Schroder AsiaPacific Fund PLC Half-year Report (8119I)

TIDMSDP

RNS Number : 8119I

Schroder AsiaPacific Fund PLC

22 June 2017

22 June 2017

Half Year Report

Schroder AsiaPacific Fund plc (the "Company") hereby submits its Half Year Report for the period ended 31 March 2017 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2.

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroders.co.uk/asiapacific. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/8119I_-2017-6-21.pdf

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Ria Vavakis

Schroder Investment Management Limited

Tel: [phone]

LEI number: 549300A71N7LE35KWU14

___________________________________________________________________________________________________________________________

Half Year Report and Accounts for the six months ended 31 March 2017

Interim Management Report

Chairman's Statement

Performance

I am pleased to report a total return of 11.8% for both the Company's net asset value ("NAV") and the share price during the six month period to 31 March 2017, comparing favourably with a total return of 10.4% for the benchmark, the MSCI All Countries Asia excluding Japan Index in sterling terms.

The strong rise in the Company's NAV was due to a combination of outperformance of the benchmark, a fall in the value of sterling and a rise in markets. Further analysis of performance may be found in the Manager's Review.

Gearing

Gearing stood at 0.4% at the beginning of the period and had increased to 4.0% as at 31 March 2017. Average gearing during the period was 1.7%. The level of gearing continues to operate within pre-agreed levels so that net gearing does not represent more than 20% of shareholders' funds.

Discount management

Over the period, the average discount of the Company's shares to NAV was 12.7%, wider than the longer-term maximum 10% target adopted by the Board. The Board continues to monitor the level of discount in light of that of its peer group and prevailing market conditions. Despite strong performance in regional markets, investor demand remained mixed and this was reflected in wide discounts generally across the peer group. A total of 225,000 shares were purchased for cancellation during the period.

Management fee

During the period the Board undertook its annual review of the management fee and, following discussion with the Manager, agreed a change in the structure and level of the fee in order to reduce the level of the Company's operating expenses for shareholders.

The fee structure will remain tiered but in three rather than four levels, with a reduction in charges, as follows:

The fee will continue to be charged on the value of the Company's assets under management, net of current liabilities other than short term borrowings.

A fee of 0.90% will be charged on the first GBP300 million, reducing to 0.80% on assets between GBP300 million and GBP600 million and further reducing to 0.75% on assets above GBP600 million.

Based on the NAV at 31 March 2017, this change would reduce the annual fee from GBP6,370,000 to GBP6,197,000.

The reduction in management fee will be effective from 1 April 2017.

Board changes

As disclosed in my last annual statement, Anthony Fenn, the Senior Independent Director, will retire at the Company's next Annual General Meeting. The Board has commenced the search for Anthony's successor, for appointment later this year.

Outlook

Geo-political developments dominate the news but we are reassured by the continuing success of the

companies in the portfolio. Their growth is in many cases at lower levels than in their heyday, but across the region they look competitive. Short-term growth of dividends in aggregate looks assured, and valuations do not seem expensive. Even allowing for the fall in sterling over the last year, there are good reasons why the Company's share price has been at all-time highs.

This is not to deny the challenges facing the region, as discussed in the Manager's Review. The Board continues to believe, however, in the virtues of a conservatively-run investment portfolio of high quality companies, particularly when - as now - corporate cash flow is rising strongly.

Nicholas Smith

Chairman

21 June 2017

Manager's Review

The net asset value per share of the Company recorded a total return of 11.8% over the six months to end March 2017. This was ahead of the performance of the benchmark, the MSCI All Countries Asia excluding Japan Index in sterling terms, which was up 10.4% over the same period.

Asian equity markets put in a solid performance over the first six months of the Company's financial year. However, there has been considerable volatility. Markets were somewhat subdued in October/November digesting the strong progress in the summer, and reflecting concern that rising US interest rates and a stronger dollar presaged a tightening of monetary conditions. These incipient concerns seemed confirmed by the US presidential election result, which triggered expectations of an "America First" policy of deregulation, tax reform, infrastructure spending, and a more protectionist trade policy.

Needless to say, Asian markets did not react well, with more trade-exposed markets, sectors and companies performing particularly badly. Interest rate sensitive stocks such as real estate also weakened, although more strongly capitalised banks in the region did well on anticipation that rising interest rates would materially enhance their profitability.

