Hello and welcome to the 2023 Pacific Assets Trust AGM manager update for those not able to attend the AGM in person.
My name is Doug Ledingham and alongside David Gait, I co-manage the Trust.
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This presentation will provide a review of the year to 31st May 2023 and should be used alongside the investment manager section of the 2023 annual report.
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As a reminder, over the financial year to 31st January 2023 the NAV of the Trust grew 4.7% versus the comparative index of minus 7.7% and the CPI+6% comparator of 8.1%. For the 12 months through the 31st May 2023 the Trust’s NAV grew 9.4% versus minus 6.5% for the comparator index and 15.3% for the CPI comparator.
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To start off I thought I’d provide a quick reminder of our investment philosophy.
This is a collection of ideas we take very seriously. Ideas that have been central to our thinking for over thirty years.
Very simply, everything we do stems from how seriously we take our role as stewards of other people’s money and the obligation we have to first protect their capital in the knowledge that only then can that capital be grown.
We are long term. We have no ability to forecast what will happen over the next quarter or next 12 months. Over the last ten years we have failed to predict Brexit, Trump’s election, a military coup in Thailand, India removing 90% of its currency overnight, the political interference faced by Chinese internet companies, covid, central banks reaction to covid and the recent rapid shift in interest rates. You name it and we failed to foresee it.
Instead we seek to own companies for as long as possible in the belief that over the long term, investors can enjoy the benefits of underlying growth and value creation. Our average holding periods is between seven and ten years but we have held many names for over ten.
Next is how we think about risk. As we see our job as protecting clients hard earned savings, we very simply think about risk as the risk of losing money. We do not think about it as deviation against a benchmark.
This sets us free from the constraints of using the benchmark as a menu to finding companies and means we can approach building portfolios with a blank sheet of paper. As we will talk about later, the Trust looks and behaves very differently to the benchmark and other Asian portfolios.
As we are looking at companies with a time horizon of ten years we are naturally thinking about how they are positioned relative to the many headwinds and tailwinds that come from a path to a more sustainable economy whether that be increased government regulation or changing consumer preferences, By using this lens we are better able to understand risk and reward. Companies well positioned for sustainable development, in our eyes, should enjoy better opportunities for growth and be lower risk.
But opportunities for growth are meaningless for a long term investor if there is no ability to create and capture value from this growth. That is why we place so much emphasis on quality. We look at businesses through the lenses of quality of people, quality of franchise and quality of financials. Quality businesses are rare, great people are rare too. But great businesses and great people produce fewer problems and increase the chances of exceptional returns.
Our approach is heavily qualitative as the key enduring points we seek to understand like “are the people trustworthy and competent” and “is this a business that can continue to delight customers and earn attractive margins and returns in ten years' time” cannot be quantified with backward looking data.
Outcomes of our focus on owning high quality is that our companies tend to have long term owners at the helm, enjoy robust and resilient cash flows which provides growth in good times and defence in times of stress.
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Here I have a collection of the outcomes of our process. Hopefully this serves as evidence that we are doing what we say we do.
I’ll quickly draw your attention to a few of these - in the top middle we have the performance of the Trust in markets where the index is negative. And outcome of our focus on capital preservation is that the Trust tends to outperform in more than three quarters of down markets.
With median turnover of 13% we are holding on to our companies for 8 years.
Bottom left we have the carbon footprint of the Trust - Our focus on owning high quality companies well positioned for sustainability positioning naturally takes us away from the carbon intensive, high risk, companies and sectors.
To the right of that we have the percentage of companies held in the Trust with net cash balance sheets and to the right of that, the percentage of companies that are owned by stewards who have their own money invested alongside us. Resilient balance sheets and long term owners are vitally important in the companies that we own, and their ability to survive and prosper in times of stress while being able to create longer term opportunities for growth.
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Moving on to what went wrong over the last 12 months.
I don’t think there is an overarching theme here.
Aavas is one of India’s leading providers of mortgages to low income households. We believe the share price has come under pressure due to concerns around short term profitability. We continue to be very excited about the long term opportunity for Aavas to grow over the coming decade and have added to the Trust’s position in recent months.
Naver is a Korean internet company with a dominant search engine and growing presence in e-commerce. We sold Naver during the year as we lost confidence in their capital allocation abilities after they embarked on a very expensive purchase of a marginal quality business in the US.
We also sold Techtronic. Techtronic is a major player in the power tools space. We have a lot of respect for the quality of the franchise and the strength of their brands. But we have grown increasingly uncomfortable with the aggression and overconfidence of the management team and how this may feed into greater fragility of earnings going forward.
