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Pacific Assets Trust: Understanding Ethical vs. Sustainable

Holly Cook

Holly Cook: Here at Morningstar our analysts rate well over 1,000 funds and to talk about one specific analyst rating, I'm joined today by Jackie Beard, director of closed-end fund research.

Jackie, thanks very much for joining me.

Jackie Beard: Hi, Holly.

Cook: So we're talking about Pacific Assets today, and you've given that a Bronze Analyst rating, but the manager, David Gait, has only been there since mid-2010. How can you have that level of conviction after a relatively short tenure?

Beard: Well, it was in 2010 that First State were appointed as managers of the fund. So yes, he's only been running this fund since then, but he's been at First State an awful lot longer. He's part of Angus Tulloch’s team there; very well-established, well-known team. Angus himself has been investing in Asia and emerging markets for pretty much 30 years now.

So he's developed his process over that time and the team has stayed very consistent with that process. It's been tweaked and enhanced every now and then, but fundamentally nothing has changed since as far as they look at stocks from the bottom up and they try not to get distracted by macro noise. But the key differentiator here is there focus on sustainability.

Cook: So is this an ethical fund?

Beard: No, it’s not, and I think it's important to understand this. So, ethical funds will negatively screen out companies depending on certain criteria; whereas here everything is positively screened in. There is no automatic negative ‘we can't touch this’.

So they are looking for businesses that can really maintain themselves for the long-term without having a detrimental impact in any way. So, for example, it's about looking after their labour force in the right way. You won’t see mining companies here, for example, because they are foraging into the ground and that's not a sustainable business because at some point those resources will run out. So it's very much about companies that can produce for the long-term and do good by it as well.

Cook: So does that mean that this fund is actually quite different from its peers in that sense?

Beard: Yes, it does. I think there are a few other little differences as well in terms of how they go about their research and how they go about engaging with management, too. So, for example, they use an independent company to screen funds just to highlight any flags or potential issues that they are not aware of. But if they see an issue, rather than just sell out and go to the next idea, they actually go and engage with the management and try and get them to change their business practices. So everything is about being that sustainable business. They are also very cognisant of the fact that as Western investors in Asia they need to earn that right to engage with managements and I think that really does set them apart from some of their peers.

Cook: So how this approach worked from the shareholders’ point of view?

Beard: Yes it has. So we haven’t got too long a history to look at at Pacific Assets, because they only took over in 2010. But as a team they have been running sustainable funds since 2005 in this way. The sustainable [fund] is really only an extension of their original process that dates way back with Angus.

We can see that these are the kinds of funds that in down markets, you’re likely to probably lose less than the majority of your peers, because they’re very focused on capital preservation as well. That doesn’t mean that they give it all up in up markets, they will rally, but you wouldn’t ever see them right at the top of that table. But I think that’s okay, because if you’re getting that downside protection a little bit as well then from a risk control prospective I think it does a very good job.

Cook: So what would be your key takeaway then for an investor who is considering this fund?

Beard: It’s early days in terms of their managing this particular fund, but I think their track record elsewhere shows that they are very core and [have a] very solid approach, and I also like the fact that all the team are investing in their funds as well, because that’s built into their remuneration structure. So I think it means everybody’s interests are very clearly aligned. It’s still early days here, but I think it looks very promising.

Cook: But it is important to remember that this isn’t an ethical fund if that’s what you’re looking for?

Beard: Absolutely. Yeah.

Cook: Well, thanks so much for letting us into the insights on how you rate this fund.

Beard: Thanks.

Cook: For Morningstar, I’m Holly Cook. Thanks for watching.