Baillie Gifford-run investment trust has scope for a return to favour
Thursday 14 Nov 2019 Author: Steven Frazer

These are interesting times for Asia. The ongoing trade dispute between the US and China, huge protests in Hong Kong and the economy slowing in some parts are overshadowing, for now, the undoubted enormous long-run growth potential as the region’s vast population hubs become larger, wealthier and older.

We are optimistic that the current complex challenges facing parts of the region will head toward resolution through 2020 and beyond and believe that Pacific Horizon Investment Trust (PHI) is a good way to tap into the underlying profit potential.

For example, by 2024 the spending power of Chinese consumers is estimated to nearly double in US dollar terms, according to forecasts – in India it should increase by 60%-plus.

The trust is run by the same Baillie Gifford team behind popular growth investment trusts such as Scottish Mortgage (SMT) and Monks (MNKS), both five star-rated by Trustnet. Pacific Horizon itself has earned four star Trustnet status.

It shares the same focus on long-term growth as its larger trust cousins but concentrates on the Asia-Pacific ex-Japan region. Among its pet investment themes are digitisation and technology transforming industry.

Pacific Horizon looks for companies that have credible potential to increase revenue and earnings at around 15% per year over a five-year period or longer.

The trust keeps an eye out for enterprises with this growth scope and where the rest of the market has been slow to fully recognise the opportunity

Pacific Horizon runs a portfolio of between 40 and 120 stocks (it was 75 at 31 July). Holdings include Alibaba, Tencent, Samsung, and Geely, one of China’s biggest car makers. It’s biggest stake is Singapore-based (and Tencent-backed) SEA, one of South-East Asia’s online gaming and commerce firms.

Let’s be clear, this is a higher risk investment. The trust invests exclusively in emerging parts of the world where there are democratic challenges and attitudes to wealth creation are not the same as in the West. Pacific Horizon also concentrates on medium-sized enterprises where earnings quality and reliability can be patchy.

That said, Pacific Horizon has significantly outstripped its Investment Trust Asia Pacific benchmark over three and five years in both share price and net asset terms.

The current discount to NAV of more than 9%, versus 7.1% average, means there is real scope for investors to get the double whammy of a narrower discount and hopefully net asset value growth.

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