Weiss Korea Opportunity Fund - Half-Yearly Financial Report and Unaudited Financial Statements
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
HALF-YEARLY FINANCIAL REPORT AND UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED
Company Performance
Performance Summary
As at Asat
30 June 2024 31December2023
£ £
Total Net Assets 122,617,033 116,849,704
Net Asset Value ("NAV") Per Share 1.77 1.69
Mid-Market Share Price 1.66 1.68
Financial Highlights
Six months to
Sinceinception
30 June 2024
NAV Return 6.4% 129.1%
Benchmark Return 1.8% 76.4%
As at As at
30 June 2024 31December2023
Portfolio Discount* 49.9% 49.7%
Share Price Discount (6.2%) (0.4%)
Fund Dividend Yield 3.1% 3.2%
Average Trailing 12-Month P/E Ratio of Preference 7.3x 4.8x
Shares Held
P/B Ratio of Preference Shares Held 0.3 0.3
Annualised Total Expense Ratio 2.1% 2.1%
*Portfolio Discount
The portfolio discount represents the discount of WKOF's actual NAV to the value of what the NAV would be if WKOF held the respective common shares of issuers rather than preference shares on a one-to-one basis.
As at close of business on
Chair's Report
For the period ended
Investment Performance
I am pleased to report that during the period from
Dividend
The Directors declared an interim dividend of
Share Buybacks
The Board is also authorised to repurchase up to 40% of WKOF's outstanding Ordinary Shares in issue as of
Realisation Opportunity
WKOF offers shareholders the regular opportunity to elect to realise all, or a part, of their shareholding in WKOF (the "Realisation Opportunity") once every two years, on the anniversary of WKOF's admission date, with the next Realisation Opportunity taking place in
Your Investment Manager
Shareholders have been fortunate to have access to Weiss Asset Management ("WAM") as their investment managers since launch. WKOF remains the only listed vehicle that your Investment Manager runs and, despite best efforts to grow the fund, it remains only a small part of the
Promotion of the Company
Through
Outlook
Whilst WKOF was not immune to the significant market gyrations of recent weeks, the `Corporate Value-Up Programme' in
I look forward to communicating with you about WKOF's activities in the future. If any Shareholders wish to speak with the Board, please contact Singers, and we will be happy to answer any questions you may have.
Chair
Investment Manager's Report
For the period ended
WKOF Performance Attribution
At the end of
-- The performance of the Korean equity market generally as indicated by
the Korea Index;
-- The discounts of the preference shares WKOF holds narrowing or widening
relative to their corresponding common shares;
-- The performance of the common shares (which correspond to the preference
shares held by WKOF) relative to the performance of the Korean equity
market;
-- Excess dividend yields of the preference shares held by WKOF; and
-- Fees, expenses and other factors.
In order to compare WKOF's relative return to the Korea Index, we report the attribution of these aforementioned factors to WKOF's performance. The following table provides this performance attribution for the last 12 months and for the period since the inception of WKOF in
Performance Attribution Table
Return Component Year-to-Date Last 12 Months Since Inception The Korea Index 1.8% 9.6% 76.4% Discount Narrowing of Preferred 5.1% 5.2% 72.1% Shares WKOF common Shares vs the Korea 0.6% -8.6% -32.5% Index Excess Dividend Yield of Preferred 1.3% 1.5% 14.3% Shares Owned Fees, Expenses and Others -2.4% -1.9% -1.2% NAV Performance 6.4% 5.8% 129.1%
WKOF's investment thesis at inception was based on the likelihood that WKOF's NAV would perform well, largely due to (i) decreases in the large discounts of the preference shares held by WKOF relative to their corresponding common shares and (ii) the related excess dividend yields caused by these large discounts. This has, indeed, generally been the case as these two factors have collectively been the main contributors to WKOF's outperformance relative to the Korea Index since inception. At present, we continue to remain confident in both of these theses.
