Pacific Assets trust backs fund manager despite tough five years

The board of an interactive investor ACE 30 investment trust backs the fund manager to turn around performance. 

The board of the Pacific Assets investment trust (LSE: PAC) has said that it is sticking by manager David Gait despite performance coming off the boil over the last five years.

The trust, one of interactive investor’s ACE 30 selections, has returned 53.9% over five years compared to 110.8% from the Asia Pacific investment trust sector, and 12.8% over three years against 30.9% from the peer group.

Despite the underperformance, interactive investor remains a fan of the trust. The manager has a strong reputation and plenty of experience investing in the region. Moreover, on a 10-year view, the trust has outperformed the Asia Pacific investment trust sector, up 156.2% versus 147.8%, according to FE Analytics.

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In its half-year results to 31 July, the board of the £373 million trust said that it noted the portfolio’s three- and five-year underperformance and had opened a dialogue with the fund manager. It concluded that it remains happy with the fund manager’s approach to investment decisions, although it is disappointed that the trust has slipped on to a wider discount of 9.2% on average over the reporting period.

The trust’s chairman James Williams said in his statement to the market: “The board initiated a dialogue with the investment manager in which we looked in detail at their decision-making, company selection and portfolio construction. We discussed with them the investment approach that they use and the philosophy that lies behind it. In these matters we are satisfied that the investment manager continues to maintain high standards of research and selection, and remains consistent in approach to investing sustainably in its target markets.”

Four reasons for underperformance

Portfolio manager Gait, of Asia and EM specialist fund house Stewart Investors, said that the trust historically preserves capital better than competitors three out of four times in falling markets, but this time it had “disappointingly” failed to do so. He gave four reasons for this: a large fall in the Indian market, where the trust had significant exposure of 35%; the market falls punishing all companies, no matter their quality; too much exposure to banks; and too little exposure to strong-performing China.  

Seven of the worst contributors to the trust’s performance over the reporting period were listed in the Indian subcontinent, as the MSCI India fell 42% from peak to trough. Meanwhile, Chinese equities were “among the best performing in the world”, said Gait, and at the start of lockdown the trust did not hold any Chinese stocks, although he has since added four positions in the country as valuations looks compelling. “Not owning many Chinese companies and internet companies, in particular, hurt performance. Over the years, we have explained that the absence of quality stewards of sustainable franchises with robust financials and valuations dissuaded us from investing [our investors’] capital in the large majority of companies listed in China,” said Gait.

The four new stocks have so far contributed positively to performance on the trust, as have some of its longer-term positions in Japan.

Looking forward, the board is sanguine about future performance on the trust. Williams said his warning a year ago that investors could expect a period of lower investment returns still stands, while uncertainties such as the impact of the pandemic and the risk of higher inflation and interest rates remain present.

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‘Attractive entry point’

Investment trust analyst Numis said Gait’s approach differentiates him from the peer group because of his focus on the quality of management and the long-term sustainability of business models.

“Therefore we would expect its performance to diverge from the benchmark over short periods,” it said in a note.

“It will be pleasing for shareholders to note the strong performance since 31 July, with the NAV up 8.4% vs 5.4% for the MSCI AC Asia ex Japan index. Over a 10-year time horizon, the fund’s long-term track record remains strong, with net asset value (NAV) total returns of 166% compared to 153.6% for the peer group and 111% for the index, albeit performance relative to the market in recent years has been much more variable.”

It added that share price performance has been weaker, but noted that the discount at 11.4% could “prove an attractive entry point if the manager’s style comes more into favour”.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.