Pacific Horizon Investment Trust half year results

Summary of Unaudited Results^*

* For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

^† The MSCI All Country Asia ex Japan Index (in sterling terms) is the principal index against which performance is measured.

^# Source: Baillie Gifford/Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.

^‡ Alternative performance measure. See Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Past performance is not a guide to future performance.

Interim Management Report

Overview

What defines us is growth. We believe Asia ex Japan will be one of the fastest growing regions over the coming decades and we strive to be invested in its fastest growing companies. It is growth multiplied by growth or, as we like to call it, 'Growth²'. Such an investment style has been richly rewarded for a significant period, with the Company's NAV outperforming the comparative index, the MSCI All Country Asia ex Japan Index (in sterling terms) by 158 percentage points over the past five years.

Although we would caution on focusing too much on shorter time horizons, this reporting period (31 July 2021 to 31 January 2022) was noticeable for the dramatic shift in investor sentiment, catalysed in part by renewed inflation fears and the Federal Reserve indicating a more aggressive rate tightening cycle.

Such actions led to a sharp global correction in so-called growth assets, as investors rotated dramatically into 'value'. The result was previously unloved sectors, such as energy, being the best performing over the period (+24.3% in absolute terms), followed by Utilities (+12.5%) and Financials (+8.9%). Conversely 'growth' sectors faced substantial headwinds with Healthcare, Communication Services and Information Technology the worst performers (falling -28.7%, -23.1% and -12.8% in absolute terms respectively). During this period, our invested gearing reduced from 4% of shareholders' funds to 0.9%.

Given our growth bias, the result was a partial reversal of the portfolio's strong performance led by weakness in our holdings in Information Technology and Communication Services. The Company's NAV and share price decreased by 3.7% and 7.5% respectively, compared to the comparative index which declined 2.7% in sterling terms, all figures total return. The Company's shares ended the period at a 0.9% discount to the NAV per share, having been at a 3.2% premium six months earlier. Over the six months to 31 January 2022, the Company issued in aggregate 3,645,257 shares and also bought back into treasury 175,000 shares.

We remain optimistic. Operationally the performance of many of our higher growth technology holdings is extremely strong, and recent share price weakness in many companies is likely an investment opportunity for long term investors. The portfolio also remains well diversified, having moved significantly into more cyclical growth areas over the past couple of years; mining, for instance, is the Company's largest overweight position (predominantly focused on copper and nickel which are crucial materials for the green revolution). 

Finally, our enthusiasm for the region remains strong. The rise of the Asian middle class, accelerated by technology and innovation, continues to be one of the most powerful investment opportunities of the coming decade. As active managers, with long-term time horizons, we are enthused by the number of exciting growth companies we can buy that should benefit from these economic, social and technological changes across the region.

Review

The period was challenging as markets grappled with the implications of soaring inflation, interest rate rises and tapering in the West, armed conflict in Eastern Europe and a housing collapse in China to name a few. The consequence was a flight to safety in the US dollar and, as mentioned, an aggressive rotation from growth to value.

This resulted in a dramatic sell-off in many highly rated growth companies, especially in the technology sector. This impacted a number of the Company's holdings including what had been our largest position, Sea Limited (a South East Asian gaming and e-commerce business), which fell more than 60% from its peak. Such price moves appear extreme. The fundamentals appear solid and operationally the company continues to go from strength to strength; core e-commerce sales grew 131% year on year, take rates are rising, and ventures into new markets outside of Asia are well ahead of expectations (Sea Limited has become the most downloaded shopping app in Brazil in just over two years).

More broadly, we pay limited attention to debates of growth versus value, however, we do believe we have a diversified growth portfolio that is likely well suited to a range of market conditions. A few years ago the Company was extremely concentrated in technology and consumer stocks. This had been changing gradually as we found more opportunities in more cyclical, old economy companies. This accelerated dramatically over the course of the Covid-19 pandemic as the extreme dislocation in Asian markets provided us with extremely attractive opportunities in these more cyclical sectors.