The correction proved relatively short-lived. The reality of the US constitution has meant that substantive action on the Trump economic programme has been minimal, and a number of pre-election pledges proved subject to revision post-inauguration. Meanwhile, there were other supports to the Asian stock markets, including signs of recovery in global trade, strong data out of China including leading indicators, producer prices and corporate profits, and an earnings season which saw generally upward revisions to investor expectations, the first time for a number of years that has been the case.

Sterling weakness has continued to have a material impact on returns, with all the regional currencies rising against the pound apart from the Malaysian ringgit. In terms of overall returns, ASEAN emerging markets performed relatively poorly, reflecting to varying degrees political noise and somewhat becalmed economies. It is striking that markets perceived as more exposed to a global economic recovery led the way such as Singapore, Korea and Taiwan, although for the latter currency strength impacted exporter returns.

Performance and portfolio activity

The Company's performance was ahead of the Index. The main contributors were stock selection in Hong Kong, Korea, Indonesia and China, with lesser contributions from Thailand and Taiwan. The only significant market where stock selection was below par was India, where the Company had insufficient exposure to more economically-sensitive industrial and material names. Country allocation was a very small negative factor, primarily because of the overweighting in Hong Kong, which underperformed. In sector terms, selection in consumer cyclicals, industrials and real estate were the main positives, along with the overweighting in information technology and underweights in consumer staples and utilities.

In terms of positioning changes, we added to Korea, reflecting better earnings momentum and still attractive valuations, and made more modest additions to Singapore and Malaysia; the latter through the bond market as we deemed the currency as oversold but equity valuations unattractive. Funding the changes came from a modest increase in gearing and reductions in India and Hong Kong due to individual stocks reaching our price targets. In sector terms, we added to banks, funded from reductions in telecoms and industrials.

Outlook and policy

Recent weeks have seen a distinct moderation in the optimism about economic growth that dominated the second half of 2016. Bond yields have retraced much of their rise, commodity prices have softened, and defensive sectors have recovered some of the ground lost in 2016. However, the global economy looks in reasonable shape. Excessive hopes for US growth may be disappointed (partly because the scope to stimulate an economy near full capacity is by its nature limited), but there is no reason to expect a sharp downturn, while other developed economies such as Japan and Europe appear to be on a broad recovery tack.

Less investor focus in general has been given to the importance of China in stabilising global growth. The

influence is clear in the strong export numbers in the Asian region (Taiwan: +13% year-on-year in March; Korea: +14%) and in the buoyancy (until very recently) of commodity prices. For all the talk of fiscal packages and monetary measures in the developed world, the net new stimulus has been almost wholly from China over the last 18 months. In engineering a strong recovery, China has done it by the text book: lower interest rates, real estate stimulus, public investment and continued supply of credit (with credit continuing to grow over twice nominal GDP) leading to an impressive recovery in the secondary industry and a swing in producer prices from -6% year-on-year at the end of 2015, to +7.6% in March.

Recently the Chinese authorities have signalled a less pro-growth stance (marginal tweaks up in policy interest rates, cooling measures for large cities' real estate markets), but the priority will be to maintain a satisfactory level of growth - not too hot, not too cold, to use a cliché.

The long-term resolution of China's addiction to credit (lower growth, debt work-outs etc) has still to be faced, but on a medium-term time horizon China should be a broadly supportive influence to global and regional activity.

Trade protectionism remains a salient risk for the Asian markets, although this comes at a time when more cyclical supports are healthy, including a slow repair from the crisis conditions of 2015 for a number of emerging markets (Russia, South Africa, Latin America, Middle East) and steady recovery in Europe, which is at least as important a destination for exports as the United States. External balances in terms of current accounts, trade balances and foreign exchange reserves remain healthy, and provide some cushion should there be tighter global monetary conditions or a stronger dollar than we currently envisage. Domestic demand drivers (outside China) remain muted, however. It probably awaits a more concerted push on infrastructure spending in places like India and emerging ASEAN for this to change. Most governments have more fiscal room to manoeuvre than they did, so it is political will that forms the main impediment.

Geo-political risk is somewhat elevated for other reasons, most notably the increasingly disruptive actions of the Democratic People's Republic of Korea in pursuit of a credible nuclear deterrent. With the possible return of a more interventionist US foreign policy, tensions are high as at the time of writing. Much hangs on the personal relationship between presidents Xi and Trump given that it is China that has the power to influence the North Korean regime should it choose to exert it.

