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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Pacific Horizon Investment Trust Plc | LSE:PHI | London | Ordinary Share | GB0006667470 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -1.00 | -0.16% | 628.00 | 625.00 | 627.00 | 630.00 | 623.00 | 630.00 | 95,994 | 16:35:25 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | -20.44M | -23.29M | -0.2529 | -24.71 | 575.47M |
From Apr 2019 to Apr 2024
TIDMPHI
RNS Number : 1229P
Pacific Horizon Investment Tst PLC
08 October 2019
Pacific Horizon Investment Trust PLC
Legal Entity Identifier: VLGEI9B8R0REWKB0LN95
Regulated Information Classification: Annual Financial and Audit Reports
Annual Financial Report
This is the Annual Financial Report of Pacific Horizon Investment Trust PLC as required to be published under DTR 4 of the UKLA Listing Rules.
The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for the years ended 31 July 2018 or 31 July 2019 but is derived from those accounts. The Company's Auditors have reported on the Annual Report and Financial Statements for 2018 and 2019; their reports were unqualified, did not draw attention to any matters by way of emphasis, and did not contain statements under sections 498(2) or (3) of the Companies Act 2006. Statutory accounts for the year ended 31 July 2018 have been filed with the Registrar of Companies and the statutory accounts for the year ended 31 July 2019 will be delivered to the Registrar in due course.
The Annual Report and Financial Statements for the year ended 31 July 2019, including the Notice of Annual General Meeting, has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection http://www.morningstar.co.uk/uk/NSM and is also available on Pacific Horizon's page of the Baillie Gifford website at: www.pacifichorizon.co.uk.
Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.
Baillie Gifford & Co Limited
Company Secretaries
8 October 2019
Chairman's Statement
Performance
In the year to 31 July 2019, the Company's net asset value per share ('NAV') declined by 1.9%*, compared to a 4.2%* rise in the MSCI All Country Asia ex Japan Index in sterling terms. The share price declined by 11.8%* resulting in the shares ending the period at a 7.1% discount having been at a 3.3% premium a year earlier.
Most of the NAV underperformance against the comparative index occurred in the first half of the Company's financial year. As reported in the Interim Report, this was caused by cyclical macro-economic headwinds driving valuations and near-term earnings lower; this particularly affected growth stocks. In addition, there were several stocks in the portfolio whose specific business models were challenged and disrupted faster than the managers expected, or where the threat of greater competition came sooner than the managers originally anticipated. More recent returns continue to be volatile, driven predominantly by investor sentiment in markets. Nonetheless, the Board and Managers continue to believe that investing in growth stocks across the region offers prospects for superior returns over the long term. The Managers' Review below contains a more detailed explanation of the Company's performance.
Over the second half of the year, the Company's NAV increased by 15.4%* and the share price rose by 10.0%(*) , compared to a 9.1%(*) rise in the comparative index. The share price failed to keep pace with the rise in the NAV mainly as a result of a large institution placing a sell order close to the Company's year end.
Tender
At last year's Annual General Meeting ('AGM') shareholders approved the authority for the Company to hold a performance-based tender for up to 25 percent of the Company's issued share capital if the Company's NAV total return failed to exceed the total return of the Company's comparative index by at least 1% per annum over a three year period to 31 July 2019 on a cumulative basis. It is therefore pleasing to report that over this three year period, the Company outperformed the comparative index by 3.1 percentage points on an annualised basis and the tender offer will therefore not take place.
Hot Features
Premium
3 Years to Annualised
31 July Return Over
2019(*) 3 Years(*)
NAV Total Return 54.3% 15.5%
MSCI All Country Asia ex Japan Index Total Return (in sterling terms) 42.0% 12.4%
----------- -------------
Over the summer months, members of the Board met with a number of larger shareholders from amongst the private wealth management sector and concluded that, as the longer-term performance is satisfactory, it would not be in the interests of the Company to put in place another similar tender process. Should performance be unsatisfactory, there is an opportunity for shareholders to express their views at the Company's next Continuation Vote which will take place as part of the business of the 2021 Annual General Meeting.
Issuance, Share Buy-backs and Treasury
Over the course of the year, a total of 700,000 shares, 1.2% of the shares in issue at the start of the Company's financial year, were issued at a premium to NAV when demand could not be satisfied from existing investors. As in previous years, your Board is seeking shareholder approval at the forthcoming AGM to renew the 10% non-pre-emptive issuance authority. Issuance would continue to be undertaken only at a premium to NAV, thereby avoiding dilution to existing investors. In the event that this authority is utilised, it has the effect of enhancing NAV per share, improving liquidity in the Company's shares and reducing the per share operating expenses.
At the forthcoming AGM, the Board will also be asking shareholders to renew the authority to repurchase up to 14.99% of the outstanding shares on an ad hoc basis, either for cancellation or to be held in treasury, and also to permit the re-issuance of any shares held in treasury. The Board intends to use the buy back authority opportunistically, taking into account not only the level of the discount but also the underlying liquidity and trading volumes in the Company's shares. This approach allows the Board to seek to address any imbalance between the supply and demand for the Company's shares that results in a large discount to NAV whilst being cognisant that current and potential shareholders have expressed a desire for continuing liquidity.
The Board also believes that the Company would benefit from both the flexibility of holding any shares that are bought back in treasury and the consequent ability to re-issue these shares in the circumstances described above.
Management Fee
During the year an amendment was made to the management agreement, with the agreement of a reduction from 0.95% to 0.75% on the first GBP50 million of net assets as of 1 January 2019. The annual management fee payable by the Company is now charged at a rate 0.75% on the first GBP50 million of net assets, at 0.65% on the next GBP200 million of net assets and at 0.55% on the remaining net assets. The fee will continue to be calculated and paid on a quarterly basis. Ongoing charges for the financial year were 0.99% compared to 1.02% for the prior year.
Earnings and Dividend
There was a small surplus of 0.01p (0.60p deficit in 2018) in earnings per share this year and consequently no final dividend is being proposed. As highlighted in past reports, investors should not consider investing in this Company if they require income from their investment.
Gearing
Gearing is achieved through the use of bank borrowings. At present the Company has a multi-currency revolving credit facility with The Royal Bank of Scotland for up to GBP30 million, of which GBP20 million was drawn at 31 July 2019, split between GBP and USD.
The Board sets the gearing parameters within which the managers are permitted to operate and these are reviewed at each Board meeting. At present, the agreed range of equity gearing is minus 15% (i.e. holding net cash) to plus 10%. At the year end, invested gearing was 8.3%, compared to 7.9% at the start of the year.
Unlisted Investments
Last year, shareholders approved a change in the Company's Investment Policy, permitting the Managers to invest up to a maximum of 10% of total assets in unlisted securities (such asset value being calculated at the point of initial investment). At the time the portfolio had four unlisted investments accounting for 1.6% of total assets. Over the course of the year, no new unlisted investments were made and ++, the Chinese electric vehicle developer and manufacturer, listed on the New York Stock Exchange. As a consequence, the Company held three unlisted investments as at 31 July 2019, accounting for 1.3% of total assets: Philtown Properties (nil%), a holding inherited following its spin-out from RFM Corp of the Philippines in 2009; JHL Biotech (0.4%), a Taiwanese biotech which was taken private with a view to listing in Hong Kong; and a JHL Biotech Convertible Bond (0.9%) issued as part of its de-listing.
