22 Jul 2020 07:00
22 July 2020
This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014. This announcement has been authorised for release by the Company's Board of Directors.
Witan Pacific Investment Trust plc
Change of Investment Management Arrangements
The Board of Witan Pacific Investment Trust plc (the "Company") is pleased to announce that, after an extensive review of the Company's management arrangements, it has entered into an investment management agreement to appoint Baillie Gifford & Co Limited ("Baillie Gifford") as the Company's new AIFM, company secretary and administrator, conditional on shareholder approval.
It is proposed that, subject to shareholder approval, the Company's investment objective is changed to produce long term capital growth by investing predominantly in shares of, or depositary receipts representing the shares of, Chinese companies (the "New Investment Policy"). Under Baillie Gifford's management, the portfolio will consist of a diversified portfolio of 40 to 80 securities and up to 20 per cent. of the total assets of the Company may be invested in unlisted securities. The Company will also be able to employ gearing, which typically would not exceed 20 per cent. of gross asset value at the time of drawdown.
The Board believes that many Shareholders will wish to continue with their investment in the Company, but in order to take into account its commitment announced on 11 February 2019, the Board proposes that those Shareholders wishing to realise part or potentially all of their investment in the Company will have a chance to do so through a tender offer for up to 40 per cent. of the shares in issue at a one per cent. discount to the prevailing Net Asset Value per share (the "Tender Offer" together with the New Investment Policy, the "Proposals").
Susan Platts-Martin, Chair of Witan Pacific Investment Trust plc, commented:
"Following an extensive and competitive review of the Company's management arrangements, the Board is pleased to appoint Baillie Gifford as the Company's investment manager, subject to certain Shareholder approvals. The Board believes that China provides a compelling investment opportunity that is currently underrepresented in global portfolios. China's domestic stock market and economy have grown to become the second largest in the world and we believe that China will be one of the most important markets of the next decade. We are delighted that the Company will be able to access Baillie Gifford's proven experience investing in China given its strong track record in this area. The Board believes that the move to a China growth strategy will provide Shareholders with a truly differentiated investment proposition that should lead to a tightening of the discount and growth of the Company through superior investment returns."
Benefits of the Proposals
The Board believes that the Proposals will have the following benefits for Shareholders.
• Experienced investment manager with long term track record: Baillie Gifford has a strong track record investing in China over multiple decades
• China's growth story: China's middle class is now the largest in the world and its economy and domestic stock market are the world's second largest
• China's investment story: China accounts for 18 per cent. of global market cap in MSCI investable indices yet only accounts for a 2.5 per cent. allocation in global portfolios (Source: MSCI, June 2019)
• Partial cash exit: the Proposals allow Shareholders to realise part, and potentially all, of their investment in the Company at a price close to the Net Asset Value per share
In addition, the Proposals are expected to provide a modest uplift to NAV per Share for continuing Shareholders should the Tender Offer be fully subscribed.
Background
The Company has achieved significant absolute appreciation in its Net Asset Value and dividend pay out over recent years. As previously announced, however, the Board is concerned that, in common with many other actively managed funds, the Company has experienced some underperformance relative to its benchmark more recently.
On 11 February 2019 the Board announced that, if the Company were not to deliver NAV total return outperformance of its benchmark over the period from 31 January 2019 to 31 January 2021, the Board would put forward proposals to include a full cash exit at close to NAV for all Shareholders.
The Board is cognisant that the current market backdrop for its strategy is challenging and that, coupled with the Company's underperformance of its benchmark to date, outperformance of its benchmark for the remaining period to 31 January 2021 will be difficult. The Board has therefore decided to bring forward a set of proposals that it believes will be attractive to Shareholders.
Change of investment objective and policy
The Board and Baillie Gifford believe that China is central to the future of the Asia Pacific region and there is an exciting opportunity to re-position the Company, focusing it solely on what they believe to be one of the most important markets of the coming decades. Today there are only two investment trusts focused on China whilst there are eight that focus on the Asia Pacific region. The Board and Baillie Gifford believe the opportunity is compelling: China's economic success of the past 40 years is unsurpassed; its middle class already the largest in the world, and its economy and domestic stock market the world's second largest.
China's growing competitiveness is being noticed. Baillie Gifford believes that technology is at the heart of US-China tensions. Baillie Gifford believes that China has proven its ability to deliver world leading companies through investment, innovation and support. Baillie Gifford believes that dominance of old economy sectors such as construction and manufacturing is shifting to a lead in many new economy areas, such as e-commerce, online payments, renewable energy and healthcare.
The Board and Baillie Gifford believe that the desire to invest directly into China will continue to grow. China accounts for 18 per cent. of global market cap in MSCI investable indices, 19 per cent. of global purchasing power by GDP and 31 per cent. of all global listed stocks in MSCI investable indices, yet only accounts for a 2.5 per cent. allocation in global portfolios (Source: MSCI, June 2019).
