Pacific Assets focuses on sustainable development

Pacific Assets Trust's managers say an important factor in this outperformance is their 'sustainable investment approach'.

"By sustainable investment, we are not referring to green, clean tech or ethical investing," says David Gait, manager of Pacific Assets Trust. "The emphasis is on sustainable development. We are simply setting out to invest in those companies we believe are particularly well-positioned to deliver long-term returns in the face of the huge development challenges facing all countries today.

"There are hundreds of listed companies in Asia with the words solar, clean or green in their company name, but we have yet to invest in any of them. Our greatest investment challenge is not to identify the many companies well-positioned to help contribute towards cleaner air in the region, but rather to try and sift out from this list the 99 per cent of them which ultimately fail our investment quality requirements."

His team focuses on quality companies with sound growth prospects. "Determining the quality of a company involves assessing the management, the franchise and the financials, and it also entails assessing the sustainability performance and positioning," he explains. "Sustainability is the degree to which a company will benefit from and contribute to achieving higher levels of human development by using the fewest possible resources."

The emphasis on strong management teams results from the importance the trust's managers place on stewardship, and leads them to family owned companies. "These are the best stewards because it is less about 'skin in the game' and more about long-term ownership – what will happen over the next 50 to 100 years," explains Mr Gait.

There are some obvious sector omissions such as tobacco and defence shares. "But this is just because they are not well positioned from a sustainability view point," maintains Mr Gait. "We are also unlikely to invest in coal or oil related companies because of long-term sustainability issues, however, we do like gas because we see it as a transition fuel."

Around 12 per cent of the trust's assets are in companies that benefit from a move towards cleaner air in China. "Towngas China is well-positioned to benefit from the transition away from low quality diesel and coal towards cleaner gas," he says.

Other examples include Delta Electronics Thailand, a global leader in energy efficient power and thermal management solutions.

The sustainability focus leads to certain sector biases such as consumer staples, the trust's second largest sector exposure at the end of January accounting for 21.4 per cent of assets. "These companies are hard to run – you can't cut corners," explains Mr Gait. "That industry typically attracts hard working entrepreneurial management teams."

India focus

The trust's largest geographic focus is India, where finding the right companies requires a lot of research. "The most important thing is to visit companies and managements, and make site visits," says Mr Gait. "We wouldn't get the same level of information if we just read the annual reports. We do reputational checks on every company and have good relationships with non governmental organisations. We commission lots of research as well, for example on tax, and have lists of auditors we avoid.

"We might find out about pharmaceutical companies marketing practices, meanwhile, by asking doctors which ones have tried to bribe them, and have a bias away from Delhi and politics.

"We rule out 80 per cent of potential companies in India because of poor governance."

Mr Gait also doesn't invest in Indian companies listed on London's Alternative Investment Market (Aim). "There tends to be something wrong if they have to come to London," he says.

In terms of other opportunities, Mr Gait argues that Myanmar offers good opportunity with a population of more than 60m, only 4 per cent of which is currently within the 'consuming class', as well as significant oil, gas and precious stones. However, there are significance corporate governance issues so he gets exposure to this country via companies which do business there, such as India listed Marico, the fund's largest holding at 6 per cent of assets. "Marico has been selling in Myanmar for some time," he says. "It makes less than 10 per cent of its revenues there but this should grow over time."

Special situations

The portfolio turnover rate has been very low at around less than 10 per cent, though this is partly because they aim to take a five-year time horizon with shares. "There has been very little change over the last year or two but we are finding special situations where good quality companies are under valued," he says. "Examples have included Tech Mahindra, formerly Satyam, (the trust's second largest holding accounting for 5.6 per cent of assets) which the Mahindra family has turned around. However, this is starting to be factored into the share price so we are trimming it."

Valuation is their most prevalent reason for selling a share.

Another example is family run health foods manufacturer Standard Foods, which is listed in Taiwan and is one of the newest holdings, acquired in 2013. "This has been one of the worst (share price) performers over the last 12 months but the franchise has a fantastic track record and is very profitable compared to peers,” says Mr Gait. "Positioning its products as healthy alternatives has allowed the company to retain significant pricing power and it is running with clear sustainability tailwinds from trends towards healthier consumption trends. Obesity is an Asian problem more than anywhere else so healthy food companies are well positioned. Standard Food's long-term prospects are attractive as the company takes what it has learnt in Taiwan and tries to further build its business in mainland China."