Governance and Stewardship
The Board is very aware that shareholders expect good governance. Our Managers, Baillie Gifford, adopt a position of supportive and constructive engagement with those companies whose shares we own, without prescriptive policies or rules, assessing matters on a case-by-case basis. As part of maximising long-term performance for the benefit of the Company's shareholders, the managers consider Environmental, Social and Governance (ESG) factors as part of the investment case. The degree to which ESG concerns have an impact on a potential investment decision is qualitative and depends upon the managers' subjective understanding of the issues.
Details of the Company's policy on socially responsible investment can be found under Corporate Governance and Stewardship on page 25 of the Annual Report and Financial Statements. A document outlining Baillie Gifford's Governance and Sustainability principles can be found at www.bailliegifford.com.
Changes to the Board
Two new Directors joined the Board during the year - Angela Lane, whose appointment was ratified by shareholders at last year's AGM and Richard ('Joe') Studwell, whose appointment falls to be ratified by shareholders at this year's AGM. Their respective biographies are contained on page 18 of the Annual Report and Financial Statements.
At the conclusion of your Company's AGM, I will be standing down from the Board. Having been Chairman since 2010 and a Director since 2003, I believe it is right that others take on the opportunity to direct the Company going forward. I have greatly enjoyed my time on the Board and appreciated working with some very talented fellow Directors. The Board has determined that Angus Macpherson will become the Company's next Chairman. He has very relevant skills and experience and I wish him and the Board continued success.
Outlook
There are currently an increasing number of global political, social and economic issues to worry investors, but there are also a large number of companies in our universe that continue to grow successfully and can be bought at reasonable valuations. The most pertinent issue for our markets is the disagreement between the USA and China regarding tariffs on goods in and out of the region. China is not giving in and is now using the Renminbi exchange rate to offset some of the rising costs to Chinese exporters. A more localised issue is the political disturbance in Hong Kong and whether it can be resolved to the satisfaction of all parties.
Aside from the Asian region, UK shareholders are focussed on Brexit. The Board, along with Baillie Gifford, has considered the uncertainties surrounding Brexit and concluded that they will not have a material impact on the Company and that the Company's main Brexit-related exposure is to fluctuations in exchange rates which will have an impact on both the value of the Company's investments and borrowings denominated in currencies other than sterling.
The Board believes that the managers are focussed on both the risks and the rewards in the portfolio, and that the portfolio is well positioned to weather potential externally generated short term volatility, whilst providing shareholders with good returns over the longer term.
Annual General Meeting
This year's AGM will take place on 12 November 2019 at the offices of Baillie Gifford & Co in Edinburgh at 11.00am. I would encourage shareholders to arrive by 10.50am to allow time to register. The managers will make a presentation and, along with the Directors, will answer any questions from shareholders. I hope to see as many of you as possible there.
Jean Matterson
Chairman
20 September 2019
* Calculated on a total return basis. Source: Baillie Gifford/Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
Managers' Review
Overview
The current age of uncertainty might be defined thus: the old order has been undermined, but the shape of the new one is not yet clear. What determines how it turns out? Transformational technology? The sudden rise of China? Perhaps the consequences of unorthodox monetary policy? Most likely a combination of all these and more. What is certain is that, even amidst this upheaval, the search for growth and the discovery of and investment in great companies will enable outperformance for the benefit of shareholders.
At a company level we see huge opportunities and risks. Companies appear from nowhere to become multi-billion USD enterprises while others see what was a unique competitive advantage disappear overnight. As an example, our largest holding at the start of the year, Sunny Optical Technology, fell over 60% from peak to trough, as new algorithms reduced the need for precision lenses in smartphone cameras, eroding its competitive advantage. In China, Tencent and Baidu have found previously unassailable online advertising business models successfully attacked by new competitors. In four years, TikTok has gone from having less than 2% of China's social/media advertising budget to 40%-plus in 2019, making it larger than Tencent in this sphere.
If we reject the risk and uncertainty arising from investment in times of rapid change, we will lose the opportunity to outperform; hence our continued willingness to look for great individual company return opportunities. The existence of risk and uncertainty, however, means that we will inevitably make what, in hindsight, appear to be mistakes and that many of our investments will be less successful than we had initially hoped. Our approach is to back our current holdings, which we hope will outperform in the longer term, whilst continuously searching for stocks which have the potential to deliver significantly enhanced returns over longer time frames.
In the year to 31 July 2019, on a total return basis, the Company's NAV and share price decreased by 1.9%(*) and 11.8%(*) respectively. This compares unfavourably against the Company's comparative index, the MSCI All Country Asia ex Japan Index (in sterling terms), which rose by 4.2%(*) .
Over the course of our latest financial year, market performance can be divided into two distinct halves. In late 2018, many businesses previously doing very well were severely hampered by global trade wars, a liquidity crunch and technology in transition. This hurt the share prices of many of our holdings and the portfolio lost significant value. In hindsight, we were late in selling several of our previous winners, including Sunny Optical Technology, Macronix and Geely Automobile; albeit still making a significant return on these investments during the period when we were investors. In the current calendar year, several of our holdings, which hitherto had not performed, started on their own growth course and continue to do well. For example, SEA Limited in South-East Asia, launched a new hit game Free Fire, which rapidly garnered 450 million downloads and 50 million daily active users, having a very positive impact on its share price.
The risks and opportunities from increased disruption are here to stay. In our view, the market's focus on geopolitics and capital flows misses the bigger picture, that of a global rise in digital penetration, technological change and the rise of the Asian middle class.
These fundamentals will underpin growth in the region for decades to come. We believe that the best way to invest in this rapidly-changing growth market is to find the best long-term growth companies.
Philosophy
We are excited by the future. We are growth investors looking for rapidly growing companies. Believing that time is on our side, we are patient. We seek out companies whose business models and management teams are very likely to fulfil their ambitions. We are looking for areas where our ideas give us an edge on the market over a longer time frame.
When thinking about growth, we look for companies that have the potential to increase their revenue and earnings at around 15% per annum for the next five years or longer, and for opportunities where we feel this potential has not been fully recognised by the market. Our approach may lead to significant investment concentration in certain areas of the market depending upon the immediate outlook for different countries and sectors. As well as growth potential, the corporate characteristics we look for include sustainable competitive advantages, attractive financials and good management. We also target stocks where a wider range of positive potential outcomes may not be recognised by the market but which seem likely to enhance their profitability.
Our starting premise is how we think the world and individual countries may change over the next three, five and ten years plus, in every area of life - economically, socially and politically - and the impact that technology might have on these trends. When we look at a company and think about what the market size of its industry might be, we ask ourselves what the current rate of growth is, how this industry could change and whether there are additional opportunities for growth in adjacent markets that the company could enter. This gives us a rough estimate of the potential total addressable market for a company and its products and its growth potential. We examine the competitive dynamics of the industry and try to understand how these are likely to change. We ask whether the industry is improving and whether the likely position of the company within it is also changing for the better. Lastly, we look for a management team that we believe has the ability, ambition and integrity to deliver on its promise. The ideal team has a vision of the future and knows how, in its own small space, it can realise this vision.
The background to this process, however, is inevitably one of uncertainty. Both error and chance play a huge role in any eventual outcome: hence the way the portfolio is diversified by country, sector and industry. More importantly we understand that not all the companies we choose to invest in will realise their potential value and growth potential. We will remain committed to and back our winners and reduce and sell our losers. Ideally, we will end up with a small group of stocks which, due to compounding growth and profit, will generate significant longer-term returns. These will be counterbalanced by a potentially larger group that have not reached this level of performance. Due to smaller holdings sizes in this latter group and the benefits of enhanced returns from our successful investments, we aim to deliver outperformance over time.
