Analysis of Witan Pacific Investment Trust Plc- Fund Management - Essay Example

? Analysis of Witan Pacific Investment Trust Plc- Fund Management Contents Contents 2 Introduction 2.Overview of Witan Pacific Fund 2.1History 1 2.2Investment Objective 2 2.3Investment Strategies 2 2.4Shareholding Pattern 4 2.5Management of the Fund 4 2.6Returns & Gearing 5 2.7Risks 5 3. Investment Approach 8 3.1Investment Approach of Aberdeen & Nomura 8 3.2Aberdeen Investment Analysis 8 3.3Nomura Investment Analysis 9 4.Performance of the Fund 12 5.Summary of Findings 15 6.Conclusion & Recommendation 16 7.References 18 1. Introduction This project aims to provide an analysis of Witan Pacific, in terms of objectives, structure, operations, investment portfolio, investment performance and management of the fund by Aberdeen Asset Managers and Nomura Asset Management. The reason for analyzing Witan Pacific is its objective of investing in emerging markets in Asia, especially when the western economies are facing economic turmoil. The motivation for various global funds to invest in emerging markets comes from the fact that growth potential is high and there is less correlation between the emerging markets and developed markets (Arouri, et al., 2010, p. 20). Therefore, the risk and return assessment of Witan Pacific aims to see whether the investment managers have been able to capture the risk-adjusted excess returns from investments in these markets. 2. Overview of Witan Pacific Fund 2.1 History Witan Pacific is an investment trust that was established in 1907 as General Investors & Trustees Limited (GIT). The company then used to invest in a diverse range of assets. Following the 1929 market crash, the company shifted from equities to Treasury Bills, cash and British Government Securities. GIT merged with City and Gracechurch Investment Trust in 1975. GIT was renamed F&C Pacific Investment Trust in 1984. In 2005 it adopted a multi-manager approach where Witan Investment Services was entrusted with management of the operations and Aberdeen and Nomura became the investment managers of the company (Witan Investment Services Limited, 2012). 2.2 Investment Objective The investment objective of the fund is to give its shareholders a portfolio of investments with a balance of assets in the region of Asia Pacific with the aim to outperform MSCI AC Asia Pacific (Witan Pacific, 2011, p.1). 2.3 Investment Strategies In order to achieve the aim and objective, the fund has devised a set of strategies: In order to diversify risk and add value for investors, active multi-manager approach is used. The company faces the foreign currency exchange risk and equity market risks in emerging markets such as settlement risks with regional exchanges. Other risks include selection of investment managers and other generic risks related to specific country. The company does not use foreign currency hedging instruments but regularly report the sensitivity analysis of each foreign currency exposure. This might be due to the fact that using hedging instruments with underlying emerging markets currencies except yen may add to the existing inherent risks. Also the concentrated exposure to Japanese markets has been reduced from 2010 levels (figure 5). The investments are also more diversified on the basis of sectors (figure 6). The multi-manager strategy and regular reviews by the board have helped mitigate the equity market risks and settlement risks because of the different investment approach. Investment in fund with two different investment approaches diversifies risk by averaging the risk and return. Investment in two different funds will increase the costs for the investors. To manage the fund’s growth predominantly through return on capital. The NAV total returns over 1 year, 3 years and 5 years period are more than the benchmark return (figure 12). Over the five years, the NAV has been at premium to the share price of the trust over 5 years. The NAV total returns and total shareholder returns include dividends re-invested. Buy-back shares when the company’s shares are at a discount to the net asset value. The bought back shares have not been taken into treasury but only cancelled. During 2011, there was repurchase of 64,000 shares, to be cancelled. Employ moderate level of gearing to enhance the fund’s long-term returns while holding up to 10% of cash is left at the investment managers’ discretion. The level of gearing has reduced substantially in the last 10 years (figure 4). In 2009, the gearing was limited to 10% only (Witan Pacific, 2009, p.1). Growth in dividends per share in real terms is subject to prudence and market circumstances. The dividends in FY11 grew by 33.3%. To maintain the total expense