approval at a general meeting. This is despite the fact that it has long been the case that the Company only invests in companies that the Portfolio Manager believes are sustainable/have sustainability characteristics.

The Board wishes to understand better whether the adoption of a UK SDR label will bring real benefits to the Company, and have time to consider relevant guidance published by the Association of Investment Companies (the “AIC”), before recommending any changes. Given the proximity of this material change to the Company’s year end, the Board believes it is prudent to take the necessary time to consider if and how the Company’s published investment objective and policy should be developed, rather than formally proposing any changes to shareholders at the AGM in July. As a result, the Company will not apply a sustainability label under UK SDR for the time being.

The Board wishes to emphasise to shareholders that UK SDR will not change Stewart Investors’ strategy in managing the Company’s portfolio. We would also highlight, for the avoidance of doubt, that we have been advised that our existing disclosures are sufficient for maintaining the Company’s classification under Article 9 of the EU SFDR. If any shareholders wish to discuss the implications of the UK SDR with the Board, they are encouraged to contact me through the Company Secretary.

Share price performance

The Company’s shares traded at an average discount to the net asset value per share of 6.4% through the year to the end of January (2023: 10.1%). This was again narrower than the peer group average discount of 9.3%. In line with the investment trust sector generally, the discount narrowed towards the end of December, and at one point the shares briefly traded at a small premium, before the discount widened again towards the end of the financial year to close at 9.2% (2023: 8.6%).

The Board has continued its work to improve the visibility of the Company throughout the year. We wish to bolster our long-standing wealth manager base by attracting a broader range of shareholders, including retail investors who represent a smaller proportion of our shareholder base. The Board has established a new standing subcommittee, the Sales, Marketing and Communications Committee (the “SMCC”), which is chaired by Edward Troughton. The Board has delegated to the SMCC responsibility, together with the Portfolio Manager, for developing and overseeing the marketing and promotional strategy for the Company. It will review all the marketing activities taken by and on behalf of the Company by third parties. The intention is that this will be helpful in increasing wider demand for the Company’s shares. Strong relative performance will assist investor sentiment, as will the Portfolio Manager’s high level of credibility as a sustainable investor; offering an appealing prospect to shareholders who are seeking exposure to Asia through genuinely responsible investing.

Dividend

The Company generated a revenue return of 4.3p per share during the year (2023: 2.5p per share) and, as a result, the Board recommends to shareholders the payment of a final dividend to allow the Company to comply with the investment trust rules regarding distributable income and the Company’s policy to pay out the majority of income earned in any one year.

Subject to shareholder approval at the AGM, a final dividend of 4.0p per share will be paid on 12 July 2024 to shareholders on the register on 14 June 2024. The associated ex-dividend date will be 13 June 2024.

The increased revenue return arose as a result of increased dividend receipts from several companies, most notably Bank OCBC and Overseas Chinese Banking Corporation, in which the Company’s position was increased during the year. We would like to remind shareholders that the Company’s policy is to pursue capital growth, with income being a secondary consideration. Accordingly, shareholders should not expect this higher dividend rate to be maintained.

The Board

During the year, as reported in the Company’s half yearly report, James Williams retired from the Board and I succeeded him as Chair.

In October, we announced the appointment of Nandita Sahgal to the Board, effective 1 January 2024. We were delighted to welcome a Director with extensive expertise both in the financial sector and in Indian and emerging markets. It is intended that Nandita will succeed Charlotta Ginman as Chair of the Audit Committee after Charlotta retires at the conclusion of the AGM in 2024.

In anticipation of her retirement, I would like to extend my sincere gratitude to Charlotta for her dedicated service and incisive contributions during her tenure as Audit Committee Chair. Charlotta’s expertise, professionalism and commitment to upholding the highest standards of financial integrity and governance have been invaluable to the Board.

We adhere to good corporate governance principles that directors should not serve on the Board for over nine years. Accordingly, the Board has appointed an executive search firm to assist in the appointment of a director to replace Sian Hansen when she steps down at the AGM in 2025.

The Annual General Meeting

As some shareholders will be aware, the Company is incorporated in Scotland and our Portfolio Manager, Stewart Investors, have an office in Edinburgh. The Board has decided that this year, the AGM will return to Edinburgh, having last been held there in 2004. The AGM will be held at 12 noon on Tuesday, 9 July 2024, at the Royal College of Physicians of Edinburgh, 11 Queen Street, Edinburgh EH2 1JQ.

As well as the formal proceedings, there will be an opportunity for shareholders to meet the Board and the Portfolio Manager, and to receive an update on the Company’s performance and its key investments.

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