Weiss Korea Opportunity Fund - Annual Report and Audited Financial Statements for the year ended 31 December 2023
LEI 213800GXKGJVWN3BF511
(Classified Regulated Information, under DTR 6 Annex 1 section 1.1)
ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
Financial Highlights
Asat31December2023 Asat31December2022 £ £ Total Net Assets 116,849,704 127,080,493 Net Asset Value ("NAV") Per Share 1.69 1.83 Mid-Market Share Price 1.68 1.81 Asat 31December2023 Sinceinception NAV Return -5.5% 112.2% Benchmark Return 14.8% 73.2% Asat Asat 31December2023 31December2022 Portfolio Discount* 49.7% 68.0% Share Price Discount -0.4% -1.6% Fund Dividend Yield 3.2% 3.5% Average Trailing 12-Month P/E Ratio of 4.8x 4.0x Preference Shares Held P/B Ratio of Preference Shares Held 0.3 0.3 Annualised Total Expense Ratio 2.1% 2.0%
* 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 Review
For the year ended 31 December 2023
Investment Performance
Against a backdrop of weakening economic data in
Dividend
During the year, the Directors declared an interim dividend yield of
The Company’s policy is to pay a single dividend, which incorporates all dividends received (net of withholding tax), on an annual basis. As discussed in the Investment Manager’s report below, there are changes afoot in Korean corporate governance. One of the initiatives aims to address Korean companies’ unique approach to the declaration of dividends, whereby a dividend is declared but its quantum is not announced at the same time. The proposal is that both the time and amount of the dividend ought to be declared together. Some of the companies in which we are invested have already proactively implemented this, such as Hyundai Motors. The impact of this change is that the dividends receivable in 2023 (that is those declared) are significantly lower than in previous years. This is because those companies that have moved to the new process have declared their dividends post year-end. At the time of writing, most of these companies have declared and (in most cases) already paid out their dividends. The board therefore intends to take into account all dividends received up to
As things currently stand, the Board expects to adopt a similar approach for future periods but will keep the dividend policy and process under review
Share Buybacks
The Board is 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. As we said in our Half-Yearly Financial Report, we were pleased to see that only 41,496 shares were tendered (0.06% of WKOF’s shares) as this displayed positive shareholder support. The next Realisation Opportunity will take place in 2025, and we hope that shareholders will continue to show their support for WKOF and the long-term opportunity it offers.
Board Composition
This is my first Annual Report as Chairman, and I wish to extend, again, our thanks to
Your Investment Manager
Following a pause during COVID, I am pleased to report that your Investment Manager has been increasingly engaging with South Korean companies on governance matters, very much in support of the government’s ‘Corporate Value-Up initiative’. During the reporting period, your Investment Manager held a number of meetings with portfolio companies in the portfolio and expects to continue doing so in the future.
Value for Money
Your Board continues to keep all costs under review and we are very mindful that the ongoing charges for the year were approximately 2.1%. We strive to keep the cost of investing as low as possible for shareholders, with the investment management fee of 1.5% making up the bulk of the costs. The Realisation Opportunity added approximately £124,000 of expense for the year, but the Board believes that this periodic redemption facility is very much in the best interest of all shareholders. The Board scrutinised all other overheads during the year, cutting back where no obvious value was being generated, to ensure that shareholders receive value for money.
Responsible Investing
As an AIM quoted investment company, WKOF is not subject to the FCA Listing Rule requirement to comply with TCFD (
Outlook
2023’s relative and absolute performance was disappointing for WKOF, but there are reasons to be optimistic about the future performance, not least given the recent uplift in performance following the end of the reporting period (and as detailed in the Investment Manager’s Report). While investors will most likely remain sceptical of material change occurring 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.
Krishna Shanmuganathan
Chair
2 May 2024
Investment Manager’s Report
For the year ended 31 December 2023
WKOF Performance Attribution
At the end of
-- The performance of the South 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 South 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 South Korea Index, we report the attribution of these aforementioned factors to WKOF’s performance. The following table provides this performance attribution for the year ended
Performance Attribution Table
ReturnComponent 2023 SinceInception The Korea Index 14.8% 73.2% Discount Narrowing (Widening) of Preferred Shares Owned 1.8% 66.2% WKOF Common Shares vs. The Korea Index -20.4% -29.3% Excess Dividend Yield of Preferred Shares Owned 1.7% 16.7% Fees, Expenses and Others -3.4% -14.6% NAVPerformance -5.5% 112.2%
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 South Korea Index since inception. At present, we continue to remain confident in both of these theses.
