As the only constituent left in its sector, it ploughs a lonely furrow, but could the convergence of Asian stock markets in recent years give Witan Pacific a winning hand?
Fast Facts
Operated as a multi-manager, meaning it selects the best external managers to manage portfolio
Low cost compared to multi-manager peers
Unusually, invests in Asia including Japan
In recent years Japan and wider Asian markets have converged
Since the multi-manager strategy was adopted at end-May 2005:
191% rise in NAV, vs benchmark 173.3%.
Dividend increased fourfold.
Outperformed in 8 out of the 11 annual reporting periods.
Dividend is low but has increased every year for eleven years
Asian economies growing faster than Western peers
Renewed focus on shareholders rights/corporate governance augurs well for future returns
Witan Pacific Investment Trust (LON:WPC), invests across all of Asia, that is, including Japan, which makes it the only trust in its Asia including Japan sector, since the other constituents changed their mandates (Aberdeen became Japan only, Martin Currie Pacific became Greater China Unconstrained). The manager however, posits that including Japan, gives WPC an advantage, because the reason for separating the two has largely disappeared in recent times, as we will touch on later.
Another unique aspect of Witan Pacific is it is run as a multi-manager, that is, instead of putting the money to work selecting stocks itself, it selects a range of underlying external asset management groups to manage the funds. The advantage is investors gain exposure to several different asset managers, selected, because Witan believes they are at the top of their game.
Often, multi-manager funds charge high fees, because of the double charging, i.e. fees to the multi-manager, in addition to the underlying managers, which can drive annual fees beyond 2% per annum, before performance fees, and sometimes over 3%. Witan Pacific’s fees are very low however, with an on-going charge of only 0.87%, roughly similar to non-multi-manager peers.
Witan relationship
Witan Pacific has been a self-managed investment trust, i.e. not part of a larger asset management firm, since 2005. This means that the Board have ultimate responsibility, and it is they who have appointed Witan to advise on manager selection process, and provide administration services. Until 2005 it was known as F&C Pacific investment trust.
Why a multi-manager?
The manager argues that it is rare to find an individual manager or management-house that is able to perform well through all economic cycles, when their style goes out of fashion.
Some managers have a bias to a particular country, or if they have staff based in a particular territory, have a bias towards that. Having more than one external asset manager, allows the board to choose the best managers for any one time, and iron out the weaknesses in them.
The manager believes that when trying to put together a multi-manager structure you’ve got to be very careful to use managers who are very active, and don’t look like the benchmark. Gavkav was added recently, but up until 2012, the portfolio was managed by Aberdeen, who had 50%, and Nomura with 50%.
WPC uses three underlying external managers to manage portions of the portfolio.
Matthews Asia: 
Investment style: Stock specific, unconstrained, long-term strategy blending yield with potential growth.
Managers: Robert Horrocks and Yu Zhang.
Share of Portfolio (as at 31.07.16): 47.0%.
Appointment: April 2012.
Matthews – are optimistic about China, and about businesses doing business with China. They overweight both China and Hog Kong.
Matthews is the largest dedicated Asia investment specialist in the U.S. As at the end of last year, Matthews Asia had £17.3bn of assets in Asia.
Aberdeen:
Investment style: Stock specific, unconstrained, growth at an attractive price.
Managers: Hugh Young and team.
Share of Portfolio (as at 31.07.16): 42.4%.
Appointment: May 2005.
Aberdeen – are less enthusiastic about China, and struggle to find businesses they like in Japan. The reason is they’re looking for companies with a history of treating shareholders well. Nonetheless, their Japanese holdings have been creeping up over time.
Aberdeen were appointed when the multi-manager approach was adopted by Witan Pacific in 2005. As at the end of last year, Aberdeen was managing £52.8bn of assets in Asia. Hugh Young leads a team of 41 equity Fund Managers, emphasising the identification of good quality companies on low valuations relative to their growth potential.
Gavkal:
Investment style: Unconstrained, actively managing exposure to equities, bonds and cash.
Managers: Louis-Vincent Gave and Alfred Ho.
Share of Portfolio (as at 31.07.16): 10.6%.
Appointment: April 2012.
Gavkal represents a big change in the portfolio, even though it manages only 11% overall. Their style is very different from the other two. GavKal is a macro research house primarily, who sell their research to analysts worldwide.
They move around quite quickly, in response to anticipated macro events. For example, their Japanese exposure went form 20% zero at some speed earlier this year, and it was well timed. They have since significantly increased their Japan exposure again.
Invested in Gavekal’s Asian Opportunities Fund; assets varied between equities, bonds and cash according to top-down view of economic prospects. As at the end of last year, Gavekal had US$1.5bn, circa £1.0bn in assets managed in Asia. Within equities, weightings are company-specific not index-driven.
The important basic stuff: Fees/Discount/Gearing/Dividend
Dividend: Whilst WPC isn’t an income focused trust, they recognise that the dividend is important to investors, and although it is low compared to what UK focused trusts pay, they have an impressive eleven year track record of increasing the dividend each year.
The manager also considers income to be a good test of the quality of the companies in their portfolio. In particular the ability to be able to pay a growing dividend’s, with the emphasis on growth.
It’s also a signal of the quality of the companies across the region, in an area where historically, particularly in Japan and South Korea, shareholders rights were trampled upon.
Of the three underlying portfolio managers, Mathews Asia, targets companies who pay who can pay growing dividends, as does Aberdeen, whilst Gavcal, doesn’t target dividends as part of their top-down macroeconomic investment approach.