ratio (without performance fees) of less than 1% through costs and expense controls (Witan Pacific, 2011, p.1). The expense ratio has been less than 1% and decreased from previous financial year whereas the expense ratio including the performance fees is 1.2% lower than previous year (2010: 1.3%) (Witan Pacific, 2011, p.3). This is still lower than the equivalent open-ended funds’ total expense ratio of 1.6% and above when studied over past three years (Cross, 2011). Institutional investors are usually interested in funds which can outperform the benchmark or the highest returns available while the retail investors are more concerned about what they are paying to get the risk-adjusted excess returns (Jaffer, 2006, p.31). Witan Pacific has consistently outperformed the benchmark and also has a lower total expense ratio than the comparable open-ended funds. Therefore, the strategies underlying the funds’ performance is suitable for both the institutional and retail investors. 2.4 Shareholding Pattern The substantial interest of key shareholders and any changes are shown in Table 1, where the data are concluded in 2011 from previous year. Almost 41.41% of shares are owned by institutional investors that have increased from previous year. This information is quite important especially from the point of view of corporate governance practices and shareholder interests. The company is likely to be taking care of its shareholders’ interests. This also impacts the board’s oversight of the management. Figure 1: Substantial Interest in Witan Pacific (Witan Pacific, 2011, p.22) 2.5 Management of the Fund The Company’s management is outsourced to third party and Witan Investment Services Ltd, as executive manager, monitors and manages the outsourced relationships and structure, and facilitates the board on marketing and investment strategy. The management arrangements of the company are demonstrated in Table 2, where initially the Aberdeen and Nomura each managed 50% of the total portfolio and the proportion of assets have changed since then. Aberdeen manages 54% and Nomura manages 46% of the initial portfolio. These two managers maintain their own records of transactions that are reconciled every month. The increase in assets under management for Aberdeen shows how its initial portfolio has grown since 2005. The growth in total assets under management for the company is more contributed by Aberdeen than Nomura. Equity Mandate Investment Manager Mandate Benchmark (?) % of Initial Portfolio as at 31 May 2005 Actual % as at 31 January 2011 Asia Pacific Aberdeen Asset Managers MSCI AC Asia Pacific Free Index 50% 54% Asia Pacific Nomura Investment Management MSCI AC Asia Pacific Free Index 50% 46% Figure 2: Management Arrangement (Witan Pacific, 2011, p.11) 2.6 Returns & Gearing After 2009, when the financial industry was in recessionary phase both Aberdeen and Nomura, in comparison with Index, have performed very well. During the last five years, the gearing level has been in between 0 to 5%. The gearing level has consistently reduced in previous ten years, which used to be on an average above 10% before 2005. The Board, in other than exceptional circumstances, does not borrow more than 20% of the total capital and reserves. The gearing level is the bank loan (reduced by fixed interest stocks and cash) as a percentage of net assets. 2.7 Risks The Company invests in equities and other assets for long-term that is consistent with its objective. Therefore, while pursuing the objective, it identifies a number of financial risks it faces such as market risk, credit risk and liquidity risk. These risks affect either the company’s net asset value or profits to be distributed to investors. Figure 1 shows the geographic equity investments’ proportion and Table 3 shows the investment according to the sector. The company is heavily invested in Japan (30%), followed by Hong Kong (12%), although, it is recognized that the invested securities’ listing or country of domicile may not necessarily be an exposure to the country’s economic conditions. The board oversees the investment managers’ compliance with the investment objectives and asset allocation set by the board. Figure 3: Returns 2006-2011 (WM Company and Lipper cited in Witan Pacific, 2011, p.3) Witan Pacific’s volatility is 19.54; beta is 1.05, whereas the Sharpe ratio i.e. excess return per unit of risk is 0.75 (Interactive Investor, 2012). The beta of more than 1.05 means the movement of the fund’s NAV with that of the benchmark. A beta more than 1 indicates high risk. Figure 4: (Witan Pacific, 2011, p.54) Figure 5: (Witan Pacific, 2011, p.14) Figure 6: (Witan Pacific, 2011, p.16) 3. Investment Approach 3.1 Investment