The growth characteristics of the current portfolio remain strong, with historic earnings growth at 18.0% and one-year forecast earnings growth of 33.1%, versus 10.7% and 8.5% respectively for the comparative index. The portfolio's estimated price-to-earnings ratio for the current year is 18.7x versus 13.2x for the comparative index. Over the longer term, we believe the higher growth potential of our holdings more than justifies this additional multiple. The portfolio now has a slightly lower proportion of larger capitalised stocks compared to last year with 21.8% of the portfolio invested in companies capitalised below GBP1 billion and a further 33.0% in companies with a market capitalisation of less than GBP5 billion; this compares with 0.1% and 13.5% respectively in the comparative index. Active share is 84% and turnover for the year was 23.3%. The portfolio has invested gearing of 8.3%.
Finally, we continue to believe that the rapid development of technology is creating a fundamental change in market behaviour, with digitalisation driving profound changes in economic and political systems, businesses, consumer habits and behaviours. The number of sectors and industries that are becoming digitalised and connected is increasing rapidly. There is growing awareness of these changes across the globe. Artificial Intelligence ('AI') is now taken for granted and the concept of electric rather than gasoline-powered cars is now considered as a commercial inevitability rather than a distant vision.
Review
We actively seek out the big winners, the stocks that can give us asymmetric returns. Over the last year this approach has largely played out as intended, with a few of our chosen stocks making enormous gains. Interestingly, the top five positive contributors to relative returns versus the comparative index in the year were all stocks we had either bought (SEA Limited, Li Ning, Accton Technology, Ping An Bank) or sold (Baidu) in the prior financial year, supporting our view of 2018 as a year of change.
Over the year we reduced exposure to some of our larger positions in the Information Technology sector. Our sector exposure here now accounts for 19.6% of the portfolio, down from a restated 31.5% a year ago - restated to reflect the reclassification by MSCI of some stocks into different commercial sectors, mainly Communication Services. Despite this, Information Technology continues to be our largest absolute sector position. Over the course of the financial year, it had an average return of minus 7.5%, significantly underperforming the broader index return of a 4.2% gain and the sector return of 3.7%. SEA Limited, the Singapore-based e-commerce and gaming company, rose 167% and became our largest holding following a re-rating sparked by its new hit game Free Fire, which is likely to deliver close to a US$1 billion of revenue for it in 2019. This was one of the holdings reclassified to the Communication Services sector, resulting in our exposure here returning 67.5% versus 14.0% for the sector. We further reduced our holding in Tencent, reflecting our concern that the company's previous leadership in the WeChat social platform is being threatened by ByteDance. We sold Sunny Optical Technology, our biggest performance detractor of the year, over concerns that new AI algorithms were reducing its leadership advantage in high-precision lenses and threatening margins. We also sold Macronix and reduced SK Hynix as the global semiconductor memory market looked set for an extended downturn.
The Consumer Discretionary sector is our second largest sector exposure at 16.6%, down from 20.5% in the previous year. As economic growth within the region recovers, the focus on the Asian consumer and the consequent growth opportunities has the potential to generate increased investor interest. Li-Ning, a domestic Chinese online footwear brand performed very well, rising 146% on the back of a recovery in sportswear sales. We reduced our holding in Geely Automobile as the Chinese car maker is undergoing a prolonged restructuring. Despite significant share price volatility, we have broadly maintained our holdings in JD.com and Alibaba.
The Financial sector represents the third largest sector weighting in the portfolio at 16.4%. We sold Mumbai-based IndusInd Bank after it had performed well over several years. We remain concerned that rapid credit growth may lead to an increase in non-performing loans, and we decided to sell before a management transition next year.
On the negative side, South Korea was our worst performing market, falling 20% and detracting 450 basis points from the portfolio's overall performance. A combination of factors, including trade disputes with China and Japan, weak semiconductor and smartphone sales and negative sentiment towards biotech companies all affected our diverse range of holdings in the country. We had only two contributors to positive performance: software company Douzone Bizon and Samsung battery power subsidiary Samsung SDI. We have maintained most of our holdings and we are confident of their potential for future growth despite the poor short-term stock performance.
Our Vietnamese exposure hurt as this frontier market suffered from liquidity outflows and reduced investor appetite for risk in this market. We continue to be attracted to the long-term outlook for the country and believe that its economic prospects have been bolstered by the US trade conflict with China. Our Vietnam holdings fell 6.4% on average during the year. We see the Vietnamese economy as an under-appreciated growth story.
In terms of the countries where we invest, our Hong Kong and China weighting decreased from 40.2% to 34.4%. It remains the largest country weighting in the portfolio, followed by South Korea at 19.0%.
Environmental, Social and Governance
As growth investors, we are attracted to companies whose products will benefit from strong future demand. These companies not only have to produce better and cheaper products and services than their competitors, but they must also be alert for changes in the outlooks and attitudes of the societies of which they form a part.
Companies that fail to keep pace with the societies they serve tend to fail, either as a result of falling consumer demand for their products or because of government intervention in their activities. When taking investment decisions, we consider the potential positive and negative impact on society that these companies may have, and how their commercial activities may be perceived by their external stakeholders in the future.
For our long-term investments to be successful, the companies in which we invest must add value to society. This can be achieved in various ways. For example, the products of our regenerative biotech companies may allow many to benefit from otherwise unachievable medical cures; our internet companies provide goods and services at prices and in quantities that were previously beyond the reach of many; and our technology holdings are helping to enable the greatest and most rapid increase in human connectivity and information availability on record.
Lastly, it is very important to us that the interests of minority shareholders must be upheld; we remain careful to make sure our interests as investors are aligned with those of majority shareholders and owners.
Outlook
There is significant potential for positive returns from the Asia Pacific region in the coming years. Our focus remains on investment in individual stocks which will benefit from the economic, social and technological changes in evidence across the region. In the near term, the recent market noise over trade wars, slowing global growth and a rising US dollar are obscuring the underlying reality of strong, consistent economic growth and social opportunity within the region. When the market looks again at fundamentals in Asia, we expect it to see healthy growing economies, with attractively priced companies and undervalued currencies, all creating significant investment opportunities for the Company, and all to the benefit of our shareholders.