The result is a portfolio today that looks different to many of our growth focused peers. In absolute terms, our largest exposures remain focused on the key themes of the rising middle class, technology and innovation. However, we now have significant exposures to more cyclical industries including materials, industrials and energy that respectively make up three of the largest relative positions within the portfolio. There remains, however, one commonality among the companies held: growth.

By country India remains both the largest absolute (31.7%) and relative (+17.2 percentage points) position. Our holdings here can be divided into two parts. The first is 'old' India where we have significant holdings in traditional sectors such as property and steel, where we believe India is on the cusp of a multi-year infrastructure spending revival led by a resurgence in the country's property sector.

The second part is the new economy. Catalysed by the rollout of the world's second largest 4G mobile network, allowing many Indians to access the internet for the first time, we are seeing a new breed of innovative technology businesses emerging across the country for the first time.

Many of these prized businesses, however, remain private, and Pacific Horizon's ability to invest into unlisted companies has been extremely beneficial. Our unlisted holdings include Delhivery (leading delivery and e-commerce logistics) and Dailyhunt (online short form video), while we continue to own Zomato (food delivery) and Star Health (India's largest private health insurance provider) which the Company owned as private businesses before their recent listings. We also purchased Policybazaar at its IPO, which is the country's largest price comparison website and is transforming how insurance and other financial products are sold in the country.

We continue to be enthused by the long-term structural growth story in Vietnam, the Company's second largest overweight position after India. We would note the unfortunate truth that most emerging economies fail to emerge. Those that do, Korea, Taiwan, and China for instance, often have one key characteristic: a successful export manufacturing base. With its advantageous geographic location, a young and cheap workforce, and a government able to get things done, Vietnam has built the region's most impressive new export manufacturing-based economy. As China moves up the manufacturing value chain and several trillion dollars' worth of low-end manufacturing comes up for grabs over the next few decades, the majority is likely to find its way to Vietnam. Consequently, Vietnam is arguably the best structural growth story of any Asian economy over the next twenty years.

China remains one of the Company's largest underweight positions (-14.8 percentage points). After a difficult year, driven by a severe regulatory clampdown on technology businesses, the feared bankruptcy of the country's second largest property developer, Evergrande, and continued geopolitical tensions, we believe the country is looking relatively well placed for a recovery. Fears of a property crisis appear misplaced, technology regulations look relatively sensible, and after a period of financial orthodoxy and tightening, China is likely to be going in the opposite direction to many major economies as it loosens monetary and fiscal policies over the year. Given China's importance to the region, this is a notably positive situation.

Over the period we purchased a new Chinese holding, Zhejiang Supor, one of the country's leading cookware manufacturers (and majority owned by the French company Groupe SEB, the world's largest cookware manufacturer). We also purchased Midea, one of the country's leading white goods manufacturers with an exciting high end robotics business (which it obtained by acquiring the German company Kuka in 2016). This increased exposure to China was however partially offset by our sales of CNOOC (oil and gas) due to US sanctions and Huya (videogame streaming) on increasing regulatory issues.

We continue to look for new ideas in China. In the online space, however, our research suggests that we may only be at the beginning of regulatory tightening, with further anti-competitive measures coming and a significant tightening on data rules in the pipeline. Although these are likely to be a long term positive as China plans its digital economy for the next 30 years, we fear this could be a painful headwind for a number of companies for the foreseeable future.

We have also been searching for companies more aligned with the state's intentions over the coming decade, such as the environmental, semiconductor and advanced manufacturing industries. We have some exposure to these areas through companies such as Longi Green Energy (the world's largest solar panel maker) and Hans Laser (industrial lasers), however we have struggled to find many new ideas, especially in the local A-share market due to valuations. It is not uncommon for price to earnings multiples to be nearing or in excess of 100x which appears high, especially given the extreme competitive intensity in these industries and as yet there are no clear winners.

