Pacific Horizon

PHI is a long-term outperformer looking cheap after big NAV falls…

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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Pacific Horizon

Pacific Horizon Investment Trust (PHI) aims to generate long-term growth by identifying the companies developing and benefitting from our future ways of living and transacting. Managers Ewan Markson-Brown and Roddy Snell at Baillie Gifford have built a portfolio concentrated in internet-related and technology companies, as well as those benefitting from the shift to online consumption, the development of electric cars and the expansion of middle-class consumption into Asia – where 50% of the world’s population lives.

The managers have a bias to small and mid-caps relative to their peers and the index, and own one unlisted stock. The approach is highly active, with an active share of 83%; individual companies are allowed to grow to a high weighting as long as the managers think the growth can continue. Ewan and Roddy believe that we are nearer the beginning of the technological revolution than the end, and so there are small companies which could revolutionise the world ready to be found. The relatively diversified portfolio of 78 stocks means the managers can accept that some of their stock ideas won’t pay off.

PHI has one of the best long-term track records in the AIC Asia Pacific sector. As we discuss in the Performance section, the trust has performed strongly relative to peers over the past five years. During a particularly strong run in 2016 and 2017, it was trading on a significant premium to par and regularly issuing shares. As markets have become more choppy – particularly since the outbreak of the coronavirus pandemic – the shares have fallen onto a 12% discount. PHI does not pay a dividend.

Kepler View

PHI offers a way to invest in the exciting secular changes happening in Asia. Many of these involve new technology or online ways of doing business which are in line with, or in advance of, the current state of development in the UK, despite the fact that the region is supposedly ‘emerging’ rather than ‘developed’. There are of course dangers in investing in high-growth online businesses. One of these is that a competitor will come along and steal your lunch. New entrants can seem to come from nowhere – does anyone remember Myspace? We think Ewan and Roddy’s move into SEA and away from Tencent illustrates they are well able to cope with this element of the technology sector. Moreover, the relatively diversified portfolio of stocks allows them to take more shots without having to pick a handful of winners and hope for a 100% strike rate.

In particular we think that the coronavirus pandemic illustrates how the process of digitalisation could go much further than it has – how many of the new online shopping customers will go back to physical visits after the crisis ends, for example? In this light, the managers’ saying “everything can be replaced by software” makes more sense. For those who want to take a long-term position in a trust aiming to invest in the future, the current 12% discount could be an appealing entry point, although we note that discount volatility has been high.

Bull bear
A highly active approach maximises the potential for outperformance A highly active approach can lead to underperformance if active decisions don't work
High revenue-growth potential in Asia and new technologies Gearing can exacerbate losses in down markets
Commonality of approach at Baillie Gifford means there is a lot of expertise to draw on Discount volatility is high
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

Fund History

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