* Source: Baillie Gifford/Refinitiv and relevant underlying index provders/ See disclaimer at the end of this announcement.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
List of Investments as at 31 July 2019
=======================================
Value % of total assets*
Name Country Business GBP'000
=================================== ============ =================================== ======== ==================
SEA Limited ADR Singapore Internet gaming and e-commerce 18,383 8.2
Alibaba Group ADR HK/China Online and mobile commerce 11,834 5.3
Li Ning HK/China Sportswear apparel supplier 9,182 4.1
Server network equipment
Accton Technology Taiwan manufacturer 7,626 3.4
Tencent Holdings HK/China Online gaming and social networking 7,295 3.3
Samsung SDI Korea Electrical equipment manufacturer 7,196 3.2
Ping An Insurance H Shares HK/China Life insurance provider 6,468 2.9
CNOOC Ltd HK/China Oil and gas producer 6,440 2.9
Dragon Capital Vietnam Enterprise
Investments Vietnam Vietnam investment fund 5,905 2.6
Ping An Bank A Shares HK/China Consumer Bank 5,825 2.6
JD.com ADR HK/China Online mobile commerce 5,105 2.3
Enterprise management software
Kingdee International Software HK/China distributor 5,062 2.3
Koh Young Technology Korea 3D inspection machine manufacturer 4,864 2.2
ICICI Bank ADR India Retail and corporate bank 4,061 1.8
Electronic component and device
SK Hynix Korea manufacturer 4,031 1.8
PT Aneka Tambang Indonesia Nickel miner 3,996 1.8
PT Vale Indonesia Indonesia Nickel miner 3,712 1.7
Enterprise resource planning
software
Douzone Bizon Korea developer 3,651 1.6
HDBank Vietnam Consumer Bank 3,494 1.6
Multi-service online review
Info Edge India aggregator 3,346 1.5
BizLink Holding Taiwan Electrical components manufacturer 3,307 1.5
Jadestone Singapore Oil and gas explorer and producer 2,937 1.3
Military Commercial Joint Stock
Bank Vietnam Retail and corporate bank 2,935 1.3
Nickel Mines Indonesia Base metals miner 2,924 1.3
Vincom Vietnam Property developer 2,812 1.3
Zai Lab ADR HK/China Biopharmaceutical company 2,609 1.2
AviChina Industry & Technology H Aircraft and aircraft parts
Shares HK/China manufacturer 2,559 1.1
Therapeutic vaccine researcher and
Genexine Korea developer 2,548 1.1
Bharat Electronics India Indian defence company 2,392 1.1
Reliance Industries India Petrochemical company 2,388 1.1
Minibus and automotive components
Brilliance China Automotive HK/China manufacturer 2,335 1.0
Non-ferrous metals smelter and
Korea Zinc Korea manufacturer 2,238 1.0
Geely Automobile HK/China Automobile manufacturer 2,212 1.0
Precision Tsugami HK/China Industrial machinery manufacturer 2,101 0.9
JHL Biotech Convertible Bond(u) Taiwan Biopharmaceutical company 2,036 0.9
ICICI Lombard India General insurance provider 2,031 0.9
TCI Taiwan Food producer 1,986 0.9
Cowell Fashion Korea Apparel manufacturer 1,901 0.9
Mitac Holdings Taiwan GPS and server products distributer 1,899 0.8
Enzychem Lifesciences Corp Korea Biopharmaceuticals company 1,837 0.8
Steel and related products
Hoa Phat Group Vietnam manufacturer 1,804 0.8
Bioneer Korea Drug researcher and developer 1,799 0.8
NCSOFT Korea Online games developer 1,784 0.8
Memory, phones and electronic
Samsung Electronics Korea components manufacturer 1,738 0.8
Basso Industries Taiwan Powerdrills manufacturer 1,690 0.8
Cafe24 Korea Web service provider 1,610 0.7
Saigon Securities Vietnam Brokerage and securities company 1,578 0.7
Kingpak Technology Taiwan Semiconductor packaging supplier 1,556 0.7
Jianpu Technology ADR HK/China Platform for financial products 1,547 0.7
Techtronic Industries HK/China Power tool manufacturer 1,460 0.7
Petro Matad Mongolia Oil explorer and producer 1,422 0.6
Medy-Tox Korea Global biopharmaceutical company 1,376 0.6
Chinasoft International HK/China Information technology provider 1,374 0.6
Construction and mining machinery
Doosan Bobcat Korea manufacturer 1,348 0.6
Electric Vehicle original equipment
NIO Inc ADR HK/China manufacturer 1,324 0.6
Kansai Nerolac Paints India Paint manufacturer 1,223 0.5
ICICI Prudential Life Insurance India Life insurance provider 1,164 0.5
Vinh Hoan Corporation Vietnam Food Producer 1,097 0.5
Intron Biotechnology Korea Antibiotics drug researcher 1,088 0.5
Mahindra CIE Automotive India Truck parts manufacturer 1,034 0.5
GlobalWafers Taiwan Semiconductor wafers manufacturer 1,031 0.5
3SBIO HK/China Biologics company 1,005 0.5
AU Small Finance Bank India Consumer finance bank 974 0.4
Proteomic drug discovery
CrystalGenomics Korea investigator 896 0.4
Taiwan Semiconductor Manufacturing Taiwan Semiconductor foundry 895 0.4
Stationery and lead frames for
SDI Corporation Taiwan semiconductors manufacturer 882 0.4
JHL Biotech(u*) Taiwan Biopharmaceutical company 878 0.4
Hanall Biopharma Korea Pharmaceutical company 848 0.4
Max Financial Services India Life insurance provider 768 0.3
Quess Corp India Human resources company 750 0.3
L&C Bio Korea Medical equipment manufacturer 736 0.3
Dilip Buildcon India Construction company 703 0.3
Yeah1 Group Corporation Vietnam Media company 655 0.3
Binh Minh Plastics Joint Stock
Company Vietnam Plastic piping manufacturer 647 0.3
LG Innotek Korea Mobile phone component manufacturer 582 0.3
TTY Biopharm Taiwan Specialist genetics manufacturer 534 0.2
BitAuto Holdings Ltd ADR HK/China Automobile pricing website 507 0.2
Manufacturer of specialist
ST Pharm Korea pharmaceutical ingredients 503 0.2
Aslan Pharmaceuticals Singapore Biosimilar drug developer 486 0.2
Washing machine and water heater
Haier Electronics Group HK/China manufacturer 480 0.2
Aslan Pharmaceuticals ADR Singapore Biosimilar drug developer 387 0.2
Chinese and Western medicines
China Shineway Pharmaceuticals HK/China company 303 0.1
Cox & Kings India India Travel agent 51 0.0 Cox & Kings Financial Service India Non-banking financial services 4 0.0 Philtown Properties(u) Philippines Property Developer - 0.0 Total Investments 219,9844 98.3 -------------------------------------------------------------------------------------- -------- ------------------ Net Current Assets 3,7719 1.7 -------------------------------------------------------------------------------------- -------- ------------------ Total Assets 223,755 100.0 ====================================================================================== ======== ==================
HK/China denotes Hong Kong and China
Details of the ten largest investments are given on pages 13 and 14 of the Annual Report and Financial Statements along with comparative valuations.
* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
(u) Denotes unlisted investment.
Distribution of Total Assets(*)
Geographical Analysis
At 31 July At 31 July
2019 2018
% %
=========== ===================== =========== ===========
Equities: Hong Kong and China 34.4 40.2
Korea 19.0 21.2
Taiwan 10.9 11.3
Vietnam 9.4 8.9
India 9.3 8.4
Singapore 9.9 4.1
Indonesia 4.8 3.4
Mongolia 0.6 0.7
Total equities 98.3 98.2
Net current assets 1.7 1.8
================================== =========== ===========
Total assets 100.0 100.0
================================== =========== ===========
Sectoral Analysis
At 31 July 2019 At 31 July 2018
% %
========== ======================= =============== ===============
Equities: Consumer Discretionary 16.6 20.5
Communication services 14.3 10.8
Consumer Staples 1.4 -
Energy 5.9 2.6
Financials 16.4 16.3
Health Care 8.9 8.3
Industrials 6.8 2.4
Information Technology 19.6 31.5
Materials 7.1 4.7
Real Estate 1.3 1.1
================================== =============== ===============
Total equities 98.3 98.2
Net current assets 1.7 1.8
=================================== =============== ===============
Total assets 100.0 100.0
=================================== =============== ===============
* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Key Performance Indicators
The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:
3/4 the movement in net asset value per ordinary share on a total return basis;
3/4 the movement in the share price on a total return basis;
3/4 the premium/(discount) of the share price to the net asset value per share; and
3/4 the ongoing charges.