In order to capitalise on this opportunity, the Board is proposing that the investment objective and policy be revised so that the Company will aim to produce long term capital growth by investing predominantly in shares of, or depositary receipts representing the shares of, Chinese companies. The portfolio will consist of a diversified portfolio of 40 to 80 securities and up to 20 per cent. of the total assets of the Company may be invested in unlisted securities. The Company will also be able to employ gearing, which typically would not exceed 20 per cent. of gross asset value at the time of drawdown.
The Company's proposed New Investment Policy will be set out in a circular to Shareholders, to be published on or around 24 August 2020 (the "Circular").
Change of investment management arrangements
Baillie Gifford's appointment
Earlier this year, the Board undertook a thorough review of its investment management arrangements. A strong selection of candidates submitted an array of alternative options and, after a competitive process and multiple stages of assessments, the Board resolved to appoint Baillie Gifford as the Company's AIFM, company secretary and administrator. The appointment of Baillie Gifford is conditional upon Shareholders voting in favour of the New Investment Policy resolution and change of name resolution at the general meeting expected to be held on or around 16 September 2020 (the "General Meeting").
The Company's investments are currently managed by four investment managers, monitored by Witan Investment Services ("Witan"), the Company's executive manager. Witan has fully supported, and assisted in, the process and indicated its willingness to cease its executive role at a time to be mutually agreed with the Board. Witan is pleased with the outcome of the process and wishes the Company well for the future.
Baillie Gifford is an independent fund manager with approximately £262 billion under management as at 30 June 2020 and is the largest manager of UK listed investment trusts and companies by assets, managing 10 investment trusts and 1 investment company.
Baillie Gifford will be paid an annual management fee of (i) 0.75 per cent. of the first £50 million of Net Asset Value; plus (ii) 0.65 per cent. of Net Asset Value between £50 million and £250 million; plus (iii) 0.55 per cent. of Net Asset Value in excess of £250 million. Baillie Gifford has agreed to waive its investment management fee for the first six months following its appointment as a contribution to the costs that the Company will bear in respect of the Proposals. The management fee payable by the Company under the new investment management arrangements will be lower than the management fee arrangements that are currently in place.
Baillie Gifford has agreed to make a significant marketing contribution to the re-launch of the Company and will also fund all investor marketing activity undertaken on behalf of the Company during the first year of its management. As a result, the Company will not make any contribution to the costs of marketing the Company until 2022 at the earliest.
Advantages of the proposed change of management arrangements
The Board believes that the change in investment manager and the related adoption of the New Investment Policy will provide the following benefits to investors.
• Access to Baillie Gifford's China capability: Baillie Gifford has a strong team with substantial funds invested in China, having invested in the region for multiple decades
• Strong track record: The Baillie Gifford China Fund has a thirteen year history, achieving top quartile performance over 1, 3, 5, and 10 years since inception
• A differentiated product: The 'best ideas' portfolio will consist of 40-80 listed and unlisted Chinese growth stocks from across the market capitalisation spectrum. This will be a differentiated product, characterised by Baillie Gifford's long term time horizon, focus on identifying companies with strong growth potential, and experience investing in attractive unlisted securities
• Long term view: Baillie Gifford adopts a long term view with a typical investment horizon of five years and beyond, with turnover of its China portfolios typically 20% per cent. per annum
• Scale: Baillie Gifford is the largest manager of listed investment funds in the UK and currently manages 11 such funds with combined assets of approximately £20bn as at 30 June 2020
It is the Board's view that the change in investment manager and the adoption of the proposed strategy provide the scope for improved future long term performance and should enhance the appeal of the Company. With the support of Baillie Gifford, the Company will aim to attract new investors and, over time, seek to grow.
Baillie Gifford's China capability
Baillie Gifford has a strong track record investing in China having invested in the region over multiple decades. As at 30 June 2020 Baillie Gifford had over £44.6 billion invested in both Chinese listed and unlisted companies via its global, regional and unlisted strategies.
The Baillie Gifford China Fund has a thirteen year history, achieving top quartile performance over 1, 3, 5, 10 years and since inception. It has outperformed the index and the peer group by 6.8 per cent. and 7.2 per cent. per annum respectively over the past 5 years.
Baillie Gifford's China equity strategy is managed by its emerging markets team, with research input from Baillie Gifford's Shanghai office. Baillie Gifford's emerging markets team comprises six investment managers and two analysts. Baillie Gifford's Shanghai research platform, comprising three investment researchers, provides an 'on-the-ground' presence, further enabling Baillie Gifford to identify the next generation of exceptional companies. Additionally, the majority of Baillie Gifford's 115 investors research Chinese companies as part of their own remit, and Baillie Gifford has built relationships with company founders, industry specialists and independent research providers.
Sophie Earnshaw and Roderick Snell will manage the portfolio on a day-to-day basis. Sophie Earnshaw is an investment manager in Baillie Gifford's emerging markets equity team and has been co-manager of the Baillie Gifford China Fund since 2014 and is also a decision maker on the China A Share Fund. Roderick Snell is also an investment manager in Baillie Gifford's emerging markets equity team and has managed the Baillie Gifford Pacific Fund since 2010 and been deputy manager of Pacific Horizon Investment Trust since September 2013.