In
As displayed above in the attribution table, WKOF under-performed the South Korea Index during 2023 due to negative attribution via common share selection return. We believe it is primarily a result of thematic- driven investors favouring growth-oriented common shares which typically have higher valuation metrics. While it has been a frustrating two years for WKOF on an absolute basis and relative to various South Korean equity indices, there is optimism that investors could begin rewarding certain low price-to-book equities due to investor optimism of corporate governance reform as discussed in greater detail below. While investor sentiment could change, it is encouraging to see a possible tailwind for low price-to-book securities like those held by WKOF.
Review of the South Korean Macro Environment
There is increasing concern that
South Korea’s economy, the fourth largest in
South Korea’s 3.5% policy interest rate or bank base rate, which has been unchanged since
Valuation of Major Indices IndexName P/ERatio P/BRatio DividendYield NiftyIndex(India) 24.4 3.1 1.3% S&P500(US) 23.4 4.5 1.5% Nikkei225(Japan) 20.4 1.9 1.9% FTSE100(UK) 10.7 1.7 3.9% ShanghaiComposite(China) 11.3 1.3 2.8% HangSengIndex(HK) 9.2 1.0 4.1% TAIEX(Taiwan) 18.2 2.1 3.4% KOSPI200(Korea) 11.6 1.0 1.6% WKOFPortfolioHoldings 4.2 0.4 2.7%
South 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 in this report.
As previously discussed, WKOF’s portfolio discount as at
Portfolio Discussion and Korean Corporate Governance
Investors who read our reports have become accustomed to the valuation table above which displays South Korean equities trading at highly discounted valuations relative to other developed markets, as well as certain emerging markets. These discounts have persisted for an extended period of time and investors may rightfully wonder what might cause a change. While
International concerns about South Korean corporate governance practices typically focus on the following issues:
-- Laws and regulations, which contain fewer minority protections relative to developed markets, allow controlling shareholders of publicly traded companies to favour their own interests over those of minority shareholders; -- A lack of truly independent directors on the boards of many publicly traded companies due to directors only being required to maintain a standard of being “loyal” to the company, not shareholders (source: Article 382-3 of the Commercial Act); -- Wealthy families are often controlling shareholders of publicly traded companies and may have an incentive to depress the valuations of the publicly traded stocks they control to avoid high inheritance taxes (which can be as high as 60%) when they transfer wealth to the next generation of the family; -- Stocks bought back by companies are often held in treasury without cancellation which is dilutive to earnings per share; this practice also maintains a defensive currency that issuers can readily use to dilute minority shareholders in the future; -- Payout ratios to shareholders, even by profitable companies with large cash positions, are often materially lower than in other countries; and -- Minority shareholders may be at risk of a controlling shareholder forcing them to swap their shares of the company they own with another less attractive company the controlling shareholder owns or be diluted through an unattractive new stock offering.
As mentioned in our prior reports, there are reasons for optimism that the above corporate governance regime may be ending.
The recently announced government-sponsored ‘Corporate Value-up Programme’ could be the start of more pronounced long-term changes in corporate governance in
While details will not be available until
-- Encouraging companies to improve corporate governance standards through incentives and tax benefits; -- Creating an index of companies, the “Korea Premium Index,” composed of best practicing companies similar to Japan’s JPX Prime 150 Index and exchange traded funds; -- Encouraging pension funds and domestic institutional investors to track the new index; and -- Requiring listed companies to disclose plans to enhance corporate value through the revised Corporate Governance Disclosures and key valuation metrics.
If improvements are made in corporate governance, we are hopeful it will have a positive impact on WKOF’s future performance. As shown in the table on the right, WKOF’s Top 10 Holdings are primarily comprised of companies with low price-to-book ratios.