Approach of Aberdeen & Nomura The Witan Pacific started its multi-manager strategy in 2005. The changes in investment objectives and strategies in 2005 were a result of disappointing performance of the company as compared to the benchmark. The returns were at discount with the benchmark at 10.8% and 9.8% in the end of 2005 and 2004, respectively (F&C Pacific Investment Trust Plc, 2005, p.3). The Company is presently managed by Aberdeen and Nomura. The main rationale behind the multi-manager strategy is not to depend on one investment manager for returns. The two asset management companies started out managing equal proportions of the company. However, in 2011 there has been slight change in the assets under their management (figure 2). The investment approaches of Aberdeen and Nomura differ considerably. Aberdeen picks bottom stocks and ranks the countries more on the basis their stock selection process than market capitalization. Contrary to this, Nomura first assesses the weightings of the country and industry, and then on the basis of the assessment, selects the stocks. As a result, Aberdeen holds a more concentrated portfolio than Nomura. 3.2 Aberdeen Investment Analysis Aberdeen does not select stocks based on country weightings that are a part of benchmark index. The exposure of Aberdeen investments are more in Asian markets and considerably less to Japan. In other words, Aberdeen does not follow the benchmark index. This has had a positive impact on the returns generated by the company in comparison with the index. Aberdeen Asia, Singapore incorporated fund manager, had ?7.8 billion AUM at January 2005. It had provided five-year annualized return of 2.7% and excess annualized returns of 8.8% (against benchmark) by December, 2004 (F&C Pacific Investment Trust Plc, 2005, p.6). Graph 2 shows the consistent outperformance of Aberdeen investment management of Witan Pacific, since 2005. The bottom-up stock picking approach of most fund managers is driven by the high volatility in emerging markets, which often leads to mispricing. This approach involves continuously screening the emerging markets and buying the shares at significant discount and selling at premium (Lhabitant, 2006, p.314). Such funds are highly concentrated and differ substantially from the emerging market index, similar to Aberdeen’s portfolio. This strategy of Aberdeen is also called as equity style investing where Aberdeen is the active value manager. An active value manager seeks stocks on which the market has given up temporarily. Such stocks are often characterized by unfavourable news, lower P/E, higher dividend yields, and unpopular industries whose general growth prospects are low (Fabozzi, 2009). 3.3 Nomura Investment Analysis Nomura invests more like the benchmark, based on the country weightings in MSCI AC Asia Pacific Free Index. Although, Nomura also prefers investments in Asian markets over Japan, the weightings are less marked than Aberdeen. By 2005, Nomura had been managing ?11.6 billion of assets in Pacific Basin region for institutional clients and had a global AUM of $140 billion. Its annualized return over 5 year period by 2005 was -4.36% as against the benchmark return -6.72% (F&C Pacific Investment Trust Plc, 2005, p.7). Nomura performed better than the index. The major reason of choosing Nomura was its stable investment process and considerable ground resources. Post 2005, the excess returns generated by Nomura have been lower as compared to Aberdeen (graph 2). This is possibly due to the fact that Nomura follows the benchmark more closely than Aberdeen and does not seek the mispricing in stocks as actively as Aberdeen. Nomura takes the index like position with preference for growth characteristics of Asian markets other than Japan. However, its countries’ rankings were based on the benchmark. The approach of Nomura is top-down approach, where the manager first assesses the macroeconomic environment and forecasts the near term outlook. Based on these forecasts and assessment, it allocates the funds to different sectors, industries and asset classes. In the top-down approach, the manager relies on the assessment of the equity market to benefit from relative anticipated economic forecasts. The industry weightings have been considered from the benchmark. In addition to the top-down approach, Nomura’s investment strategy is more like a passive strategy i.e. indexing. With the mix of top-down approach and indexing, Nomura has been able to derive excess returns against the benchmark, however, lower than Aberdeen (graph 2). Figure 7: Performance of Aberdeen and Nomura 2005-2010 Figure 8: Excess Returns over 6 years Figure 9 shows the geographic investments of both the