In
Review of the Korean Macro Environment
In May, the
Throughout the first half of 2024,
_____________________________________________________________ |Index Name |P/E Ratio|P/B Ratio|Dividend Yield| |__________________________|_________|_________|______________| |Nifty Index (India) |23.1 |3.9 |1.2% | |__________________________|_________|_________|______________| |S&P 500 (US) |26.4 |4.9 |1.3% | |__________________________|_________|_________|______________| |Nikkei 225 (Japan) |23.5 |2.1 |1.6% | |__________________________|_________|_________|______________| |FTSE 100 (UK) |13.1 |1.9 |4.0% | |__________________________|_________|_________|______________| |Shanghai Composite (China)|11.8 |1.2 |2.9% | |__________________________|_________|_________|______________| |Hang Seng Index (HK) |9.5 |1.0 |4.4% | |__________________________|_________|_________|______________| |TAIEX (Taiwan) |21.8 |2.6 |2.4% | |__________________________|_________|_________|______________| |KOSPI 200 (S. Korea) |14.0 |1.0 |1.8% | |__________________________|_________|_________|______________| |WKOF Portfolio Holdings |5.7 |0.4 |3.6% | |__________________________|_________|_________|______________|
Korean equities and the portfolio holdings of WKOF continue to offer apparent valuation discounts relative to other countries' equity markets as represented by the price-to-earnings ratios ("P/E ratios") and price-to-book ratios ("P/B ratios") listed above.
As previously discussed, WKOF's current portfolio discount, calculated as the weighted average discount of the preference shares owned by WKOF relative to the prices of such preference shares' corresponding common shares, was 49.9%. In addition, the KOSPI 200 has depressed valuation multiples as shown in the table above relative to the average of other major indices.
Korean Corporate Governance and Portfolio Discussion
In the 2023 Annual Report, we discussed the potential impact of the Corporate Value-Up Programme ("CVUP") that was first announced in
Additional information was announced during
In May, a more detailed version of the CVUP was announced, but it lacked specifics and made adherence to the programme voluntary. In summary, it states that companies should voluntarily disclose on an annual basis the actions they plan to take to improve minority shareholder returns and corporate governance standards. Some of the examples provided included plans for treasury stock cancellation, dividend and share repurchases, disclosures over potential conflicts of interest, and reporting quantifiable metrics relative to competitors in their industry.
Since June, some additional and more specific announcements have been made which could benefit shareholders:
-- A more detailed tax benefit plan was released, which includes a tax
credit of up to 5% of the increase in shareholder return.
-- The Financial Services Commission ("FSC") proposed a new rule requiring
companies with more than 5% of their outstanding stock in treasury to
provide additional disclosures about the purpose and intent of these
holdings. In the past, minority investors have been negatively impacted
by South Korean companies' use of outstanding treasury shares to
opportunistically dilute minority shareholders.
-- The nominee for the head of the FSC, Korea's top regulator, advocated
scrapping a plan to increase capital gains taxes. Investors are
concerned about the potential for an increase in the capital gains tax
from 20% to 25% when the annual return from a financial investment is
greater than 300 million won . The implementation of this tax has been
postponed for two years but is currently scheduled for January 1, 2025 .
While President Yoon Suk Yeol is in favour of eliminating or deferring
the increased tax, Representative Jin Sung -joon who leads the policy
committee for the opposition party, has stated it should be implemented
as scheduled.
-- The FSC Governor called for expanding the scope of a board of directors'
fiduciary duty to include shareholders (rather than just the company).
Until more details are known, it is challenging to determine the potential effectiveness of the CVUP and its impact on the market. Despite the uncertainty, we think that by the end of the year, investors will most likely have additional clarity on the direction of corporate governance improvements and react accordingly.