An explanation of these measures can be found in the Glossary of Terms and Alternative Performance Measures at the end of this announcement. The one, five and ten year records for the KPIs can be found on pages 4, 5 and 6 of the Annual Report and Financial Statements respectively.
In addition to the above, the Board also has regard to the total return of the Company's principal comparative index (MSCI All Country Asia ex Japan Index (in sterling terms)) and considers the performance of comparable companies.
Borrowings
The Company has a one year multi-currency revolving credit facility of up to GBP30 million with The Royal Bank of Scotland International Limited (31 July 2018 - up to GBP30 million). At 31 July 2019 there were outstanding drawings of GBP10,000,000 and US$12,739,900 at interest rates of 1.28492% and 2.9272% respectively (31 July 2018 - GBP10,000,000 and US$13,358,000 at interest rates of 1.08075% and 2.79063% respectively).
Future Developments of the Company
The outlook for the Company is set out in the Chairman's Statement and the Managers' Review above.
Transactions with Related Parties and the Managers and Secretaries
The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 28 of the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.
Baillie Gifford & Co Limited has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Details of the terms of the Investment Management Agreement, the fees during the year and the balances outstanding at the year end are shown below.
Management Fee Arrangements
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting have been further sub-delegated to Baillie Gifford Overseas Limited.
The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. Compensation fees would only be payable in respect of the notice period if termination were to occur within a shorter notice period. The Board is of the view that
calculating the fee with reference to performance would be unlikely to exert a positive influence on performance.
With effect from 1 January 2019 the annual management fee is 0.75% on the first GBP50 million of net assets, 0.65% on the next GBP200 million of net assets and 0.55% on the remaining net assets. In the periods before 1 January 2019 covered by this report the fee was 0.95% on the first GBP50 million of net assets, 0.65% on the next GBP200 million of net assets and 0.55% on the remaining net assets.
2019 2018
GBP'000 GBP'000
=========================== ========= =========
Investment management fee 1,297 1,396
=========================== ========= =========
Investment management fees outstanding at 31 July 2019 amounted to GBP343,000 (2018 - GBP370,000).
Principal Risks
As explained on pages 24 and 25 of the Annual Report and Financial Statements there is a process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. There have been no significant changes to the principal risks during the year. A description of these risks and how they are being managed or mitigated is set out below:
Financial Risk - the Company's assets consist mainly of listed securities and its principal financial risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained below. As oversight of this risk, the Board considers at each meeting various metrics including regional and industrial sector weightings, top and bottom stock contributors to performance along with sales and purchases of investments. Individual investments are discussed with the portfolio managers together with their general views on the various investment markets and sectors. A strategy meeting is held annually.
Investment Strategy Risk pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or the ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their net asset value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy, the investment portfolio and its performance, the level of discount/premium to net asset value at which the shares trade and movements in the share register.
Discount Risk - the discount/premium at which the Company's shares trade relative to its net asset value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares, when deemed by the Board to be in the best interests of the Company and its shareholders.
Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. To mitigate this risk, Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes and procedures are in place to ensure adherence to the Transparency Directive and the Market Abuse Directive with reference to inside information.
Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including breaches of cyber security. To monitor potential risk, the Audit Committee receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers who also agree uncertificated unlisted portfolio holdings to confirmations from investee companies. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Business Risk Department and a summary of the key points is reported to the Audit Committee and any concerns investigated. In addition, the existence of assets is subject to annual external audit.
Operational Risk - failure of Baillie Gifford's systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. To mitigate this risk, Baillie Gifford has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Audit Committee reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.
Leverage Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the impact of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings. The Company can also make use of derivative contracts. To mitigate this risk, all borrowings require the prior approval of the Board and leverage levels are discussed by the Board and Managers at every meeting. Covenant levels are monitored regularly. The majority of the Company's investments are in quoted securities that are readily realisable. Further information on leverage can be found below and in the Glossary of Terms and Alternative Performance Measures at the end of this announcement.
.
Political and Associated Economic Risk - the Board is of the view that political change in areas in which the Company invests or may invest may have financial consequences for the Company. Political developments are closely monitored and considered by the Board, particularly in respect of tensions between the USA and China regarding tariffs and unrest in Hong Kong. The Board also continues to monitor developments as they occur regarding the UK Government's intention that the UK should leave the European Union and to assess the potential consequences for the Company's future activities. Whilst there remains considerable uncertainty at present, the Board believes that the Company's portfolio, which predominantly comprises companies listed on the stock markets of the Asia Pacific region (excluding Japan) and the Indian Sub-continent, positions the Company to be suitably insulated from Brexit-related risk.
Viability Statement
Notwithstanding that the continuation of the Company is subject to approval of shareholders every five years, with the next vote at the Annual General Meeting in 2021, the Directors have, in accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, published by the Financial Reporting Council, assessed the prospects of the Company over a three year period. The Directors continue to believe this period to be appropriate as it is reflective of the Company's investment approach. In the absence of any adverse change to the regulatory environment and the favourable tax treatment afforded to UK investment trusts, such a period is one over which they do not expect there to be any significant change to the current principal risks and to the adequacy of the mitigating controls in place. The Directors do not envisage any change in the Company's strategy or objectives nor do they foresee any events that would prevent the Company from continuing in existence over that period.
In making this assessment regarding viability, the Directors have taken into account the Company's current position and have conducted a robust assessment of the Company's principal risks and uncertainties (as detailed above), in particular the impact of market risk where a significant fall in the Asia-Pacific (excluding Japan) and the Indian Sub-continent equity markets would adversely impact the value of the investment portfolio. The Directors have also considered the Company's investment objective and policy, the level of demand for the Company's shares, the nature of its assets, its liabilities and its projected income and expenditure. The vast majority of the Company's investments are readily realisable and can be sold to meet its liabilities as they fall due, the main liability currently being the short term bank borrowings. In addition, substantially all of the essential services required by the Company are outsourced to third party service providers; this allows key service providers to be replaced at relatively short notice where necessary.
The Board has specifically considered the uncertainties regarding the UK Government's continuing negotiations to leave the European Union and does not consider that any of the possible outcomes would affect the going concern status or viability of the Company.
Based on the Company's processes for monitoring revenue projections, share price discount/premium, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.
Going Concern
In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained below.
The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. The Board approves borrowing and gearing limits and reviews regularly the amounts of any borrowing and the level of gearing as well as compliance with borrowing covenants. In accordance with the Company's Articles of Association, shareholders have the right to vote on the continuation of the Company every five years, the next vote being in 2021. After making enquiries and considering the future prospects of the Company and notwithstanding the above, the Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matter set out in the Viability Statement below which assess the prospects of the Company over a period of three years, that the Company will continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements.
Financial Instruments
As an Investment Trust, the Company invests in equities and makes other investments so as to achieve its investment objective of maximising capital appreciation from a focused and actively managed portfolio of investments from the Asia-Pacific region including the Indian Sub-continent. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests.
These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise short term volatility. Risk provides the potential for both losses and gains. In assessing risk, the Board encourages the Managers to exploit the opportunities that risk affords.
The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.
Market Risk
The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis.
Details of the Company's investment portfolios are shown in note 8 of the Annual Report and Financial Statements. The Company may, from time to time, enter into derivative transactions to hedge specific market, currency or interest rate risk. During the years to 31 July 2018 and 31 July 2019 no such transactions were entered into.