investment managers. Aberdeen is over-weighted in Hong Kong, India and Singapore as compared to Nomura whereas Nomura is over-weighted in Australia, China, Japan and South Korea. Aberdeen Nomura Index Australia 9 13 15 China 7 9 11 Hong Kong 17 6 5 India 8 5 5 Indonesia 2 2 2 Japan 23 37 40 Malaysia 4 3 2 The Philippines 2 1 - Singapore 14 3 3 South Korea 6 11 9 Taiwan 4 8 7 Thailand 4 2 1 Figure 9: Geographical Investment of Aberdeen and Nomura (Witan Pacific, 2011, p.15) Figure 10 shows the sector-wise investments of both the investment managers and the benchmark. Both Aberdeen and Nomura have made sector-wise investments in different proportions as compared to the benchmark. They have significantly deviated from the benchmark investments sector-wise. Aberdeen Nomura Index Consumer Discretionary 8 14 12 Consumer Staples 8 2 6 Energy 6 4 5 Financials 31 24 27 Healthcare 3 2 3 Industrials 7 16 14 Information Technology 12 14 14 Materials 10 16 11 Telecommunication Services 7 3 4 Utilities - - 4 Other 8 5 - Figure 10: Sector-wise Investments of Aberdeen and Nomura (Witan Pacific, 2011, p.17) 4. Performance of the Fund It can be seen in figure 6, that Witan Pacific has followed the benchmark index and only outperformed it in 2010. The Company’s total returns increased steadily since 2005 and has declined in 2008-2009 probably because the world economic recession. The exposure of the Asian economies to the economic crisis led to the drop in performance. The crisis affected the Asian countries’ corporate profit margins and the regional currencies. This has had a profound impact on the returns of the two investment managers (see graph 1). If the performance of Witan Pacific is seen in figure 7, the price of the fund has increased by 24.24% and NAV by almost 36% in the last five years. The NAV growth and benchmark growth has been the same. This shows that the fund during the period 2007-2010, has provided stable and comparative returns. The dip in 2011 is probably resulted from the Japanese Earthquake followed by failure of nuclear reactor in March 2011 (figure 12). This deeply impacted the economy of Japan (Huffington Post, 2011). Although, the share price performance is only slightly greater than the benchmark, the fund has outperformed the benchmark in terms of NAV rather well by 12.4% (figure 12). The fund takes the advantage of this discount in the share price by buying back the shares every year, which is a way of returning the capital to its shareholders (this is also one of the objectives of the company). As the shares bought back get cancelled instead of going to treasury, this has a positive impact on the return per ordinary share of the company. The base management fees is in between 0.2% and 0.25% p.a. of the NAV and the performance fees remains in between 10% and 15% of average NAV of portfolio outperformance. The performance fees have increased by 30% over last one year. Moreover, the management fees have also increased by 36%. These two costs constitute 3.7% of the total net income earned during 2010-11. This percentage was 2.9% in 2009-10. Figure 11: Performance 2006-2010 (Witan Pacific, 2011, p.32) Figure 12: Performance of Witan Pacific in last 5 years (Financial Times, 2011) Figure 13: Cumulative Performance (Witan Pacific, 2011, p.3) The Reuters’ analysts in Table 6 have provided ratings in terms of total return, consistent return and capital preservation on a scale of 1-5, where a rating of 1 is the weakest and 5 is the strongest. The ratings for total returns reflect the historical return of the fund against the peer group. The consistent return rating is the historical risk-adjusted return of the fund. The capital preservation rating is a relative rating. The strong ratings of 4 and 5 in total return and consistent return, respectively, have been given in comparison to the fund’s peers. The capital preservation rating, however, is low, probably due to the fact that the exposure of the fund is in the Asian markets. Figure 14: Analysts' Ratings (Reuters, 2012) Witan Pacific’s total expense ratio excluding performance fees has been less than 1% in FY 2011 and 2010, and has decreased. This is consistent with the strategic objectives of the company. This shows that the fund has improved its operating efficiency. 5. Summary of Findings Following are the findings from the analyses: 1. The blend of two different kinds of investment strategies by Aberdeen and Nomura allows Witan Pacific diversify its risk and provide increasing total returns to its shareholders. 2. Witan Pacific has consistently outperformed the benchmark over 1-year, 3-years and 5-years time period. 3. Aberdeen follows active market strategy whereas Nomura follows the benchmark in terms of geographical investment proportions. 