Elsewhere, the only other new purchase was the Korean company LG Energy (at its IPO), the world's second largest electric vehicle battery maker. The company is the world's leading manufacturer of high end nickel cobalt manganese ('NCM') batteries which we believe are likely to dominate western markets. There were several reductions, most notably Sea Limited which was reduced by around 200bps in September. The number of holdings in the portfolio reduced further to 107, as a number of small (<0.3%) holdings, such as Venustech and Guangzhou Kingmed Diagnostics were exited. 

Performance

Over the six months to 31 January 2022, the high growth sectors, notably Information Technology and Communication Services, were the biggest detractors to the portfolio's performance. A number of holdings in these sectors experienced dramatic share price weakness, notably Sea Limited (previously the largest holding in the portfolio), which despite reporting strong results, fell more than 60% from its peak. Similar falls were seen in a number of our technology holdings in China including Kingsoft Cloud and Dada Nexus.   

More positively, the portfolio's significant exposure to more cyclical sectors, which has been increasing significantly over the past couple of years, helped offset much of the weakness. Tata Motors, the Indian automotive company which also owns the Jaguar Land Rover brand, was the biggest contributor as its domestic operations turned around and its move into electric vehicles started to gain traction. Other top contributors included commodity and energy companies Nickel Mines (Indonesian nickel producer), RUSAL (global aluminium producer), Vedanta (Indian commodities) and Jadestone (Asian exploration and production).   

A number of the unlisted holdings were also among the top contributors including Delhivery (India's leading delivery and e-commerce logistics company), Dailyhunt (online short form video) and Star Health (India's largest private health insurance provider), which listed during the period. Finally, the portfolio's underweight position in a number of the large internet platforms in China was also beneficial, the underweight position in Alibaba (online and mobile commerce) for example being the second largest positive contributor.

By country the two largest overweight positions, India and Vietnam, were the biggest positive contributors, while Taiwan and China were the biggest detractors. Weakness in Taiwan was largely as a consequence of the portfolio's underweight position in TSMC, arguably the world's most important semiconductor manufacturer. TSMC continues to increase its technological lead over rivals, and we will be carefully considering the portfolio's exposure to the company, and its main Korean rival, Samsung Electronics.

Chinese weakness was led by a handful of our technology holdings, and MMG, which operates the Las Bambas copper mine in Peru, experienced a number of operational issues which impacted production.  Copper remains a large exposure for the portfolio and we remain extremely positive on the long-term outlook for our companies exposed to the commodity which is central to the green revolution.

Outlook

In the short-term markets may be volatile as investors grapple with the prospects of inflation, rising interest rates, tapering and the end of eye-popping monetary stimulus, to name a few. However, we remain extremely positive on the long-term outlook for the region and the portfolio and will likely utilise available borrowings as opportunities arise.

We believe our philosophy of embracing growth in all its forms means we are well diversified and should benefit from the wide range of opportunities that are likely to arise as the global economy re-opens.  More importantly, the risks and opportunities from increased disruption are here to stay. In our view, the market's focus on geopolitics, capital flows and interest rates misses the bigger picture, that of a global rise in digital penetration, technological change and the rise of the Asian middle class. These fundamentals will underpin growth in the region for decades to come. We believe that the best way to invest in this rapidly changing growth market is to find the best growth companies.

The principal risks and uncertainties facing the Company are set out in note 13.

Since the period end, the holding in RUSAL has been sold.

Baillie Gifford & Co Limited

Managers & Secretaries

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Total return information is sourced from Baillie Gifford/Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.

Past performance is not a guide to future performance.

Baillie Gifford Statement on Stewardship

Reclaiming Activism for Long-Term Investors

Baillie Gifford's over-arching ethos is that we are 'actual' investors. We have a responsibility to behave as supportive and constructively engaged long-term investors. We invest in companies at different stages in their evolution, across vastly different industries and geographies and we celebrate their uniqueness. Consequently, we are wary of prescriptive policies and rules, believing that these often run counter to thoughtful and beneficial corporate stewardship. Our approach favours a small number of simple principles which help shape our interactions with companies.

