Weiss Korea Opportunity Fund - Half-Yearly Financial Report and Unaudited Financial Statements
PR Newswire
LONDON, United Kingdom, September 23
WEISS KOREA OPPORTUNITY FUND LTD.
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 30 JUNE 2024
Weiss Korea Opportunity Fund Ltd. (the "Company" or "WKOF") has today, released its Half-yearly Financial Report for the period ended 30 June 2024. The Report will shortly be available for inspection via the Company's website www.weisskoreaopportunityfund.com.
Company Performance
Performance Summary
| As at | As at |
| 30 June 2024 | 31 December 2023 |
| £ | £ |
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 30 June 2024 | Since inception |
NAV Return | 6.4% | 129.1% |
Benchmark Return | 1.8% | 76.4% |
|
|
|
| As at 30 June 2024 | As at 31 December 2023 |
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 Shares Held | 7.3x | 4.8x |
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 20 September 2024, the latest published NAV per Share was £1.63 and the Share Price was £1.57.
Chair's Report
For the period ended 30 June 2024
Investment Performance
I am pleased to report that during the period from 1 January 2024 to 30 June 2024, WKOF's NAV in pounds Sterling ("GBP") increased by 6.4%, including reinvested dividends, out-performing the reference MSCI South Korea 25/50 Net Total Return Index (the "Korea Index") by 4.6%. Since the admission of WKOF to AIM in May 2013, NAV has increased by 129.1%, including reinvested dividends, compared to the Korea Index returns of 76.4%, a cumulative outperformance of 52.7% since inception.
Dividend
The Directors declared an interim dividend of 5.1851 pence per share on 14 May 2024, equating to a 3.1% net dividend yield over the past 12 months, to distribute the income received by WKOF in respect of the year ended 31 December 2023. This dividend was paid to all Shareholders on 24 June 2024.
Share Buybacks
The Board is also authorised to repurchase up to 40% of WKOF's outstanding Ordinary Shares in issue as of 30 June 2024. To date, WKOF has repurchased 12.6% of Ordinary Shares issued at admission and continues to have the intention to repurchase shares if they trade at a significant discount to NAV in the future. The share price was generally in line with NAV but traded at a slight discount over the period. We will also keep shareholders informed of any share repurchases through public announcements.
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 May 2025.
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 $2.7 billion of WAM's assets under management. Your Board and your Investment Manager continue to review the challenges and opportunities associated with this situation.
Promotion of the Company
Through Singer Capital Markets ("Singers"), the Company continues its established investor relations and marketing outreach to wealth managers, institutions and private clients. With regards to retail shareholders, either direct or through platforms, meaningful engagement continues to prove challenging. Your Board continues to review the Company's ability to grow and attract new shareholders, as well as monitoring how it represents value for money for all shareholders.
Outlook
Whilst WKOF was not immune to the significant market gyrations of recent weeks, the `Corporate Value-Up Programme' in Korea has provided support for WKOF's investment thesis: that improved corporate governance in Korean companies would help close the discount between their preference shares and their ordinary shares. However, the extent to which governance improvements will be adopted by companies and enforced by the government is difficult to gauge currently. As your Investment Manager explains, in the coming weeks and months they should have a better understanding of the extent to which these governance improvements are real and what their impact on WKOF might be, and the Board will keep developments in this regard under review.
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
23 September 2024
Investment Manager's Report
For the period ended 30 June 2024
WKOF Performance Attribution
At the end of June 2024, WKOF held a portfolio of 32 South Korean preference shares. As a reminder, the economic rights of South Korean preference shares are generally the same or slightly better than the corresponding common shares, yet the preference shares often trade at substantial discounts to the common shares. WKOF's returns, on a currency-neutral basis, are driven by five primary factors:
- 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 May 2013 to 30 June 2024.
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 Shares | 5.1% | 5.2% | 72.1% |
WKOF common Shares vs the Korea Index | 0.6% | -8.6% | -32.5% |
Excess Dividend Yield of Preferred Shares Owned | 1.3% | 1.5% | 14.3% |
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 September 2013, shortly after inception, the preference shares held by WKOF traded at a 55.5% discount to their corresponding common shares and the dividend yield was 1.7%. As at 30 June 2024, the discount and dividend yield were 49.9% and 3.1%, respectively. We are focussed on returns since inception because we believe that due to high levels of idiosyncratic volatility, any data that is gathered over a one-year period is unlikely to be a reliable guide for future performance.