During the first half of 2024, we reduced WKOF's exposure to Hyundai Motors ("HMC") from approximately 22% at the end of 2023 to 10% as of the end of
After reducing exposure to LG Chem's preference shares throughout 2023, HMC was WKOF's largest position at the end of 2023. In last year's Half Yearly report, we discussed the improved corporate governance from HMC's management in terms of shareholder returns and the cheapness of the preference shares expressed in a forward dividend yield of nearly 9%. During the first quarter of this year, market observers highlighted HMC as one of the main beneficiaries of CVUP due to its depressed valuations and potential catalysts for improvement. During the same period, we also observed increased market interest in HMC's preference shares in the media and among foreign investors. For instance, foreign investors increased their holdings of HMC's preference shares by approximately
Regular readers of our investment manager reports and monthly factsheets are likely to be familiar with our portfolio rebalancing strategy. WKOF deliberately rotates from narrower to wider discount preference shares to offer a portfolio with larger average portfolio discounts to our investors. The existence of wider discounts in the preference share universe, such as LG Electronics preference shares at greater than 55% discount and Amorepacific Corp at greater than 70% discount, caused us to materially reduce HMC's portfolio weight. However, a by-product of this approach may result in higher-than-expected holdings in cash or securities held as cash replacements (such as a Korean index ETF) when there is not matching liquidity in the positions that we are exiting and entering. As a result, the Samsung KODEX 200 ETF, which tracks the local KOSPI 200 index, peaked at 17% of NAV but has been reduced to under 10% as of
Hedging
WKOF pursues its investment strategy with a portfolio that is generally long-only. However, as further described in WKOF's Annual Report and Audited Financial Statements for the year ended
WKOF has limited its use of hedging instruments to purchases of CDS and put options on the MSCI Korea 25/50 Index, securities we believe would generate high returns if
The table below provides details about the hedges as of
____________________________________________________________________________ |CDS Notional Amount (GBP)|Cost Paid as a % of Notional Value|Expiration Date| | |per Annum (Spread) | | |_________________________|__________________________________|_______________| |79,104,530 |0.245% |20/06/2025 | |_________________________|__________________________________|_______________|
Concluding Remarks
We wish to again express our thanks to our long-term shareholders for their patience. We continue to remain disciplined and focussed on attempting to capitalise on a rare economic anomaly in the form of Korean preference shares trading at steep discounts to the corresponding common shares despite largely equivalent economic rights. Whilst we believe more information about CVUP will be known by the market over the coming months, it is difficult to determine whether the CVUP will offer a clear path forward for valuation rerating in
This rare economic anomaly has also become more widely recognised, with more investment options for investors to access the preference share universe itself. In addition, the investable preference share market has become smaller and less liquid as the discounts on larger companies with more liquid preference shares have narrowed. We are keeping a close eye on these developments - and their impact on WKOF. We look forward to updating you again in the future.
Statement of Financial Position
As at
Asat Asat
30June 31December
2024 2023
(Unaudited) (Audited)
£ £
Assets
Financial assets at fair value through profit or loss 120,543,997 112,427,879
Other receivables 281,490 1,627,052
Margin account 1,423,038 1,396,037
Cash and cash equivalents 1,856,504 3,364,287
Totalassets 124,105,029 118,815,255
Liabilities
Derivative financial liabilities 568,698 903,381
Due to broker 254,449 271,189
Other payables 664,849 790,981
Totalliabilities 1,487,996 1,965,551
Netassets 122,617,033 116,849,704
Representedby:
Shareholders'equityandreserves
Share capital 33,912,856 33,912,856
Other reserves 88,704,177 82,936,848
TotalShareholders'equity 122,617,033 116,849,704
NetAssetsValueperOrdinaryShare 1.7702 1.6870
The Financial Statements were approved and authorised for issue by the Board of Directors on
Chair Audit and Risk Committee Chair
Statement of Comprehensive Income
For the period ended
For the period For the period
ended ended
30June2024 30June2023
(Unaudited) (Unaudited)
£ £
Income
Net changes in fair value of financial assets 8,955,523 (1,851,203)
at fair value through profit or loss
Net changes in fair value of derivative 334,628 36,181
financial instruments through profit or loss
Net foreign currency losses (317,329) (486,385)
Dividend income 2,945,724 392,104
Bank interest income 2,788 9,801
Totalincome/(loss) 11,921,334 (1,899,502)
Expenses
Operating expenses (1,915,084) (1,947,468)
Totaloperatingexpenses (1,915,084) (1,947,468)
Profit/(loss) for the period before dividend 10,006,250 (3,846,970)
withholding tax
Dividend withholding tax (647,437) (86,263)
Profit/ 9,358,813 (3,933,233)
(loss)fortheperiodafterdividendwithholdingtax
Profit/(loss)andtotalcomprehensiveincome/
(loss)for
theperiod 9,358,813 (3,933,233)
Basicanddilutedearnings/(loss)perShare 0.1351 (0.0568)
All items derive from continuing activities.
