Pacific Assets Trust plc14
Portfolio Manager’s Review continued
As always, we held true to our investment philosophy
and we did not succumb to despondency in China or
euphoria in India. Accordingly, the majority of the Trust’s
investments in Hong Kong, South Korea and China fell
less than local equity comparisons while the majority
of investments in Taiwan and India failed to keep pace
with markets that were driven by strong investor
enthusiasm. This is evidenced by examination of the top
ten contributors to performance.
Eight of the Trust’s top ten contributors were listed
in India. India enjoyed a ‘blockbuster year’
2
for new
equity raisings in 2021. Record numbers, both in terms
of the number of listings (63) and the value of capital
raised (almost US$13 billion), were matched by bullish
adjectives such as ‘wild’, ‘buzzing’ and ‘frenzy’. We
tend not to participate in new issues unless we fully
understand and can cross-reference the track record of
the founders. Moreover, the pressures of being listed,
with investors eager for quarterly updates, can have
a corrosive influence on a culture, which we prefer to
be long-term focused. For IPOs, it is often better to be
patient and wait until a track record is established and
the culture has settled. In this regard, it is noteworthy
that, in accordance with our investment philosophy, the
majority of the top contributors had been held in the
Trust for over five years.
Examination of the Indian portion of the Trust shows
that we held true to our investment philosophy and did
not get carried away with over-exuberance. We did not
participate in hot IPOs or invest in fashionable areas
such as clean energy, fintech, electric vehicles or big data
analytics. In stark contrast, the main business of the top
contributor (Tube Investments) is the manufacture of
bicycles. Tube Investments did not perform because it is
fashionable. It performed because this family-controlled
conglomerate is undertaking a powerful transformation
under the excellent leadership of Vellayan Subbiah, a
family member. Part of this restructuring involved the
purchase and rejuvenation of another old franchise in
India, CG Power and Industrial Solutions Limited, which
is owned by the Trust and performed strongly over the
period. Other strong contributors were Aavas Financiers,
Dr Lal Pathlabs, Elgi Equipments, Tech Mahindra
Mahindra & Mahindra and Marico. Each of these
businesses boast high quality stewardship, improving
franchises and robust financials. These were, at one
time, each small businesses accounting for a small
portion of the Trust, but they have grown into more
significant holdings thanks to the long growth runways
available in India and the rest of Asia.
Outside India, Techtronic Industries (Hong Kong),
a manufacturer of power tools, Voltronic Power
Technology (Taiwan), an original design manufacturer
of uninterruptable power supplies and Silergy Corp, a
manufacturer of analogue semiconductors in China for
Chinese customers, contributed positively to the Trust’s
performance.
What detracted from our return?
The most significant detractor of performance was
Vitasoy International (Hong Kong) where politically
motivated commotions, distinct from the management
or the products – plant based beverages – of the
company, conspired to disrupt sales in mainland China
during the peak summer months. The quality of the
stewardship, franchise and financials of Vitasoy is
undiminished. In addition, we note that Vitasoy has
renewed advertising activities, is placing orders with
suppliers and has restarted production, which increases
our confidence that the worst of this unfortunate
episode is in the past. The rest of the detractors from
performance were significantly smaller. Sometimes
it is hard to determine any meaningful patterns in
contributors or detractors. Last year, however, seven
of the top ten detractors were either listed in, or had
significant operations in, China. The seven companies
are: Guangzhou Kingmed Diagnostics, Hualan Biological,
Amoy Diagnostics, Vinda International, Vitasoy
International, Pigeon Corporation and Unicharm.
Over the course of the year, the Chinese economy
slowed and political headwinds strengthened. In pockets
of the economy, notably property, there was economic
stress. The second order impact of the weaker property
sector was reduced confidence in banks, insurance
and retail. The once popular internet and education
sectors suffered from penalties as they were deemed to
be no longer compatible with the common prosperity
of the Chinese population. The combination of these
connected but distinct factors reduced equity valuations
of these sectors dramatically and almost all listed
Chinese companies more generally. The Trust was not
invested in any of these specific sectors and the focus
on high quality sustainable businesses insulated the
shareholders from the worst of the falls in China in 2021.
Covid restrictions and rising input costs were two
additional factors impacting certain equities in the
financial year. In this regard, lockdowns and reduced
economic activity help to explain weak performance
2 “2021: A blockbuster year for public offers despite hiccups”, The Economic Times,
Sanam Mirchandani. 01/01/22