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Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
PAC's conservative approach and focus on sustainability has protected it in falling markets...
Overview

Pacific Assets (PAC) invests in equity markets in Asia with a long-term, conservative approach, aiming to identify high-quality businesses with high-quality management teams, which can compound wealth over the long run while minimising serious losses of capital.

PAC is managed by David Gait of the Sustainable Funds Group at Stewart Investors, and sustainability is at the heart of the investment process. David views the sustainability of a company’s attitudes to its community and environment to be a crucial factor impacting its ability to generate long-term returns. We cover this in greater detail in the ESG section.

The trust is highly active and bears little resemblance to the benchmark. Although stock selection rather than macro views determine exposures at any one time, there has been a persistent underweight to China and overweight to India since David took over in 2010. This has overall resulted in strong relative and absolute performance, particularly in falling markets: we discuss this in more detail in the performance section.

The strong long-term track record and defensive qualities of the trust are likely to be principal reasons why it has tended to trade on a premium to the average Asia trust. In fact, for much of the past year, PAC has been on a premium in absolute terms - read more about its discount history here.

PAC focuses on long-term capital growth rather than on generating dividends; the yield is low and dividends have been inconsistent.

Analyst's View

PAC offers a relatively conservative way to invest in the Asia Pacific region for the long term. The lack of gearing and focus on defensive and stable earnings streams means the trust is likely to lag in sharply rising markets, as it has in the past. Nevertheless, the success of the strategy in avoiding losses in falling markets has led to long-term outperformance.

A critical differentiator for the trust is the focus on sustainability. This approach has been developed and employed within the Stewart Investors team for many years, long before the current fashion for ESG investing took off. We think the manager’s argument that over the long run, companies will only survive and prosper if they take their responsibilities to the environment and society seriously, has some force. In particular, as markets in Asia develop, standards of governance and expected corporate behaviour have been tightened up, and this seems to us likely to be a long-term trend from which PAC is set to benefit.

The trust trades close to par, having been on a premium for much of 2019. We believe the strong demand for the shares reflects the greater risk aversion in markets during 2019 and corresponding greater interest in more defensive strategies. In our view, while risk aversion remains, the high rating is likely to be secure. It is worth noting, however, that when markets have rallied stronger the trust has slipped onto a wider discount. Generally this has been narrower than 10% however, and the five year average discount is low at just 0.7%.

bull bear
A strong focus on sustainability should appeal to many investors No gearing limits returns in rising markets
Focus on quality characteristics and low leverage could limit losses in down markets Lack of dividends means unlikely to appeal to income investors
A hgihly active strategy increases the chance of outperformance Major "bets" against China and for India could lead to periods of underperformance
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