Pacific Assets Trust: Recent Financial Performance, Sustainability, and Strategic Updates Amid Global Challenges

Key Points:

1. Pacific Assets Trust’s annualized return of 7.7% lags behind its performance objective, but inflation stabilization offers hope for improved results.
2. Indian and Taiwanese companies were key contributors to returns, while Chinese companies struggled amid economic challenges.
3. The Company maintains its focus on sustainability but will not apply for a UK SDR label, continuing its qualitative approach to sustainable investing.

Pacific Assets Trust plc (LSE:PAC) has released its latest report, addressing its performance over recent periods, sustainability considerations, and strategic positioning as it navigates a dynamic and often unpredictable global environment. The Company continues to focus on delivering long-term returns for its predominantly UK-based investors by leveraging the faster-growing economies of Asia, despite recent challenges posed by global inflation and varying economic conditions across the region.

Investment Performance

Over the past five years, the Company’s annualized return of 7.7% has lagged behind its performance objective of UK CPI plus 6%, which stood at 10.8%. The significant disparity is primarily attributed to the unusually high inflation in the UK and globally in recent years. However, with inflation in the UK showing signs of stabilizing and returning toward the Bank of England’s 2% target, the Board remains optimistic that the Company's performance objective will become more attainable in the near future.

In terms of net asset value per share, the Company delivered a positive return in the first half of the financial year. However, its performance of 10.8% fell short of both the peer group average return of 12.9% and the MSCI All Country Asia Pacific ex-Japan Index return of 14.9%. Despite this, Pacific Assets Trust’s exposure to India has proven to be a bright spot, with Indian companies such as Mahindra & Mahindra, CG Power, and Triveni Turbine being key contributors to returns. Taiwanese companies, particularly in the technology and semiconductor sectors, also performed well, with Voltronic Power, TSMC, and Chroma ATE showing strong results.

However, these positive contributions were offset by challenges related to capital gains tax in India, which increased from 10% to 12.5%. Additionally, companies exposed to the struggling Chinese economy, including Shenzhen Inovance, Wuxi Biologics, and Koh Young Technology, were principal detractors, as China continues to grapple with post-COVID economic issues, a property downturn, government debt, and weak domestic spending.

Share Price Performance and Discount

The Company’s shares traded at an average discount of 10.4% during the reporting period, which is slightly below the sector average of 14.7%. Share price performance, however, was positive, with a total return of 11.8%, slightly outperforming the net asset return of 10.8%. This reflects a narrowing of the discount on the share price compared to the start of the period. To improve investor demand and awareness, the Board, in collaboration with its Sales, Marketing, and Communications Committee, has been working with the Portfolio Manager to highlight the Company's distinct investment approach, which prioritizes capital preservation, total return, and sustainability.

The Board has also debated the potential use of share buybacks to manage the discount on the Company’s shares. While it recognizes the limitations of buybacks, the Board remains prepared to act if the discount widens materially. In September, the Company bought back 35,000 shares at a total cost of £131,000, representing an average discount of 12.9%.

Sustainability Focus

Sustainability continues to be a key focus for the Company, and it has evaluated whether to adopt a sustainable investment label under the UK Sustainability Disclosure Requirements (UK SDR). After reviewing guidance from the FCA and the Association of Investment Companies (AIC), the Board has decided not to propose changes to its investment objective and policy for now. The primary concern is that imposing specific measurable objectives and key performance indicators (KPIs) across the entire portfolio may not align with the broader, more qualitative approach to sustainable investing followed by Stewart Investors, the Portfolio Manager.

While the Company will not apply for a UK SDR label at this stage, it remains committed to high standards of sustainability disclosure under the European Union’s Sustainable Finance Disclosure Regulation (SFDR), reporting at the Article 9 level. The Board, AIFM, and Portfolio Manager will continue monitoring regulatory developments in sustainability reporting to ensure compliance and maintain transparency with investors.

Board Updates and Outlook

The Board has seen some changes during the period, with Charlotta Ginman retiring and Nandita Sahgal taking over as Chair of the Audit Committee. Additionally, June Ang, with her extensive experience in the financial sector and Asian emerging markets, has joined the Board.

Looking ahead, the Company is optimistic that its performance objective of exceeding UK CPI plus 6% will become more achievable as inflation stabilizes. In Asia, the outlook varies significantly by country, with India presenting attractive opportunities, while China’s growth remains a concern.