Following review of the AIC SORP and its impact on the Statement of Comprehensive Income, the Board has decided not to follow the recommended income and capital split. This is due to the fact that the Company's dividend policy is not influenced by its expense policy.
Statement of Changes in Equity
For the period ended
Share Other Total
Fortheperiodended30June2024(Unaudited) capital reserves
£
£ £
Balanceasat1January2024 33,912,856 82,936,848 116,849,704
Total comprehensive income for the period - 9,358,813 9,358,813
TransactionswithShareholders,recordeddirectlyinequity
- (3,591,484) (3,591,484)
Distributions paid
Balanceasat30June2024 33,912,856 88,704,177 122,617,033
Share Other Total
capital reserves
Fortheperiodended30June2023(Unaudited) £ £ £
Balanceasat1January2023 33,986,846 93,093,647 127,080,493
Total comprehensive loss for the period - (3,933,233) (3,933,233)
TransactionswithShareholders,recordeddirectlyinequity
(73,990) - (73,990)
Purchase of Realisation Shares
Distributions paid - (3,709,107) (3,709,107)
Balanceasat30June2023 33,912,856 85,451,307 119,364,163
Statement of Cash Flows
For the period ended
Fortheperiod Fortheperiod
ended30June2024 ended30June2023
(Unaudited) (Unaudited)
£ £
Cashflowsfromoperatingactivities
Profit/(loss) and total comprehensive income/ 9,358,813 (3,933,233)
(loss) for the period
Adjustments for:
Net change in fair value of financial assets
held at fair value
through profit or loss (8,955,523) 1,851,203
Exchange losses on cash and cash equivalents
557,166 1,147,298
Net change in fair value of derivative
financial instruments held
at fair value through profit or loss (334,628) (36,181)
Increase in receivables excluding dividends (13,594) (18,444)
Increase in other payables excluding 172,882 92,894
withholding tax
Dividend income (2,298,287) (305,841)
Dividend received 3,358,429 3,626,410
Purchase of financial assets at fair value (39,218,509) (9,766,020)
through profit or loss
Proceeds from the sale of financial assets at
fair value through
profit or loss 40,041,173 10,921,807
Netcashgeneratedfromoperatingactivities 2,667,922 3,579,893
Cashflowsfrominvestingactivities
Opening of derivative financial instruments 87 20
Closure of derivative financial instruments (141) -
(Increase)/decrease in margin account (27,001) 1,014,745
Netcash(used (27,055) 1,014,765
in)/generatedfrominvestingactivities
Cashflowsfromfinancingactivities
Repurchase of realisation Shares - (73,990)
Distributions paid (3,591,484) (3,709,107)
Netcashusedinfinancingactivities (3,591,484) (3,783,097)
Net (decrease)/increaseincashandcashequivalents (950,617) 811,561
Exchangelossesoncashandcashequivalents (557,166) (1,147,298)
Cash and cash equivalents at the beginning of 3,364,287 2,890,620
the period
Cashandcashequivalentsattheendoftheperiod 1,856,504 2,554,883
For further information, please contact:
SingerCapital Markets Limited James Maxwell /James Fischer - Nominated Adviser +44 20 7496 3000James Waterlow - Sales NorthernTrustInternationalFund Administration Services (Guernsey) Limited +44 1481 745001 Company secretary