At a company level, we take heart from the fact that companies we favour have been disciplined in terms of capital spending over recent years, and have used the opportunity to strengthen balance sheets and

concentrate on raising value-added rather than pursuing expansion for the sake of it, which is usually at the expense of shareholder returns. A by-product of this is that corporate free cash flow is growing considerably faster than reported earnings.

Schroder Investment Management Limited

21 June 2017

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following categories: strategy and competitiveness risk; investment management risk; financial and currency risk; accounting, legal and regulatory risk; custodian and depositary risk; and service provider risk. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 15 and 16 of the Company's published Annual Report and Accounts for the year ended 30 September 2016.

These risks and uncertainties have not materially changed during the six months ended 31 March 2017, with the exception of cyber risk relating to the Company's key service providers. The Board considers that this has increased in light of the rising frequency and success of cyber attacks on businesses and institutions. In order to ensure that this risk is managed and mitigated appropriately, the Board is seeking enhanced reporting on cyber risk controls from its key service providers.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 17 of the published Annual Report and Accounts for the year ended 30 September 2016, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2017.

Directors' responsibility statement

The Directors confirm that, to the best of their knowledge, this set of condensed financial statements

has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and with the Statement of Recommended Practice, "Financial Statements of Investment Companies and Venture Capital Trusts" issued in November 2014 and that this Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Income Statement

for the six months ended 31 March 2017 (unaudited)

 
                                  (Unaudited)                   (Unaudited)                  (Audited) for 
                                   for the six                   for the six                    the year 
                                     months                        months                  ended 30 September 
                                 ended 31 March                ended 31 March                     2016 
                                      2017                          2016 
------------------------ 
 
                           Revenue   Capital     Total   Revenue   Capital     Total   Revenue   Capital     Total 
                           GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000   GBP'000 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Gains on investments 
 held at fair 
value through 
 profit or loss                  -    75,516    75,516         -    52,416    52,416         -   186,860   186,860 
Gains on derivative 
 contracts                       -         -         -         -       133       133         -       163       163 
Net foreign currency 
 losses                          -     (374)     (374)         -     (861)     (861)         -   (3,664)   (3,664) 
Income from investments      5,238         -     5,238     3,802         -     3,802    15,232       220    15,452 
Other interest 
 receivable and 
similar income                   1         -         1         1         -         1         1         -         1 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Gross return                 5,239    75,142    80,381     3,803    51,688    55,491    15,233   183,579   198,812 
Investment management 
 fee                       (2,979)         -   (2,979)   (2,330)         -   (2,330)   (5,006)         -   (5,006) 
Administrative 
 expenses                    (430)         -     (430)     (448)         -     (448)     (855)         -     (855) 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Net return before 
 finance costs 
and taxation                 1,830    75,142    76,972     1,025    51,688    52,713     9,372   183,579   192,951 
Finance costs                (137)               (137)     (149)         -     (149)     (304)         -     (304) 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Net return on 
 ordinary activities 
before taxation              1,693    75,142    76,835       876    51,688    52,564     9,068   183,579   192,647 
Taxation (note 
 3)                          (309)      (11)     (320)     (234)      (82)     (316)   (1,028)     (162)   (1,190) 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Net return on 
 ordinary activities 
after taxation               1,384    75,131    76,515       642    51,606    52,248     8,040   183,417   191,457 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
Return per share 
 (note 4)                    0.83p    44.83p    45.66p     0.38p    30.56p    30.94p     4.77p   108.78p   113.55p 
------------------------  --------  --------  --------  --------  --------  --------  --------  --------  -------- 
 

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the period.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

Statement of Changes in Equity

for the six months ended 31 March 2017 (unaudited)

 
                   Called-up            Capital     Warrant     Share 
----------------- 
                       share    Share  redemption  exercise  purchase   Capital  Revenue 
----------------- 
                     capital  premium     reserve   reserve   reserve  reserves  reserve    Total 
                     GBP'000  GBP'000     GBP'000   GBP'000   GBP'000   GBP'000  GBP'000  GBP'000 
-----------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
At 30 September 
 2016                 16,780  100,956       3,364     8,704    32,396   487,957    8,164  658,321 
Repurchase and 
 cancellation 
of the Company's 
 own 
Ordinary shares         (23)        -          23         -     (821)         -        -    (821) 
Net return on 
 ordinary 
activities after 
 taxation                  -        -           -         -         -    75,131    1,384   76,515 
Dividend paid 
 in the period 
(note 5)                   -        -           -         -         -         -  (7,960)  (7,960) 
-----------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
At 31 March 
 2017                 16,757  100,956       3,387     8,704    31,575   563,088    1,588  726,055 
-----------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
 

for the six months ended 31 March 2016 (unaudited)