Our Stewardship Principles

Prioritisation of long-term value creation

We encourage company management and their boards to be ambitious and focus their investments on long-term value creation. We understand that it is easy for businesses to be influenced by short-sighted demands for profit maximisation but believe these often lead to sub-optimal long-term outcomes. We regard it as our responsibility to steer businesses

away from destructive financial engineering towards activities that create genuine economic value over the long run. We are happy that our value will often be in supporting management when others don't.

A constructive and purposeful board

We believe that boards play a key role in supporting corporate success and representing the interests of minority shareholders. There is no fixed formula, but it is our expectation that boards have the resources, cognitive diversity and information they need to fulfil these responsibilities. We believe that a board works best when there is strong independent representation

able to assist, advise and constructively test the thinking of management.

Long-term focused remuneration with stretching targets

We look for remuneration policies that are simple, transparent and reward superior strategic and operational endeavour. We believe incentive schemes can be important in driving behaviour, and we encourage policies which create alignment with genuine long-term shareholders. We are accepting of significant pay-outs to executives if these are commensurate with outstanding long-run value creation, but plans should not reward mediocre outcomes. We think that performance hurdles

should be skewed towards long-term results and that remuneration plans should be subject to shareholder approval.

Fair treatment of stakeholders

We believe it is in the long-term interests of companies to maintain strong relationships with all stakeholders, treating employees, customers, suppliers, governments and regulators in a fair and transparent manner. We do not believe in one-size-fits-all governance and we recognise that different shareholder structures are appropriate for different businesses. However, regardless of structure, companies must always respect the rights of all equity owners.

Sustainable business practices

We look for companies to act as responsible corporate citizens, working within the spirit and not just the letter of the laws and regulations that govern them. We believe that corporate success will only be sustained if a business's long-run impact on society and the environment is taken into account. Management and boards should therefore understand and regularly review this aspect of their activities, disclosing such information publicly alongside plans for ongoing improvement.
 

Thirty Largest Holdings at 31 January 2022 (unaudited)

HK/China denotes Hong Kong and China (China 'A' denotes China 'A' Shares*)

*      For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

^u      Denotes unlisted investment (private company).

^p         Denotes listed security previously held in the portfolio as an unlisted (private company) security.

†      Since the period end, the holding in RUSAL has been sold.

Distribution of Total Assets^* (unaudited)

Geographical Analysis

Sectoral Analysis

*      For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end

 of this announcement.

Income Statement (unaudited)

The total column of this statement represents the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance issued by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and total comprehensive income for the period.

Balance Sheet (unaudited)

*      For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Statement of Changes in Equity (unaudited)

For the six months ended 31 January 2022

For the six months ended 31 January 2021

*    The Capital Reserve balance at 31 January 2022 includes investment holding gains on investments of £239,779,000 (31 January 2021 - gains of £243,107,000).

Condensed Cash Flow Statement (unaudited)

* Cash from operations includes dividends received of £2,682,000 (31 January 2021 - £1,225,000) and interest received of nil (31 January 2021 - £66,000).

Notes to the Condensed Financial Statements (unaudited)

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

The printed version of the Interim Financial Report will be sent to shareholders and will be available on the Company's page on the Managers' website pacifichorizon.co.uk‡ on or around 14 March 2022.

‡      Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Sustainable Finance Disclosure Regulation ('SFDR')

The AIFM has adopted Baillie Gifford & Co's Governance and Sustainable Principles and Guidelines as its policy on integration of sustainability risks in investment decisions.

Baillie Gifford & Co believes that a company cannot be financially sustainable in the long run if its approach to business is fundamentally out of line with changing societal expectations. It defines 'sustainability' as a deliberately broad concept which encapsulates a company's purpose, values, business model, culture, and operating practices.

Baillie Gifford & Co's approach to investment is based on identifying and holding high quality growth businesses that enjoy sustainable competitive advantages in their marketplace. To do this it looks beyond current financial performance, undertaking proprietary research to build up an in-depth knowledge of an individual company and a view on its long-term prospects. This includes the consideration of sustainability factors (environmental, social and/or governance matters) which it believes will positively or negatively influence the financial returns of an investment. The likely impact on the return of the portfolio from a potential or actual material decline in the value of investment due to the occurrence of an environmental, social or governance event or condition will vary and will depend on several factors including but not limited to the type, extent, complexity and duration of an event or condition, prevailing market conditions and existence of any mitigating factors.