The Company's Managers may not enter into derivative transactions without the prior approval of the Board.
Currency Risk
The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and that in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items.
The Managers monitor the Company's exposure to foreign currencies and report to the Board on a regular basis. The Managers assess the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.
Foreign currency borrowings can limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments.
Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.
Cash and
cash equivalents Other debtors
Investments GBP'000 Loans and creditors* Net exposure
At 31 July 2019 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== ================== ========== ================= ===============
Hong Kong dollar 48,276 - - 29 48,305
Korean won 42,574 - - 28 42,602
US dollar 47,793 2,891 (10,405) 74 40,353
Taiwan dollar 22,770 5 - 413 23,188
Indian rupee 16,828 - - 6 16,834
Vietnam dong 15,022 711 - - 15,733
Indonesian rupiah 7,708 - - - 7,708
Chinese yuan 5,825 - - - 5,825
Australian dollar 2,924 - - - 2,924
Total exposure to
currency risk 209,720 3,607 (10,405) 550 203,472
Sterling 10,264 20 (10,000) (406) (122)
=================== ============== ================== ========== ================= ===============
219,984 3,627 (20,405) 144 203,350
=================== ============== ================== ========== ================= ===============
* Includes net non-monetary assets of GBP35,000.
Cash and
cash equivalents Other debtors
Investments GBP'000 Loans and creditors* Net exposure
At 31 July 2018 GBP'000 GBP'000 GBP'000 GBP'000
=================== ============== ================== ========== ================= ===============
Hong Kong dollar 59,033 - - 41 59,074
Korean won 47,906 5 - 11 47,922
US dollar 38,263 3,063 (10,183) (38) 31,105
Taiwan dollar 25,169 5 - 399 25,573
Indian rupee 18,922 29 - (4) 18,947
Vietnam dong 13,993 - - - 13,993
Indonesian rupiah 7,710 - - - 7,710
Chinese yuan 2,242 29 - 19 2,290
Australian dollar 435 - - - 435
Total exposure to
currency risk 213,673 3,131 (10,183) 428 207,049
Sterling 7,401 360 (10,000) 70 (2,169)
=================== ============== ================== ========== ================= ===============
221,074 3,491 (20,183) 498 204,880
=================== ============== ================== ========== ================= ===============
* Includes net non-monetary assets of GBP8,000.
Currency Risk Sensitivity
At 31 July 2019, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The level of change is considered to be reasonable based on observations of current market conditions. The analysis is performed on the same basis for 2018.
2019 2018
GBP'000 GBP'000
=================== ========= =========
Hong Kong dollar 2,415 2,954
Korean won 2,130 2,396
US dollar 2,018 1,555
Taiwan dollar 1,159 1,279
Indian rupee 842 947
Vietnam dong 787 700
Indonesian rupiah 385 386
Chinese yuan 291 114
Australian dollar 146 22
10,173 10,353
=================== ========= =========
Interest Rate Risk
Interest rate movements may affect directly:
3/4 the fair value of any investments in fixed interest rate securities;
3/4 the level of income receivable on cash deposits;
3/4 the fair value of any fixed-rate borrowings; and
3/4 the interest payable on any variable rate borrowings.
Interest rate movements may also impact upon the market value of investments outwith fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements. The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.
The Company may finance part of its activities through borrowings at approved levels. The amount of any such borrowings and the approved levels are monitored and reviewed regularly by the Board. Movements in interest rates, to the extent that they affect the market value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value (assuming that the Company's share price is unaffected by movements in interest rates).
The interest rate risk profile of the Company's financial assets and liabilities at 31 July is shown below.
Financial Assets
2019 2018
Fair Weighted Weighted Weighted Weighted
value average average Fair average average
GBP'000 interest fixed value interest fixed
rate rate period* GBP'000 rate rate period*
---------------------------- --------- ---------- -------------- ---------- ---------- --------------
Fixed rate bonds:
US dollar denominated
convertible bond 2,036 7.0% 30 months 1,143 7.0% 42 months
---------------------------- --------- ---------- -------------- ---------- ---------- --------------
Cash and cash equivalents:
Overseas currencies 3,607 1.4% n/a 3,131 1.2% n/a
Sterling 20 - n/a 360 - n/a ---------------------------- --------- ---------- -------------- ---------- ---------- --------------
(*) Based in expected redemption date
Financial Liabilities
The interest rate risk profile of the Company's financial liabilities and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31 July are shown below.
Interest Rate Risk Profile
2019 2018
GBP'000 GBP'000
==================================== ========= === =========
Floating rate bank loan - sterling
denominated 10,000 10,000
- US$ denominated 10,405 10,183
==================================== ========= === =========
20,405 20,183
==================================== ========= === =========
Maturity Profile
2019 2018
Within 1 year Within
GBP'000 1 year
GBP'000
==================== =============== =========
Repayment of loans 20,405 20,183
Interest on loans 109 102
==================== =============== =========
20,514 20,285
==================== =============== =========
Interest Rate Risk Sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates at the Balance Sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
An increase of 100 basis points in interest rates, with all other variables being held constant, would have decreased the Company's total net assets and total return on ordinary activities for the year ended 31 July 2019 by GBP167,000 (2018 - a decrease of GBP119,000). This is mainly due to the Company's exposure to interest rates on its floating rate bank loan and cash balances. A decrease of 100 basis points would have had an equal but opposite effect.
Other Price Risk
Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index. Investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.
Other Price Risk Sensitivity
A full list of the Company's investments is given above. In addition, a geographical analysis of the portfolio and an analysis of the investment portfolio by broad industrial or commercial sector are contained in the Strategic Report.
106.7% (2018 - 105.8%) of the Company's net assets are invested in quoted equities. A 5% (2018 - 5%) increase in quoted equity valuations at 31 July 2019 would have increased total assets and total return on ordinary activities by GBP10,853,000 (2018 - GBP10,840,000). A decrease of 5% would have had an equal but opposite effect. The level of change is considered to be reasonable based on observations of current market conditions.
Liquidity Risk
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Board provides guidance to the Managers as to the maximum exposure to any one holding and to the maximum aggregate exposure to substantial holdings.
The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's current borrowing facility is detailed below and the maturity profile of its borrowings are set out above. Under the terms of the borrowing facility, borrowings are repayable on demand at their current carrying value.
Borrowing Facilities
The Company has a one year multi-currency revolving credit facility of up to GBP30 million with The Royal Bank of Scotland International Limited (31 July 2018 - up to GBP30 million) which expires on 15 March 2020. At 31 July 2019 there were outstanding drawings of GBP10,000,000 and US$12,739,900 at interest rates of 1.28492% and 2.9272% respectively (31 July 2018 - GBP10,000,000 and US$13,358,000 at interest rates of 1.08075% and 2.79063% respectively), maturing in September 2019. The main covenants relating to the loans are that borrowings should not exceed 20% of the Company's adjusted net asset value and the Company's net asset value should be at least GBP80 million. There were no breaches in the loan covenants during the year.
Borrowings Falling Due Within One Year
2019 2018
GBP'000 GBP'000
===================================== ========= =========
The Royal Bank of Scotland plc loan 20,405 20,183
===================================== ========= =========
Credit Risk
This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
This risk is managed as follows:
3/4 where the Managers make an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;
3/4 the Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Managers monitor the Company's risk by reviewing the Custodian's internal control reports and reporting its findings to the Board;
3/4 investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;
3/4 the creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Managers; and
3/4 cash is only held at banks that are regularly reviewed by the Managers.