Baillie Gifford's approach
Baillie Gifford's China equity strategy combines the expertise of its emerging markets and Shanghai teams. Baillie Gifford invests in Chinese companies regardless of their place of listing to give its clients the widest possible China opportunity set. This gives Baillie Gifford the ability to align a broader perspective and global insight with an on-the-ground network and relationships.
Baillie Gifford invests in Chinese companies that it believes have the most substantial long term growth prospects, regardless of their size, domicile, listing or weight in any given index. Baillie Gifford looks for businesses that enjoy sustainable competitive advantages and which Baillie Gifford believes will grow their earnings significantly faster than the market average.
Baillie Gifford's approach to investing in unlisted companies has evolved naturally from its long history of investing in fast growing public companies. As in the public markets, Baillie Gifford is looking for exceptional private companies that can grow significantly over its long term investment horizon. As these companies choose to remain private for longer, they are growing to substantial scale, with well-developed business models, just like the fast-growing public companies in which Baillie Gifford has invested for decades. As such, Baillie Gifford's analysis of these companies' market opportunity, competitive advantages, management and culture, capital allocation, and long term return prospects is very similar to its public equity investing. Indeed, several of Baillie Gifford's private investments have gone on to become widely held holdings across Baillie Gifford's public equity strategies, including Alibaba and Meituan Dianping.
One of the key differences between Baillie Gifford's public company and private company investment processes lies in the sourcing of investment opportunities. Baillie Gifford's access to private investment opportunities comes from its reputation as a long term supportive shareholder of public and private companies, and its network of relationships with earlier stage investors and investee companies.
Baillie Gifford's approach results in a committed portfolio which will often look very different to its benchmark. In the pursuit of superior performance over the long term, Baillie Gifford is happy to accept volatility around an index in the short term.
Change of name
The Board are proposing to change the name of the Company to the Baillie Gifford China Growth Trust plc following the General Meeting, as it is the Board's opinion that the Company will benefit from Baillie Gifford's brand, including in respect of attracting potential new investors. The change of name is subject to Shareholder approval at the General Meeting.
Tender Offer
The Board has previously stated that it would put forward proposals to include a full cash exit at close to Net Asset Value for all Shareholders, should the Company not deliver Net Asset Value total return outperformance of its benchmark over the period from 31 January 2019 to 31 January 2021.
Given the Proposals announced today, the Board has resolved to bring forward a set of proposals, enabling Shareholders who wish to do so to retain their investment in the Company whilst offering those Shareholders who wish to realise their investment, either in part or potentially in whole, a chance to do so.
The decision to proceed with the Tender Offer was taken following discussions about the future of the Company which the Board held with major Shareholders and J.P. Morgan Cazenove. The Board believes that many Shareholders will wish to continue with their investment in the Company, but in order to take into account its commitment outlined above, the Board proposes that those Shareholders wishing to realise part or potentially all of their investment in the Company will have a chance to do so at a price close to the Net Asset Value per share through the Tender Offer for up to 40 per cent. of the Shares in issue as at the Record Date, being 24 July 2020. The Tender Offer is conditional on the passing of (i) the change of name resolution; and (ii) the adoption of the New Investment Policy resolution at the General Meeting.
Shareholders tendering in excess of 40 per cent. of their shareholding may be able to realise those Shares through the Tender Offer to the extent that other Shareholders do not tender any of their Shares or tender less than their Basic Entitlement. The Board is satisfied that, following the Tender Offer, the Company will remain an attractive size with sufficient liquidity. The Board believes that this proposal is in the interests of all Shareholders.
Given the nature of the Proposals the Board does not intend to put any further proposals to Shareholders, including any proposals based upon the performance of the Company in the period to 31 January 2021, should all of the resolutions be passed at the General Meeting. However, in the event that Baillie Gifford is appointed as AIFM to the Company following the passing of (i) the change of name resolution; and (ii) the adoption of the New Investment Policy resolution, but the Tender Offer resolution is not passed, then the Board will discuss proposals with its major Shareholders that may offer Shareholders a future exit opportunity.
Dividends
The Company's current investment objective provides Shareholders with both capital and income growth. The New Investment Policy will aim to produce long term capital growth only.
The Proposals, if approved by Shareholders, will result in returns from the portfolio being generated from capital growth as opposed to income. The current level of dividend will therefore not be covered by the future investment income.
However, in view of the Company's sizeable revenue reserves, the Board intends to continue to pay out dividends at the prevailing level of 7.15 pence per Share per annum in respect of the current financial year and the next financial year to 31 January 2022, should Shareholders approve the Proposals. This is intended to mitigate the impact on Shareholder income as a result of the Proposals in the short term.
Expected Timing
The Proposals are subject to Shareholder approval. A Circular with further details of the Proposals, including a notice convening the General Meeting, is expected to be published on or around 24 August 2020.
For further information please contact:
Witan Pacific Investment Trust plc, via J.P. Morgan Cazenove
Susan Platts-Martin (Chair)
J.P. Morgan Cazenove +44 (0)20 7742 4000
William Simmonds
Oliver Kenyon
Harry Randall
LEI: 213800KOK5G3XYI7ZX18