Review of the Korean Macro Environment
In May, the OECD increased its projected 2024 GDP growth rate for Korea from 2.2% (as of February) to 2.6%. President Yoon announced a 26 trillion KRW programme to further support the semiconductor industry, which has been a key driver of export growth. The OECD also revised its inflation forecast for Korea, expecting inflation to cool from 5% to under 3% during 2024. Should inflation ease, the Bank of Korea could reduce its policy rate over time which could have a meaningful impact on the Korean consumer, as household debt remains at close to 99% of GDP as of the first quarter of 2024 (the highest of 34 countries listed in a study by the Institute for International Finance). However, the Bank of Korea announced in May it was delaying policy rate cuts due to the more recent weakness of the won relative to the US dollar and the wide interest rate gap between the two countries.
Throughout the first half of 2024, North Korea continued to engage in hostile acts towards South Korea. As previously noted in the 2023 Annual Report, news articles have reported on North Korea's increasingly aggressive actions, including conducting strategic cruise missile tests for "a super-large warhead", as well as launching approximately 1,600 trash-filled balloons toward South Korea, which has recently led to a temporary suspension of international air travel over the Korean peninsula. Foreign policy experts have acknowledged the heightened tension and animosity in the region, even though missile tests, military drills, and rhetorical provocations are "nothing new" in North Korea. Over the years, the patterns for tit-for-tat exchanges between the Koreas have been well documented, and we expect North Korea to continue its current aggressive behaviour and South Korea to respond with its military drills near the border or even threats to develop an indigenous nuclear programme at least until the United States presidential elections later this year. With plentiful reasons for caution, WKOF continues to maintain a higher exposure in Korean sovereign Credit Default Swaps ("CDS") protection compared to prior years.
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 February 2024. We cautiously expressed our optimism that South Korea could gradually improve its corporate governance standards, which could lead to a positive response in the equity market, similar to recent developments in Japan.
Additional information was announced during March 2024, including possible changes to the Stewardship Code for the first time in seven years and the reduction of tax burdens on companies that increase shareholder returns through dividend payments or share buybacks. However, in April, the Democratic Party won a majority of the 300 seats in the National Assembly, the national legislature of South Korea, with a 67% voter turnout, the highest voter turnout in 32 years. As the opposition party, this implies a higher likelihood that future tax cuts on inheritance and corporate income may not pass the legislative body, as the opposition party could perceive these tax cuts as favouring the wealthy, which would be unpopular among their constituents.
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 June 2024. This change in the portfolio was motivated by HMC's discount compression from approximately a 44% to 38% discount during the period, as well as the availability of deeper discounts available in other South Korean preference shares.
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 200 million GBP in the first fiscal quarter of 2024.
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 July 2024.
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 31 December 2017 and in subsequent Annual Reports, the Board approved a hedging strategy intended to reduce exposure to extreme events that would negatively affect Shareholders' Investments in WKOF because of political tensions in Northeast Asia.
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 Korea experienced geopolitical disaster, and do not introduce material new risks into the portfolio. These catastrophe hedges are not expected to make money in most states of the world. We expect that, as with any insurance policy, WKOF's hedges will lose money most of the time.
The table below provides details about the hedges as of 30 June 2024. Note that outside of the general market and portfolio hedges described herein, WKOF has generally not hedged interest rates or currencies.
CDS Notional Amount (GBP) | Cost Paid as a % of Notional Value per Annum (Spread) | Expiration Date |
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 South Korea.
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.
Weiss Asset Management LP
23 September 2024
Statement of Financial Position
As at 30 June 2024
| As at 30 June | As at 31 December | |
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 |
Total assets |
| 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 |
Total liabilities |
| 1,487,996 | 1,965,551 |
Net assets |
| 122,617,033 | 116,849,704 |
Represented by: |
|
|
|
Shareholders' equity and reserves |
|
|
|
Share capital |
| 33,912,856 | 33,912,856 |
Other reserves |
| 88,704,177 | 82,936,848 |
Total Shareholders' equity |
| 122,617,033 | 116,849,704 |
Net Assets Value per Ordinary Share |
| 1.7702 | 1.6870 |
The Financial Statements were approved and authorised for issue by the Board of Directors on 23 September 2024.