Credit Risk Exposure
The exposure to credit risk at 31 July was:
2019 2018
GBP'000 GBP'000
============================== ========= =========
Convertible bond 2,036 1,143
Cash and short term deposits 3,627 3,491
Debtors and prepayments* 636 1,065
============================== ========= =========
6,299 5,699
============================== ========= =========
(*) Includes non-monetary assets of GBP35,000 (2018 - GBP8,000)
None of the Company's financial assets are past due or impaired (2018 - none).
Fair Value of Financial Assets and Financial Liabilities
The Directors are of the opinion that the carrying amount of financial assets and liabilities of the Company in the Balance Sheet approximates their fair value.
Capital Management
The capital of the Company is its share capital and reserves as set out in note 12 in the Annual Report and Financial Statements together with its borrowings (see note 10 of the Annual Report and Financial Statements). The objective of the Company is to invest in the Asia-Pacific region (excluding Japan) and in the Indian Sub-continent in order to achieve capital growth. The Company's investment policy is set out on page 7 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out above. The Company has the authority to issue and buy back its shares (see pages 20 and 21 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in notes 11 and 12 of the Annual Reports and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loan which are detailed in note 10 of the Annual Report and Financial Statements.
Investments
Level 1 Level 2 Level 3 Total
As at 31 July 2019 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========= =========
Listed equities 217,070 - - 217,070
Unlisted equities - - 2,914 2,914
======================= ========= ========= ========= =========
Total financial asset
investments 217,070 - 2,914 219,984
======================= ========= ========= ========= =========
Level 1 Level 2 Level 3 Total
As at 31 July 2018 GBP'000 GBP'000 GBP'000 GBP'000
======================= ========= ========= ========= =========
Listed equities 216,794 - 787 217,581
Unlisted equities - - 3,493 3,493
======================= ========= ========= ========= =========
Total financial asset
investments 216,794 - 4,280 221,074
======================= ========= ========= ========= =========
Investments in securities are financial assets held at fair value through profit or loss. In accordance with Financial Reporting Standard 102, the tables above provide an analysis of these investments based on the fair value hierarchy described below, which reflects the reliability and significance of the information used to measure their fair value. During the current year, investments with a combined fair value at the previous year end of GBP2,536,000 were transferred from Level 3 to Level 1 following either the resumption or commencement of trading in the companies' shares.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly
observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
The Company's unlisted ordinary share and convertible bond investments at 31 July 2019 were valued using a variety of techniques. These include using comparable company performance, comparable scenario analysis, assessment of milestone achievement at investee companies, comparison with comparable listed bonds and assessing the conversion element of the bond using option pricing. The determinations of fair value included assumptions that the comparable companies and scenarios chosen for the performance assessment provide a reasonable basis for the determination of fair value and that suitable parameters have been used for the option pricing model. In some cases the latest dealing price is considered to be the most appropriate valuation basis, but only following assessment using the techniques described above.
Alternative Investment Fund Managers Directive (AIFMD)
In accordance with the Alternative Investment Fund Managers Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM's remuneration policy is available on the Managers' website at www.bailliegifford.com or on request (see contact details on the back cover of the Annual Report and Financial Statements). The numerical remuneration disclosures in respect of the AIFM's relevant reporting period (year ended 31 March 2019) are also available at www.bailliegifford.com.
The Company's maximum and actual leverage (see Glossary of Terms and Alternative Performance Measures at the end of this announcement) levels at 31 July 2019 are shown below:
Leverage Exposure
Gross Commitment
Method Method
=============== ======== ===========
Maximum limit 2.50:1 2.00:1
Actual 1.10:1 1.10:1
=============== ======== ===========
Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'.
Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make judgements and accounting estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and
- prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable laws and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations.
The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page of the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
The work carried out by the Auditor does not involve any consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website.
Each of the Directors, whose names and functions are listed within the Directors and Managers section of the Annual Report and Financial Statements confirm that, to the best of their knowledge:
- the Financial Statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' give a true and fair view of the assets, liabilities, financial position and net return of the Company;
- the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and
- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
Jean Matterson
Chairman
20 September 2019
Income Statement
For the year ended For the year ended
31 July 2019 31 July 2018
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================ ========= ========= ========= ========= ========= =========
(Losses)/gains on
investments - (3,116) (3,116) - 22,492 22,492
Currency losses - (781) (781) - (49) (49)
Income (note 2) 2,473 - 2,473 2,032 - 2,032
Investment management
fee (note 3) (1,297) - (1,297) (1,396) - (1,396)
Other administrative
expenses (542) - (542) (534) - (534)
============================ ========= ========= ========= ========= ========= =========
Net return before
finance costs and
taxation 634 (3,897) (3,263) 102 22,443 22,545
============================ ========= ========= ========= ========= ========= =========
Finance costs of borrowing (440) - (440) (275) - (275)
============================ ========= ========= ========= ========= ========= =========
Net return on ordinary
activities before
taxation 194 (3,897) (3,703) (173) 22,443 22,270
============================ ========= ========= ========= ========= ========= =========
Tax on ordinary activities (186) - (186) (155) - (155)
============================ ========= ========= ========= ========= ========= ========= Net return on ordinary activities after taxation 8 (3,897) (3,899) (328) 22,443 22,115 ============================ ========= ========= ========= ========= ========= ========= Net return per ordinary share (note 4) 0.01p (6.65p) (6.64p) (0.60p) 40.90p 40.30p ============================ ========= ========= ========= ========= ========= =========
The total column of this statement represents the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and comprehensive income for the year.
Balance Sheet
At 31 July 2019 At 31 July 2018
GBP'000 GBP'000 GBP'000 GBP'000
================================ ========= =========== ========= ===========
Fixed assets
Investments held at fair value
through profit or loss 219,984 221,074
Current assets
Debtors 636 1,065
Cash and cash equivalents 3,627 3,491
================================ ========= =========== ========= ===========
4,263 4,556
================================ ========= =========== ========= ===========
Creditors
Amounts falling due within one
year (note 5) (20,897) (20,750)
================================ ========= =========== ========= ===========
Net current liabilities (16,634) (16,194)
================================ ========= =========== ========= ===========
Net assets 203,350 204,880
================================ ========= =========== ========= ===========
Capital and reserves
Share capital 5,903 5,833
Share premium account 20,063 17,774
Capital redemption reserve 20,367 20,367
Capital reserve 153,382 157,279
Revenue reserve 3,635 3,627
================================ ========= =========== ========= ===========
Shareholders' funds 203,350 204,880
================================ ========= =========== ========= ===========
Net asset value per ordinary
share 344.50p 351.26p
================================ ========= =========== ========= ===========
Ordinary shares in issue (note
6) 59,027,282 58,327,282
================================ ========= =========== ========= ===========
Statement of Changes in Equity
For the year ended 31 July 2019
Capital
Share Share redemption Shareholders'
capital premium account reserve Capital reserve Revenue reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=============== ========= =============== =============== =============== =============== ==============
Shareholders'
funds at 1
August 2018 5,833 17,774 20,367 157,279 3,627 204,880
Net return on
ordinary
activities
after
taxation - - - (3,897) 8 (3,889)
Ordinary
shares issued
(note 6) 70 2,289 - - - 2,359
Shareholders'
funds at 31
July 2019 5,903 20,063 20,367 153,382 3,635 203,350
--------------- --------- --------------- --------------- --------------- --------------- --------------
For the year ended 31 July 2018
Share Capital
Share premium redemption Capital Revenue Shareholders'
capital account reserve reserve reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================ ========== ========= ============ ========= ========= ==============
Shareholders' funds at
1 August 2017 5,426 3,166 20,367 134,836 3,955 167,750
Net return on ordinary
activities after taxation - - - 22,443 (328) 22,115
Ordinary shares issued 407 14,608 - - - 15,015
Shareholders' funds at
31 July 2018 5,833 17,774 20,367 157,279 3,627 204,880
---------------------------- ---------- --------- ------------ --------- --------- --------------
The Capital Reserve balance at 31 July 2019 includes investment holding gains of GBP62,384,000 (2018 - gains of GBP70,358,000).