Whilst consideration is given to sustainability matters, there are no restrictions on the investment universe of the Company, unless otherwise stated within in its Objective & Policy. Baillie Gifford & Co can invest in any companies it believes could create beneficial long-term returns for investors. However, this might result in investments being made in companies that ultimately cause a negative outcome for the environment or society.

More detail on the Investment Manager's approach to sustainability can be found in the Governance and Sustainability Principles and Guidelines document, available publicly on the Baillie Gifford website (bailliegifford.com/en/uk/about-us/literature-library/corporate-governance/governance-sustainability-principles-and-guidelines/).

Taxonomy Regulation

The Taxonomy Regulation establishes an EU-wide framework or criteria for environmentally sustainable economic activities in respect of six environmental objectives. It builds on the disclosure requirements under the EU Sustainable Finance Disclosure Regulation ('SFDR') by introducing additional disclosure obligations in respect of AIFs that invest in an economic activity that contributes to an environmental objective. These AIFs are required to disclose (a) information on the environmental objective to which the investments underlying the AIF contribute (b) a description of how and to what extent the underlying investments of the AIF are in economic activities that qualify as environmentally sustainable and are aligned with the Taxonomy Regulation (c) the proportion, as a percentage of the AIF's portfolio, of investments in environmentally sustainable economic activities which are aligned with the Taxonomy Regulation (including the proportion, as a percentage of the AIF's portfolio, of enabling and transitional activities, as described in the Taxonomy Regulation). These disclosure obligations are being phased-in - from 1 January 2022 in respect to the first two environmental objectives (climate change mitigation and climate change adaptation) and from 1 January 2023 in respect of the remaining four environmental objectives.

The Company does not commit to make sustainable investments as defined under SFDR. As such, the underlying investments do not take into account the EU criteria for environmentally sustainable economic activities.

Third Party Data Provider Disclaimer

No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom.

No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.

Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.

MSCI Index Data

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the 'MSCI Parties') expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (msci.com).

Unlisted (Private) Company

An unlisted or private company means a company whose shares are not available to the general public for trading and are not listed on a stock exchange.

Leverage (APM)

For the purposes of the Alternative Investment Fund Managers Regulations, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.

Ongoing Charges (APM)

The total recurring expenses (excluding the Company's cost of dealing in investments and borrowing costs)

incurred by the Company as a percentage of the average net asset value (with borrowings at fair value).

Pacific Horizon Investment Trust PLC (Pacific Horizon) aims to achieve capital growth through investment in the Asia-Pacific region (excluding Japan) and in the Indian Sub-continent. At 31 January 2022 the Company had total assets of £747.1 million (before deduction of loans of £59.4 million).

Pacific Horizon is managed by Baillie Gifford & Co Limited, the Edinburgh based fund management group.

Past performance is not a guide to future performance. Pacific Horizon is a listed UK Company and is not authorised or regulated by the Financial Conduct Authority. The value of its shares and any income from those shares can fall as well as rise and you may not get back the amount invested. Pacific Horizon invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. Pacific Horizon invests in emerging markets (including Chinese 'A' shares) where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Shareholders in Pacific Horizon have the right to vote every five years, on whether to continue Pacific Horizon, or wind it up. If the shareholders decide to wind the Company up, the assets will be sold and you will receive a cash sum in relation to your shareholding. The next vote will be held at the Annual General Meeting in 2026. You can find up to date performance information about Pacific Horizon on the Pacific Horizon page of the Managers' website at pacifichorizon.co.uk. Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement

4 March 2022

- ends -

For further information please contact:

Anzelm Cydzik, Baillie Gifford & Co

Tel: 0131 275 2000

Mark Knight, Four Communications

Tel: 0203 697 4200 or 07803 758810