CommonShare IssuerName PortfolioWeight Price-to-BookRatio Hyundai Motor Company, 2nd Prf. 16% 0.45 LG Electronics Inc., Prf. 10% 0.85 LG Chem Ltd., Prf. 8% 1.10 Hanwha Corporation 3rd Prf. 7% 0.18 Amorepacific Corp., Prf. 7% 1.73 CJ CheilJedang Corp, Prf. 6% 0.67 Mirae Asset Securities Co., Ltd., 2nd Prf. 5% 0.34 Samsung Kodex 200 ETF 4% N/A Hyundai Motor Company, 3rd Prf. 4% 0.45 CJ Corporation, 1st Prf. 3% 0.47 Top 10Holdings 70%
Domestic retail investors now represent a large shareholder base for South Korean stocks. The number of retail investors has grown from 6 to 14 million since 2020 - an increase of 135%, which represents approximately 33% of the voting public in
-- A draft plan was released to improve the dividend pay-out process of South Korean companies. InSouth Korea , dividend amounts are disclosed after the ex-date of dividends, which effectively precludes shareholders from knowing the per-share dividend before becoming eligible to receive those dividends. By contrast, the international market standard is to announce dividend amounts prior to the dividend record date for additional clarity on dividend payouts. All else being equal, the new practice is likely to provide greater insight into indicative dividend payouts prior to South Korean issuers’ dividend record dates, thereby allowing investors to capture attractive yield opportunities with more information about upcoming dividend payouts; -- A 30 year old rule requiring foreign investors to register with authorities in order to trade local shares was abolished, and a requirement to report transaction details of firms trading shares through an omnibus account was relaxed from two days after settlement to once a month; -- South Korean companies with market capitalisations greater thanKRW 10 trillion (roughly7-8 billion GBP market capitalisations) and foreign ownership greater than 5% will be required to provide disclosures in English starting in 2024.
There have already been slow but meaningful improvements to corporate governance in
-- WhileSouth Korea still ranks eighth for corporate governance in its region according to theAsian Corporate Governance Association , it also had the largest absolute change in corporate governance score afterJapan (Japan was +5.3 vsSouth Korea +4.2) since 2000 of any country in its region; -- Over 45 companies received proactive shareholder proposals from institutional shareholders in 2022 versus less than five instances just five years ago (Source: Insignia; Goldman Sachs, “Korea Value in Action”,7 February 2024 ); -- It was the third largest market for activism in 2023 with 77 activist campaigns - up from 10 campaigns in 2020. (Source: Grant’sInterest Rate Observer ,February 2024 ); and -- Payout ratios of companies listed on the KOSPI increased to 44% in 2023 from 32% the year prior (Source: FactSet,Korea Exchange ,Goldman Sachs Investment Research ).
If corporate
governance
in South
A leading cause is our deliberate portfolio rebalancing as the Company has rotated from preference shares where discounts have tightened towards ones with wider discounts. For example, the Company’s largest portfolio position at one point was Samsung Electronics, which had a discount wider than 40% over the life of the fund. As of the end of
Similarly, we reduced our exposure to LG Chem during 2023. It stood as the largest position in the portfolio (approximately 15% of NAV) in 2022 and now accounts for just under 8% of NAV. The discount of its preference shares tightened throughout 2023, finishing the year at 38%, demonstrating reduced scope for upside potential. It was therefore, replaced as the largest position by Hyundai Motors’ preference shares during the year. Not only were these preference shares trading at a wider-than- average 48% discount at mid-year, they also offered an attractive 10% dividend yield. A similar rationale has led us to increase the Company’s position in LG Electronics preference shares, which were trading at a 57% discount at mid-year.
We have observed that discounts in the most liquid preference shares appear to be tightening. This is not to say that corporate governance has improved universally for all South Korean companies or that past trends in preference share discounts will always repeat themselves in larger discount securities. However, when discounts widen for reasons that are hard to explain with sound economic principles, we will patiently capture attractive investment opportunities as they present themselves. We are aware that a major goal of WKOF is to enable long- term investors to benefit from the large discounts of South Korean preference shares relative to their underlying common shares and will continue to manage the portfolio to that end.
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 credit default swaps (“CDS”) and put options on certain Korean equity ETFs and indices – securities that we believe would generate high returns if
CDS Notional Amount(GBP) Cost Paid as a % of Notional Value ExpirationDate per Annum (Spread) 78,443,677 0.195% 6/20/2025
Concluding Remarks
To echo the Half-Yearly Report, we wish to again express our thanks to our long-term shareholders for their patience. We continue to remain disciplined and focused 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. Discounts are similar to when WKOF was originally listed and valuations are at heavy discounts to global equities. This is in spite of slow but steady corporate governance reforms and the recent announcements of potentially more material changes ahead. We remain optimistic about WKOF’s future risk-adjusted returns and continue to be one of its largest shareholders.