 
                       Called-up              Capital   Warrant     Share 
--------------------- 
                           share    Share  redemption  exercise  purchase   Capital    Revenue 
--------------------- 
                         capital  premium     reserve   reserve   reserve  reserves    reserve      Total 
                         GBP'000  GBP'000     GBP'000   GBP'000   GBP'000   GBP'000    GBP'000    GBP'000 
---------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
At 30 September 
 2015                     16,923  100,956       3,221     8,704    36,301   304,540      7,225    477,870 
Repurchase and 
 cancellation 
 of the Company's 
 own Ordinary 
 shares                     (35)        -          35         -     (944)         -          -      (944) 
Net return on 
 ordinary activities 
 after taxation                -        -           -         -         -    51,606        642     52,248 
Dividend paid 
 in the 
 period (note 
 5)                            -        -           -         -         -         -    (7,101)    (7,101) 
---------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
At 31 March 
 2016                     16,888  100,956       3,256     8,704    35,357   356,146        766    522,073 
---------------------  ---------  -------  ----------  --------  --------  --------  ---------  --------- 
 

for the year ended 30 September 2016 (audited)

 
                       Called-up              Capital   Warrant     Share 
--------------------- 
                           share    Share  redemption  exercise  purchase   Capital  Revenue 
--------------------- 
                         capital  premium     reserve   reserve   reserve  reserves  reserve    Total 
                         GBP'000  GBP'000     GBP'000   GBP'000   GBP'000   GBP'000  GBP'000  GBP'000 
---------------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
At 30 September 
 2015                     16,923  100,956       3,221     8,704    36,301   304,540    7,225  477,870 
Repurchase and 
 cancellation 
of the Company's 
 own 
Ordinary shares            (143)        -         143         -   (3,905)         -        -  (3,905) 
 
Net return on 
 ordinary activities 
 after taxation                -        -           -         -         -   183,417    8,040  191,457 
Dividend paid 
 in the year 
(note 5)                       -        -           -         -         -         -  (7,101)  (7,101) 
---------------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
At 30 September 
 2016                     16,780  100,956       3,364     8,704    32,396   487,957    8,164  658,321 
---------------------  ---------  -------  ----------  --------  --------  --------  -------  ------- 
 

Statement of Financial Position

at 31 March 2017 (unaudited)

 
                                   (Unaudited)  (Unaudited)     (Audited) 
--------------------------------- 
                                      31 March     31 March  30 September 
--------------------------------- 
                                          2017         2016          2016 
                                       GBP'000      GBP'000       GBP'000 
---------------------------------  -----------  -----------  ------------ 
Fixed assets 
Investments held at fair 
 value through profit or 
 loss                                  751,819      547,275       661,405 
---------------------------------  -----------  -----------  ------------ 
Current assets 
Debtors                                 10,621        1,870         1,654 
Cash at bank and in hand                16,850        4,170        18,196 
---------------------------------  -----------  -----------  ------------ 
                                        27,471        6,040        19,850 
---------------------------------  -----------  -----------  ------------ 
Current liabilities 
Creditors: amounts falling 
 due within one year                  (53,235)     (31,110)      (22,934) 
Derivative financial instruments 
 held at fair value through                  -        (132)             - 
 profit or loss 
---------------------------------  -----------  -----------  ------------ 
                                      (53,235)     (31,242)      (22,934) 
---------------------------------  -----------  -----------  ------------ 
Net current liabilities               (25,764)     (25,202)       (3,084) 
---------------------------------  -----------  -----------  ------------ 
Total assets less current 
 liabilities                           726,055      522,073       658,321 
---------------------------------  -----------  -----------  ------------ 
Net assets                             726,055      522,073       658,321 
---------------------------------  -----------  -----------  ------------ 
Capital and reserves 
Called-up share capital 
 (note 6)                               16,757       16,888        16,780 
Share premium                          100,956      100,956       100,956 
Capital redemption reserve               3,387        3,256         3,364 
Warrant exercise reserve                 8,704        8,704         8,704 
Share purchase reserve                  31,575       35,357        32,396 
Capital reserves                       563,088      356,146       487,957 
Revenue reserve                          1,588          766         8,164 
---------------------------------  -----------  -----------  ------------ 
Total equity shareholders' 
 funds                                 726,055      522,073       658,321 
---------------------------------  -----------  -----------  ------------ 
Net asset value per share 
 (note 7)                              433.28p      309.15p       392.33p 
---------------------------------  -----------  -----------  ------------ 
 