Silergy is a leading provider of analog semiconductors in China and Koh Young is a supplier of testing equipment that is used across a range of industries. In both cases we believe short term price pressure is the result of short term concerns around cyclicality and end demand. We continue to believe in the quality of these franchises and their long term growth opportunity.
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What went right. Now there is obviously some commonality with all five companies here being Indian and all five having some exposure to a recovery in industrial and infrastructure spend. I think it's important to note here that the average holding period of these names is over five years. We have not bought these companies to profit from a short term trade based on a top down view of an industrial cycle. We own these names because we believe them to be exceptionally well run by long term owners with franchises that have the ability to become multiple times larger over the next ten years or so.
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Here is the country exposure of the Trust. Obviously the major differences between Pacific Assets and the comparative benchmark is the weighting in India and China.
As mentioned earlier, given we think about risk in absolute terms we start with a blank sheet of paper rather than with the largest companies in the region and working down the market capitalisation spectrum.
In India we have a deep pool of high quality families and entrepreneurs running high quality business that are well positioned for long term growth. Underlying that 47% exposure lies a very diversified collection of cash flows from tractors to shampoo to mortgages to air compressors to software for electric vehicles. We have been actively trimming some of our larger positions in India to ensure we do not get overly exposed to a small subset of names.
We now own eight mainland Chinese listed companies that range from a provider of diagnostic tests for cancer patients to construction software to a leading supplier of kitchen appliances and pots and pans. There is a far longer list of Chinese names that sit on our watchlist but at the moment, valuations for these companies are not yet attractive enough for us to start a position in the Trust.
The Trust’s 8% Japanese exposure comes from owning four companies that although being listed in Japan have more than 50% of their sales or profits coming from the Asian region. Examples would include the leading supplier of personal hygiene products in Asia and the second largest company in the sale of lenses for eyeglasses in China.
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The slide shows the number of companies we deem to pass our quality and sustainability test within the 100 largest companies of the MSCI China and MSCI India indexes.
In China the vast majority of the largest companies are state owned which makes it very easy for us to say no to handing over our clients’ capital. For the larger companies that may not be explicitly state owned but they are certainly state controlled with many having poor quality owners at the helm. It’s worth highlighting that the Trust has never owned any of the Chinese internet companies as we struggle to gain comfort with their alignment with the state, their financials and their sustainability positioning.
In India the number of high quality large companies is higher than China but there are still 80% of names that we wouldn’t invest in because of questions over their quality or sustainability positioning.
And this serves as a reminder that if you take the index as your opportunity set you are constrained to handing your capital to these companies and these people.
This is why we love being genuinely active in our approach.
We can look anywhere for great companies. And if we come across a company that fails our want for quality and sustainability positioning we can instantly reject it no matter how large or important it is to a benchmark.
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Here I have some examples of the names we own in India alongside their global peers and respective market capitalisations. In Mahindra and Mahindra we have India’s leading tractors franchise who is well positioned to improve agricultural efficiency. In Tube we have an industrial conglomerate in the early stages of an evolution similar to that of Danaher in the US or Halma in the UK. These are all franchises that are high quality and share the key factors that have driven long term success for their global peers. Qualities like long term people at the helm, pricing power, world class technology and high returns on capital. This is certainly a slide to get very excited about if you are a long term investor in India.
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Here is an equivalent slide for our Chinese names. Again we believe we have equivalent franchises and opportunities across pharmacy chains, semiconductors and industrial automation. We are entrusting your capital to high quality people behind high quality businesses who are well positioned to contribute to key areas and industries in China's development. This alignment with the state is something we have always focused on. In China, it doesn’t matter if you have the word's greatest management team running the worlds greatest company, if you are not aligned with the Chinese communist party your capital is at serious risk.
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I’ll finish with a quick review of performance. Firstly we have discrete annual returns over the last five years against both the CPI+6% comparator as well as the regional benchmark. Some key points to reflect on would be the annual performance through May 2020. This was obviously at the height of covid when we saw internet and technology companies that we didn’t own become very popular as well as an intense period of fear take over the Indian market. Since then, the Trust has successfully provided capital protection in time of stress while participating in upside growth.
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Over the long term this ability to protect on the downside, recover quickly while owning businesses that enjoy long term growth has been important in the Trust’s ability to deliver satisfactory returns to shareholders since Stewart Investors took over management of the Trust in 2010.
Going forward we continue to avoid attempting to predict short term moves and macroeconomic events and focus on building a portfolio of robust and resilient companies that can weather economic uncertainty and provide exposure to the fantastic opportunities for long term growth that is available to long term investors the Asian region.
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