StatementofFinancial
Position
As
at
31
December
2023
Asat Asat 31December 31December 2023 2022 £ £ Assets Financial assets at fair value through profit or loss 112,427,879 120,764,446 Other receivables 1,627,052 4,598,722 Margin account 1,396,037 1,327,313 Cash and cash equivalents 3,364,287 2,890,620 Totalassets 118,815,255 129,581,101 Liabilities Derivative financial liabilities 903,381 1,145,453 Due to broker 271,189 - Other payables 790,981 1,355,155 Totalliabilities 1,965,551 2,500,608 Netassets 116,849,704 127,080,493 Representedby: Shareholders'equityandreserves Share capital 33,912,856 33,986,846 Other reserves 82,936,848 93,093,647 TotalShareholders'equity 116,849,704 127,080,493 NetAssetsValueperOrdinaryShare 1.6870 1.8336
The Financial Statements were approved and authorised for issue by the Board of Directors on
Krishna Shanmuganathan Gill Morris
Chair Director
Statement
of
Comprehensive
Income
For
the
year
ended
31
December
2023
Forthe year ended Forthe year ended 31December2023 31December2022 £ £ Income Net losses on financial assets at fair value through profit or loss (4,498,384) (37,206,667) Net gains on derivative financial instruments through profit or loss 242,072 1,253,397 Net foreign currency (losses)/gains (559,160) 632,948 Dividend income 2,490,245 5,088,748 Bank interest income 12,747 4,488 Totalloss (2,312,480) (30,227,086) Expenses (3,586,733) (3,696,545) Operating expenses Totaloperatingexpenses (3,586,733) (3,696,545) Lossfortheyearbeforedividendwithholdingtax (5,899,213) (33,923,631) Dividend withholding tax (548,479) (1,119,942) Lossfor the year after (6,447,692) (35,043,573) dividendwithholdingtax Lossandtotalcomprehensivelossfortheyear (6,447,692) (35,043,573) BasicanddilutedlossperShare (0.0931) (0.5056) All items derive from continuing activities.
Following review of the AIC SORP and its impact on the Statement of Comprehensive Income the Board have 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
year
ended
31
December
2023
Share Otherreserves Total Fortheyearended31December2023 capital £ £ £ Balanceasat1January2023 33,986,846 93,093,647 127,080,493 Total comprehensive loss for the year - (6,447,692) (6,447,692) TransactionswithShareholders,recordeddirectlyinequity Purchase of Realisation Shares (73,990) - (73,990) Distributions paid - (3,709,107) (3,709,107) Balanceasat31December2023 33,912,856 82,936,848 116,849,704 Share Other Total Fortheyearended31December2022 capital reserves £ £ £ Balanceasat1January2022 33,986,846 132,554,299 166,541,145 Total comprehensive loss for the year - (35,043,573) (35,043,573) TransactionswithShareholders,recordeddirectlyinequity Distributions paid - (4,417,079) (4,417,079) Balanceasat31December2022 33,986,846 93,093,647 127,080,493
Statement
of
Cash
Flows
For
the
year
ended
31
December
2023
For the year ended 31 For the year ended 31 December 2023 December 2022 £ £ Cash flows from operating activities Loss and total comprehensive (6,447,692) (35,043,573) loss for the year Adjustments for: Interest income (12,747) (4,488) Net gain or loss on financial assets at fair value through 4,498,384 37,206,667 profit or loss Exchange losses on cash and (81,949) (523,108) cash equivalents Net gain or loss on derivative financial (242,072) (1,253,397) instruments at fair value through profit or loss Increase in receivables (1,731) (3,314) excluding dividends Increase/(decrease) in other payables excluding 89,974 (57,744) withholding tax Dividend income net of (1,941,766) (3,968,807) withholding taxes Dividend received net of 4,261,019 4,265,673 withholding taxes Bank interest received 12,747 4,488 Purchase of financial assets at fair value through profit (18,040,415) (10,431,005) or loss Proceeds from the sale of financial assets at fair 22,149,787 11,811,591 value through profit or loss Net cash generated from 4,243,539 2,002,983 operating activities Cash flows from investing activities Opening of derivative - 1,799,480 financial instruments Closure of derivative - (163,217) financial instruments (Increase)/decrease in margin (68,724) 54,100 account Net cash generated from (68,724) 1,690,363 investing activities Cash flows from financing activities Purchase of Realisation (73,990) - Shares Distributions paid (3,709,107) (4,417,079) Net cash used in financing (3,783,097) (4,417,079) activities Net increase/(decrease) in 391,718 (723,733) cash and cash equivalents Exchange gains on cash and 81,949 523,108 cash equivalents Cash and cash equivalents at 2,890,620 3,091,245 the beginning of the year Cash and cash equivalents at 3,364,287 2,890,620 the end of the year
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