By James Thorneley The Asian portion of Premium Pacific Income split cap trust is likely to be biase...
By James Thorneley
The Asian portion of Premium Pacific Income split cap trust is likely to be biased towards Hong Kong financials.
Richard Muckart, who managed the equities portion of the trust, believes financials will be attractive, depending on US interest rates.
Muckart said: "The Hong Kong market has priced in US rates peaking at 7%. At the moment banks' margins are blurred but if rates peak at 7% there will be more transparency with the cost of debt also falling." If US interest rates do peak at 7%, he expects GDP growth in Asia to be 5% in 2000 while being only 2.5% in the US and 1% in Japan.
Over the longer term, Muckart intends to play the technology companies based in India, South Korea and Taiwan. Companies, such as Samsung Electronics and Taiwan Semi-Conductors, have a competitive advantage over similar ones based in Japan or the US, according to Muckart.
He said: "Semi-conductors and D-rams are demanded globally and Asian companies have the edge in manufacturing them." On a more general outlook, he said there is still an enormous amount of recovery potential in Asia. The Asian market has still not made up the ground it lost at the time of the Asian crisis it achieved in the first half of the 1990s.
Muckart's portfolio will account for 48.5% of the whole portfolio. The remaining 52.5% will be invested in bonds and shares from other split capital investment trusts.
Richard Gluck, the senior vice president of Canadian group, Mackenzie Ivy Management, will manage the bonds element. MacKenzie has a 24.9% stake in Premier. David Hambidge, who already manages a similar pool of shares for Premier High Income investment trust, will run the portfolio of investment trust shares.
The capital structure of the fund, domiciled in Dublin, is 55% geared ordinary shares and the remaining 45% consists of a £25m bank loan. The equity will receive all the capital appreciation of the portfolio after the bank loan is paid back and also yield 9.24%pa. The fund has a fixed, seven-year life to June 2007.
The fund is domiciled in Dublin because, despite payouts from it being equity dividends rather than interest payments, distributions from splits based offshore are treated as unfranked in the hands of onshore recipients. There is demand for unfranked income from investment trusts.
Prior to the 1997 Budget, investment trusts with excess management expenses or financing costs were able to offset them against tax credits attaching to franked investment income. These so called 'section 242 reclaims' were abolished with immediate effect in that year's Budget. Since then it has been tax efficient for closed-end funds with substantial bond exposure to seek to match management expenses with unfranked investment income.
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