The board of Pacific Assets has backed its management team led by Stewart Investors’ David Gait, despite five years of underperformance from the investment trust.
The £322m trust has returned just 55% in the five years to 6 October, data from FE fundinfo shows, well below that of both its benchmark MCSI AC Asia ex Japan at 90% and IT Asia Pacific sector peers' average of 113%.
Over a shorter, three-year timeframe, Pacific Assets has gained 13%, compared to returns from its comparator and sector peers' of 16% and 30% respectively.
In the company's most recent half-year report, the board told shareholders it had "initiated a dialogue with the investment manager", looking "in detail at their decision making, company selection, and portfolio construction".
The trust has been run by Stewart Investors' Gait for ten years as lead manager and deputy Douglas Ledingham, who joined in 2018.
Its chair James Williams said the board had discussed their investment approach 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," Williams concluded.
Numis analyst Priyesh Parmar said the trust had a differentiated approach compared with its benchmark, with a heavy focus on the quality of businesses and management, as well as the long-term sustainability of the business model.
"We therefore we would expect its performance to diverge from the benchmark over short periods," Parmar claimed. He noted the fund's minimal exposure to Chinese tech firms helped protect performance during 2018, but has acted as a headwind more recently.
Parmar continued: "The addition of a number of Chinese names is an interesting development, but significantly the manager appears to be remaining selective and sticking to the quality criteria of the investment approach, rather than chasing strong performance or becoming more benchmark aware."
Increasing exposure to China
The addition of industrial automation provider Shenzhen Inovance Technology, healthcare pair Hualan Biological Engineering and Guangzhou Kimgmed Diagnostics and industrial verification provider Centre Testing International (CTI) takes the trust's exposure to China to around 17%.
Six other additions year-to-date came from outside China and the management team said those acquisitions "should not be considered as a reaction to eye-catching falls on a share price chart or dramatic news headlines; nor was there a top down prescription or ‘asset allocation shift' to a different geography".
"Instead, these purchases were made after years of due diligence and debate on the quality of the people, franchise and financials of the companies," the management team said.
They noted that for companies that do not meet their "strict quality criteria, there is no price we are prepared to allocate shareholder funds, as the downside risk is always 100%". In addition, they continued, "in times of extremes, we would rather compromise on valuation than quality".
Finally, they noted, "the intricacies of present value arithmetic stifles valuable debate and leads to a false sense of certainty".
The team continued: "As we see globally, quality companies capable of compounding earnings at attractive rates are seeing their valuations inflated to ever more extreme levels.
"This is certainly the case in China where it is now worryingly common for such companies to see their earnings valued on a multiple of over one hundred times.
"Covid-19 and the fleeting disruption the virus caused to markets did not alter our philosophy or process. We endeavour not to be distracted by dramatic news headlines or share price oscillations.
"Instead we continue to invest in quality companies at reasonable valuations to preserve and grow your capital for future generations."
Parmar said investors should be pleased with an uptick in recent performance from the trust, with its 3.8% return over the three months to 6 October, according to FE fundinfo, well ahead of the benchmark's 1.6%gain.
In addition, Parmar reasoned, the ten-year performance continued to stack up favourably with the trust up 154% compared to its comparator's 105%.
Pacific Assets' discount has widened from 1.8%at the start of 2020 to 11.4% today, which Parmar said "prove an attractive entry point, particularly if the manager's style comes more into favour".