Defensive play misses out on rally, but long-term returns solid

Relative performance was notably weak for Pacific Assets Ord (LSE:PAC) (over its financial year to 31 January 2025) on account of the long-held underweight to Chinese companies – the opposite of the dynamic in 2023, when the trust preserved capital well as Chinese markets declined.

In terms of share price total returns, Pacific Assets notably lagged the MSCI All Country Asia ex Japan Index which returned 22.3% versus 3.7%.

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However, long-term performance remains strong, with Pacific Assets having returned 52.1% over five years to 31 January 2025, versus the benchmark return of 27%.

Its NAV increased by 9.7%, meaning the trust has delivered positive absolute returns in eight of the last nine financial years. It also beat its alternative performance measure, UK CPI +6%, which rose 8.8% over the period.

A worsening discount to net asset value (NAV) impeded share price performance and was little helped by buybacks (around 0.3% of shares bought back in the year). The current discount level of -12.6% is the deepest of the trust’s small peer group (average -10%).

The performance was in keeping with its investment philosophy. Historically, performance will trail in rapidly rising markets but preserve capital better than others when markets are weak.

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For shareholders, there were two notable announcements. The first is that longstanding manager David Gait will hand over lead manager responsibilities to Douglas Ledingham at the start of July. Gait will swap roles to continue as co-manager as part of long-term succession planning.

The second news of note is that the investment remit of the trust may expand to include Australian and New Zealand-listed companies, where the manager sees a number of high-quality investment opportunities. However, the high valuations across these markets means there’s minimal anticipated change in the short term. This is subject to shareholder approval at its annual general meeting on 1 July.

The board noted that Japan was also considered, but disregarded given that many investors prefer to invest in Japan directly.

The numbers in detail (for financial year to 31 January 2025)

Net Asset Value (NAV) Return: +9.7%
Share Price Total Return: +3.7%
Benchmark one (CPI +6): +8.8%
Benchmark two (MSCI AC Asia ex JPN): +22.3%
Premium/Discount: -11.5% (vs -5.1% prior year)
Dividend: 4.9p (vs +22.5% prior year)

Dividend

Strong revenue generation across the portfolio companies, increasing over 23% year-on-year, reflected in an increased payout (albeit not a key objective of Pacific Assets).

Portfolio

The portfolio has shifted from minimal investments in China (0.6% five years ago) to 10.4% across eight companies, driven by attractive valuations. The revenue-based exposure to China is nearly double.

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Portfolio turnover rose to 24.7% from 18.3%, reflecting new ideas and the trimming of smaller holdings. New investments varied across countries and industries, including Dongguan Yiheda Automation, a Chinese supply chain automation provider and Sundaram Finance, an Indian financial services company.

Key contributors to the portfolio included India’s Mahindra & Mahindra Ltd DR (LSE:MHID), which benefited from strong leadership and capital allocation, and CG Power (also India), which benefited from high-quality stewardship post-acquisition. Samsung Electronics Co Ltd DR (LSE:SMSN) was a key detractor as it struggled against competitors in AI semiconductors, but it’s viewed as a short-term issue.

Outlook

The outlook for the Asia-Pacific region has become more uncertain following renewed trade tensions, in particular between the US and China, prompted by the recent tariff announcements from the Trump administration.

While the region had been expected to see modest economic growth supported by easing inflation and proactive monetary policies, the re-emergence of a trade war poses fresh challenges to supply chains, investor sentiment, and export-led growth.

The focus of management will continue to be on selecting high-quality companies with strong fundamentals, resilient balance sheets, and capable management teams that can navigate volatility and adapt to a more fragmented global trade environment.

Discount

As of the time of writing, the company discount has widened, to a current level of -12.6%. This is the deepest of the trust’s small peer group (average -10%). It repurchased 370,000 shares during the year, at a total cost of £1.4 million, and at an average discount of 14.0%.

ii View

Pacific Assets trust is managed with a strong focus on risk, which can lead to the trust lagging in market rallies. Performance over the period was as expected and reflective of the investment style. Given current geopolitical issues, this could present an opportunity for investors to navigate through volatile times while accessing growth companies in the region.

It is interesting to see the increased allocation to China over the year, which now consists of eight high-quality companies. Turnover did increase as a result of entering positions in what are expected to be new long-term opportunities.

Its average share price discount over the year was -11.5%, wider than any average of the past five years and below its peer group. The board began buying back shares in the second half of the year and has continued since.

Pacific Assets is one of our ACE 40 investment ideas and invests in a sustainable manner.