Notes to the Accounts

   1.          Financial Statements 

The information contained within the accounts in this half year report has not been audited or reviewed by the Company's independent auditors.

The figures and financial information for the year ended 30 September 2016 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

   2.          Accounting policies 

Basis of accounting

The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommend Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in November 2014 and updated in January 2017.

All of the Company's operations are of a continuing nature.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 30 September 2016.

   3.          Taxation 

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The taxation charge comprises irrecoverable overseas withholding tax on dividends receivable, and overseas capital gains tax.

   4.          Return per share 
 
                               (Unaudited)  (Unaudited) 
                                Six months   Six months     (Audited) 
                                     ended        ended    Year ended 
                                  31 March     31 March  30 September 
                                      2017         2016          2016 
-----------------------------  -----------  -----------  ------------ 
Revenue return (GBP'000)             1,384          642         8,040 
Capital return (GBP'000)            75,131       51,606       183,417 
-----------------------------  -----------  -----------  ------------ 
Total return (GBP'000)              76,515       52,248       191,457 
-----------------------------  -----------  -----------  ------------ 
Weighted average number 
 of Ordinary shares in issue 
 during the period             167,592,941  168,873,716   168,605,440 
Revenue return per share             0.83p        0.38p         4.77p 
Capital return per share            44.83p       30.56p       108.78p 
-----------------------------  -----------  -----------  ------------ 
Total return per share              45.66p       30.94p       113.55p 
-----------------------------  -----------  -----------  ------------ 
 
   5.          Dividends paid 
 
                           (Unaudited)  (Unaudited) 
                            Six months   Six months     (Audited) 
                                 ended        ended    Year ended 
                              31 March     31 March  30 September 
                                  2017         2016          2016 
                               GBP'000      GBP'000       GBP'000 
-------------------------  -----------  -----------  ------------ 
2016 final dividend paid 
 of 4.75p (2015: 4.20p)          7,960        7,101         7,101 
-------------------------  -----------  -----------  ------------ 
 

No interim dividend has been declared in respect of the six months ended 31 March 2017 (2016: nil).

   6.          Called-up share capital 
 
                                   (Unaudited)  (Unaudited) 
                                    Six months   Six months     (Audited) 
                                         ended        ended    Year ended 
                                      31 March     31 March  30 September 
                                          2017         2016          2016 
---------------------------------  -----------  -----------  ------------ 
Ordinary shares of 10p each, 
 allotted, called-up and 
 fully paid: 
Opening balance of shares 
 in issue                          167,795,716  169,225,716   169,225,716 
Shares repurchased and cancelled     (225,000)    (352,000)   (1,430,000) 
---------------------------------  -----------  -----------  ------------ 
Closing balance of shares 
 in issue                          167,570,716  168,873,716   167,795,716 
---------------------------------  -----------  -----------  ------------ 
 
   7.          Net asset value per share 

Net asset value per share is calculated by dividing shareholders' funds by the number of shares in issue at 31 March 2017 of 167,570,716 (31 March 2016: 168,873,716 and 30 September 2016: 167,795,716).

   8.          Financial instruments measured at fair value 

The Company's financial instruments that are held at fair value comprise its investment portfolio. At 31 March 2017, all investments in the Company's portfolio were categorised as Level 1 in accordance with the criteria set out in paragraph 34.22 (amended) of FRS 102. That is, they are all valued using unadjusted quoted prices in active markets for identical assets (31 March 2016 and 30 September 2016: same).

9. Events after the interim period that have not been reflected in the financial statements for the interim period

The Directors have evaluated the period since the interim date and have not noted any significant events which have not been reflected in the financial statements.

This information is provided by RNS

The company news service from the London Stock Exchange

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