4. Although Asian markets provide opportunities for excess returns but they also present high level of economic uncertainty such as high inflationary pressures, political instability and high dependence of financial markets on foreign institutional investors. 5. Both the investment managers are over-weighted in Japanese markets as given by the annual report 2011. 6. Its beta is slightly more than 1. 7. The gearing level has declined substantially in the last five years and remains in between 0 to 5%, which is consistent with one of the investment objectives. 8. The financial performance of the company has been consistent with its objective and strategies since 2005. 9. The management and performance fees together as a percentage of total net income earned has increased by 27.5% from last year. Both the fees have increased by 36% and 30%, respectively. 10. Reuters’ analysts have given strong rating on the fund’s consistent returns but medium rating on the preservation of capital. 6. Conclusion & Recommendation Based on the findings, it can be said that the fund presents opportunities for high returns or comparative returns as the markets. However, the fund presents substantial financial risks from many perspectives. These perspectives are high exposure to one geographic region in Asia, economic and financial and political risks in Asian markets. The prospects of returns come from the ability of the company to achieve its investment objectives and adoption of multi-manager strategy. The fund has performed well and managed to increase shareholder returns after the global economic recession where many big financial institutions collapsed. Although, the past performance can never guarantee future performance but the two investment managers Aberdeen and Nomura have had strong investment performance even before they started management of Witan Pacific. However, the performance and management fees have increased significantly since past one year but its expense ratio is still lower as compared to open-ended funds. Therefore, it can be said that the fund is a good investment opportunity for investors who desire to invest in Asian markets through a well-diversified fund rather than directly. 7. References Arouri, M. E. H., Awadi, F. and Nguyen, D. K., 2010. The Dynamics of Emerging Stock Markets: Empirical Assessments and Implications. Germany: Springer, pp. 20. Cross, S., 2011. Seven reasons to buy investment trusts – MoneyWeek. [Online] Available at: http://www.moneyweek.com/investments/funds/seven-reasons-to-buy-investment-trusts-56312 [Accessed 1 March 2012]. F&C Pacific Investment Trust Plc, 2005. F&C Pacific Investment Trust Plc: Report and Accounts 2005. [Pdf] Available at: http://www.witanpacific.com/sites/default/files/literature/report_accounts_2005.pdf [accessed 22 February 2012]. Fabozzi, F.J., 2009. Institutional Investment Management: Equity and Bond Portfolio Strategies and Applications, Volume 177 of Frank J. Fabozzi Series. U.S.A.: John Wiley and Sons. Financial Times, 2011. Witan Pacific, WPC:LSE company performance - FT.com. [Online] Available at: http://markets.ft.com/Research/Markets/Tearsheets/News-and-comment?s=WPC:LSE [Accessed 22 February 2012]. Huffington Post, 2011. Japan Earthquake 2011: 8.9 Magnitude Earthquake Hits, 30-Foot Tsunami Triggered. [Online] Available at: http://www.huffingtonpost.com/2011/03/11/japan-earthquake-tsunami_n_834380.html [Accessed 22 February 2012]. Interactive Investor, 2012. Witan Pacific IT : Interactive Investor. [Online] Available at: http://www.iii.co.uk/investing/factsheet/IL49 [Accessed 22 February 2012]. Jaffer, S., 2006. Multi-manager funds: long-only strategies for managers and investors. United Kingdom: Euromoney Books. Lhabitant, F., 2006. Handbook of hedge funds. Great Britain: John Wiley & Sons. Reuters, 2012. Fund & ETF Centre [Online] Available at: http://funds.uk.reuters.com/UK/funds/lipperLeaderProfiles.asp?YYY622_qUzF6cb9T8GsIXv9vmvjHJRBY2EkFQ890MOMCYYfVhAnbujHeMZxivBxSCh4ndIN [Accessed 22 February 2012]. Witan Investment Services Limited, 2012. Investment Trust Pan-Pacific region | History | Witan Pacific Asian Investment Trust. [Online] Available at: http://www.witanpacific.com/about-the-trust/history-trust [Accessed 21 February 2012]. Witan Pacific, 2009. Witan Pacific- Annual Report. [Pdf] Available at: http://www.witanpacific.com/sites/default/files/literature/report_accounts_2009.pdf [Accessed 21 February 2012]. Witan Pacific, 2011. Witan Pacific- Annual Report. Witan Pacific- Annual Report. [Pdf] Available at: http://www.witanpacific.com/sites/default/files/literature/WPC%20RA%202011FINAL%20Low%20Res.pdf [Accessed 21 February 2012]. Read More