Cash Flow Statement
For the year ended For the year ended
31 July 2019 31 July 2018
GBP'000 GBP'000 GBP'000 GBP'000
================================================== ========== ======== ========= =========
Cash flows from operating activities
Net return on ordinary activities before taxation (3,703) 22,270
Net losses/(gains) on investments 3,116 (22,492)
Currency losses 781 49
Finance costs of borrowings 440 275
Overseas withholding tax (183) (152)
Changes in debtors and creditors (177) 111
================================================== ========== ======== ========= =========
Cash from operations* 274 61
Interest paid (435) (247)
================================================== ========== ======== ========= =========
Net cash outflow from operating activities (161) (186)
================================================== ========== ======== ========= =========
Cash flows from investing activities
Acquisitions of investments (53,465) (85,500)
Disposals of investments 51,412 66,468
================================================== ========== ======== ========= =========
Net cash outflow from investing activities (2,053) (19,032)
================================================== ========== ======== ========= =========
Cash flows from financing activities
Shares issued (note 6) 2,909 14,465
Borrowings drawn down 492 5,717
Borrowings repaid (972) (395)
================================================== ========== ======== ========= =========
Net cash inflow from financing activities 2,429 19,787
================================================== ========== ======== ========= =========
Increase in cash and cash equivalents 215 569
Exchange movements (79) 40
Cash and cash equivalents at 1 August 3,491 2,882
================================================== ========== ======== ========= =========
Cash and cash equivalents at 31 July 3,627 3,491
================================================== ========== ======== ========= =========
(*) Cash from operations includes dividends received of GBP2,231,000 (2018 - GBP1,998,000) and interest received of GBP144,000 (2018 - GBP30,000).
Notes to the Financial Statements
=================================
1. The Financial Statements for the year to 31 July 2019 have been prepared in accordance with
FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' Ireland'.
The accounting policies adopted are consistent with those of the previous financial year.
31 July 2019 31 July 2018
GBP'000 GBP'000
------------------------------------------------------------------------ ---------------- ----------------
2. Income from investments
Overseas dividends 2,225 2,002
======================================================================== ================ ================
Overseas interest 104 -
======================================================================== ================ ================
2,329 2,002
======================================================================== ================ ================
Other income
Deposit interest 144 30
======================================================================== ================ ================
Total income 2,473 2,032
======================================================================== ================ ================
3. The Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie
Gifford & Co, as its Alternative Investment Fund Manager (AIFM) and Company Secretaries. Baillie
Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co.
Dealing activity and transaction reporting have been further delegated to Baillie Gifford
Overseas Limited. The Managers may terminate the Management Agreement on six months' notice
and the Company may terminate on three months' notice.
With effect from 1 January 2019 the annual management fee is 0.75% on the first GBP50 million
of net assets, 0.65% on the next GBP200 million of net assets and 0.55% on the remaining net
assets. In the periods before 1 January 2019 covered by this report, the fee was 0.95% on
the first GBP50 million, 0.65% on the next GBP200 million of net assets and 0.55% on the remaining
net assets. Management fees are calculated and payable quarterly.
4. 31 July 2019 31 July 2018
GBP'000 GBP'000
------------------------------------------------------------------------ ---------------- ----------------
Net return per ordinary share
Revenue return on ordinary activities after taxation 8 (328)
Capital return on ordinary activities after taxation (3,897) 22,443
--------------------------------------------------------------------------------- ---------------- ----------------
Total return (3,889) 22,115
--------------------------------------------------------------------------------- ---------------- ----------------
Weighted average number of ordinary shares in issue 58,565,364 54,868,308
--------------------------------------------------------------------------------- ---------------- ----------------
The figures for net return per ordinary share are based on the above totals for revenue and
capital and the weighted average number of ordinary shares in issue during the year.
There are no dilutive or potentially dilutive shares in issue.
============================================================================================================
5. The Company has a one year multi-currency revolving credit facility of up to GBP30 million
with The Royal Bank of Scotland International Limited (31 July 2018 - up to GBP30 million)
which expires on 15 March 2020. At 31 July 2019 there were outstanding drawings of GBP10,000,000
and US$12,739,900 at interest rates of 1.28492% and 2.9272% respectively (31 July 2018 - GBP10,000,000
and US$13,358,000 at interest rates of 1.08075% and 2.79063% respectively), maturing in September
2019. The main covenants relating to the loans are that borrowings should not exceed 20% of
the Company's adjusted net asset value and the Company's net asset value should be at least
GBP80 million. There were no breaches in the loan covenants during the year.
============================================================================================================
6. In the year to 31 July 2019, the Company issued 700,000 ordinary shares (nominal value of
GBP70,000, representing 1.2% of the issued share capital at 31 July 2018) at a premium to
net asset value, raising net proceeds of GBP2,359,000 (2018 - 15,015,000). No shares were
bought back during the year and no shares are held in treasury. At 31 July 2019 the Company
had authority to buy back 8,743,259 ordinary shares on an ad hoc basis and to allot or sell
from treasury 5,132,728 ordinary shares without application of pre-emption rights. Under the
provisions of the Company's Articles of Association share buy-backs are funded from the capital
reserve.
7. The Company incurred transaction costs on purchases of GBP101,000 (2018 - GBP110,000) and
on sales of GBP109,000 (2018 - GBP336,000), being GBP210,000 (2018 - GBP446,000) in total.
None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
Glossary of Terms and Alternative Performance Measures (APM)
Total Assets
The total value of all assets held less all liabilities (other than liabilities in the form of borrowings).
Shareholders' Funds and Net Asset Value
Also described as shareholders' funds, Net Asset Value (NAV) is the value of all assets held less all liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue.
Net Liquid Assets
Net liquid assets comprise current assets less current liabilities, (excluding borrowings).
Discount/Premium (APM)
As stock markets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium.
Total Return (APM)
The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend.
Ongoing Charges (APM)
The total recurring expenses (excluding the Company's cost of dealing in investments and borrowing costs) incurred by the Company as a percentage of the daily average net asset value, as detailed below:
2019 2018 GBP'000
GBP'000
------------------------------- --------- -------------
Investment management
fee 1,297 1,396
Other administrative expenses 542 534
------------------------------- --------- -------------
Total Expenses 1,839 1,930
------------------------------- --------- -------------
Average net asset value 186,150 189,864
------------------------------- --------- -------------
Ongoing charges 0.99% 1.02%
------------------------------- --------- -------------
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.
Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds.
Invested gearing is borrowings at par less cash and brokers' balances expressed as a percentage of shareholders' funds.
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
Active Share (APM)
Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.
Compound Annual Return (APM)
The compound annual return converts the return over a period of longer than one year to a constant annual rate of return applied to the compound value at the start of each year.
Unlisted Company
An unlisted company means a company whose shares are not available to the general public for trading and not listed on a stock exchange.
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MSCI Index Data
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