Discount: The Board buys back shares if the discount is anomalous or significant. Its more significant that they’d like it to be, but it’s broadly in line with Asia ex-Japan peers when you remove the high dividend payers.
Gearing: There is no gearing in place, and there will not be. The Board against gearing because of the extra expense it would involve due to MIFID II regulations. The manager has calculated that it would need to be permanently 10% geared to make it viable from a cost perspective.
Fees: As previously mentioned, WPC has a low fee for a multi-manager structure.
The three underlying managers are all entitled to base fees of between 0.2% and 0.75% of the assets they manage. Additionally, Aberdeen is entitled to a performance fee of 15% of out-performance above the MSCI AC Asia Pacific Index, measured over a three-year period and subject to a cap.
The managers can be dismissed at short notice and in the case of Aberdeen and Matthews the holdings are directly held in segregated accounts.
Witan Pacific share price performance since switch to Multi manager in 2005
Outlook:
Asian economies are now growing at a faster pace. Whilst economic growth doesn’t necessarily equate a burgeoning stock market, it doesn’t provide a backdrop for opportunities.
Another opportunity is that Asian equities are lower valued relative to their history than western counterparts. Japan is still one of the cheapest stock markets in the world, despite the focus under the Prime Minister Abe on shareholders rights, and on Japan having a great selection of world beating companies. .
Improved shareholder rights and corporate governance are further increasing the attractions of Asian companies, and a focus on an increasingly interdependent region offers opportunities for stock pickers.
WPC’s bigger brother, Witan investment trust, also likes the Asia region, and holds an overweight position, vis-a-vis other regions.
Interestingly, the manager shared the chart below which demonstrates the regions within Asia, performing the same as each other. This is particularly relevant because the fashion has been to exclude Japan from Asian funds and trusts, in favour of Japanese specific funds because Japan behaved differently to the others. The chart however shows that the Japanese market is now aligned with the region.
Japan and wider Asia are converging.
Improving Shareholder rights is making Asia more attractive
Across many countries in Asia, we’re seeing a significant improvement in the rights of shareholders. The region used to have a reputation of not looking after shareholders, and in particular, smaller shareholders, well.
All that is changing, with leaders across Japan, Indonesia, South Korea and India, focused on improving corporate governance, and putting forward pro-business policies.
This should be a good news for Asian markets as long as they can keep growing. With Japan, it’s a little different, its economy is not growing faster than Western economies, but it’s got great companies.
Portfolio and Notable holdings:
The overall positioning of the portfolio is mostly a function of individual stock decisions by Aberdeen and Matthews, rather than deliberate allocations to these regions. 28% of the portfolio at 31/07/16 was invested in Japan on a look through basis.
In aggregate, the portfolio remains underweight, relative to the benchmark, Japan and Australia, and overweight China and Hong Kong.
There are around 25,000 companies listed in Asia, more than all regions of the world added together. This includes around 6,000 in India. Most though are too small or too corrupt to be investable.
Minth Group, a Chinese car part manufacturer. China produces more cars than America, Japan and Germany combined. Minth makes parts for 80% of the world’s car manufacturers. It makes the rubber around screen, brackets the seat-runners sit in, car door handles. It is growing very fast, and feeding of the maturation of the Chinese economy to more of a service based economy. It is owned in the portfolio by Matthews.
Shenzhou, makes materials for Nike and the like, high quality technical textiles.
Hoya makes the filters that go on end of lenses on SLR cameras, but the son of the founder of this Japanese company, has refocused on lenses for hi-tech medical instruments. This has paid off and the company is growing fast.
WhichInvestmentTrust.com View
Witan Pacific is differentiated from peers by its multi-manager structure and because it includes Japan within the countries it invests in. This makes it unique in the investment trust world, but, in our view, gives the managers extra flexibility and is a sensible strategy, and as we can see from the chart earlier, markets across Asia have converged.
WPC can act as a one stop shop for investors seeking exposure to the region. Its selection of underlying managers are complementary to each other, and have in the past provided some protection when the regions stock markets have performed poorly.
Whilst the regions performance, to some extent is reliant on the world economy, individual countries such as India, are less reliant on global factors, and to some extent, China too, with its growing band middle class consumers trading up to better quality goods.
The backdrop of improving corporate governance, and economies growing faster than their Western peers, with the exception of Japan, which nonetheless has a great collection of companies to invest in, means Witan Pacific has the recipe to deliver out-performance, if the regions markets begin to outperform, as at some time they surely will.
Witan Pacific Investment Trust (LON:WPC) Investment Trust Metrics
Share Price
285 pence
Dividend Yield / Dividend reserves
1.7%
5 year dividend growth p.a. = 3.5%
Total Assets/Market Cap (Million)
£210M / £188M
Gearing
0%
Managed by/since: Team
Managers direct holding: Not known.
AIC Sector/Date Founded
/ 30/12/1907
On-going charge & how much of the charge is the managers fee
0.87%
Investment Objective: To provide shareholders with capital and income growth from a diversified portfolio of investments in the Asia Pacific region designed to outperform the MSCI AC Asia Pacific Free Index ('MSCI Index') in Sterling terms.
Discount to NAV
-12%
12 Month Average Discount/Premium
-14.5%
Financial year end: 31/01/2017
Domicile: UK
Share price Total Return 1, 3, 5 & 10 years
+30%
+29%
+72%
+114%
NAV Total Return 1, 3, 5 & 10 years
+26%
+29%
+60%
+114%
MSCI AC Asia Pacific Total Return 1, 3, 5 & 10 years
+29%
+33%
+68%
+101%
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