Krishna Shanmuganathan Gill Morris
Chair Audit and Risk Committee Chair
Statement of Comprehensive Income
For the period ended 30 June 2024
|
|
| For the period ended 30 June 2024 (Unaudited) £ | For the period ended 30 June 2023 (Unaudited) £ |
Income |
|
|
|
|
Net changes in fair value of financial assets at fair value through profit or loss |
|
| 8,955,523 | (1,851,203) |
Net changes in fair value of derivative financial instruments through profit or loss |
|
| 334,628 | 36,181 |
Net foreign currency losses |
|
| (317,329) | (486,385) |
Dividend income |
|
| 2,945,724 | 392,104 |
Bank interest income |
|
| 2,788 | 9,801 |
Total income/(loss) |
|
| 11,921,334 | (1,899,502) |
Expenses |
|
|
|
|
Operating expenses |
|
| (1,915,084) | (1,947,468) |
Total operating expenses |
|
| (1,915,084) | (1,947,468) |
Profit/(loss) for the period before dividend withholding tax |
|
|
10,006,250 |
(3,846,970) |
Dividend withholding tax |
|
| (647,437) | (86,263) |
Profit/(loss) for the period after dividend withholding tax |
|
| 9,358,813 | (3,933,233) |
Profit/(loss) and total comprehensive income/(loss) for |
|
|
|
|
the period |
|
| 9,358,813 | (3,933,233) |
Basic and diluted earnings/(loss) per Share |
|
| 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 30 June 2024
For the period ended 30 June 2024 (Unaudited) |
| Share capital £ | Other reserves £ |
Total £ |
Balance as at 1 January 2024 |
| 33,912,856 | 82,936,848 | 116,849,704 |
Total comprehensive income for the period |
| - | 9,358,813 | 9,358,813 |
Transactions with Shareholders, recorded directly in equity Distributions paid |
|
- |
(3,591,484) |
(3,591,484) |
Balance as at 30 June 2024 |
| 33,912,856 | 88,704,177 | 122,617,033 |
|
|
Share capital |
Other reserves |
Total |
For the period ended 30 June 2023 (Unaudited) |
| £ | £ | £ |
|
|
|
|
|
Balance as at 1 January 2023 |
| 33,986,846 | 93,093,647 | 127,080,493 |
Total comprehensive loss for the period |
| - | (3,933,233) | (3,933,233) |
Transactions with Shareholders, recorded directly in equity Purchase of Realisation Shares |
|
(73,990) |
- |
(73,990) |
Distributions paid |
| - | (3,709,107) | (3,709,107) |
Balance as at 30 June 2023 |
| 33,912,856 | 85,451,307 | 119,364,163 |
Statement of Cash Flows
For the period ended 30 June 2024
| For the period | For the period | |
ended 30 June 2024 | ended 30 June 2023 | ||
(Unaudited) | (Unaudited) | ||
|
| £ | £ |
Cash flows from operating activities |
|
|
|
Profit/(loss) and total comprehensive income/(loss) for the period |
| 9,358,813 | (3,933,233) |
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 Net change in fair value of derivative financial instruments held |
| 557,166 | 1,147,298 |
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 withholding tax |
| 172,882 | 92,894 |
Dividend income |
| (2,298,287) | (305,841) |
Dividend received |
| 3,358,429 | 3,626,410 |
Purchase of financial assets at fair value through profit or loss |
| (39,218,509) | (9,766,020) |
Proceeds from the sale of financial assets at fair value through |
|
|
|
profit or loss |
| 40,041,173 | 10,921,807 |
Net cash generated from operating activities |
| 2,667,922 | 3,579,893 |
Cash flows from investing activities |
|
|
|
Opening of derivative financial instruments |
| 87 | 20 |
Closure of derivative financial instruments |
| (141) | - |
(Increase)/decrease in margin account |
| (27,001) | 1,014,745 |
Net cash (used in)/generated from investing activities |
| (27,055) | 1,014,765 |
Cash flows from financing activities |
|
|
|
Repurchase of realisation Shares |
| - | (73,990) |
Distributions paid |
| (3,591,484) | (3,709,107) |
Net cash used in financing activities |
| (3,591,484) | (3,783,097) |
Net (decrease)/ increase in cash and cash equivalents |
|
(950,617) |
811,561 |
Exchange losses on cash and cash equivalents |
| (557,166) | (1,147,298) |
Cash and cash equivalents at the beginning of the period |
| 3,364,287 | 2,890,620 |
Cash and cash equivalents at the end of the period |
| 1,856,504 | 2,554,883 |
For further information, please contact:
Singer Capital Markets Limited James Maxwell/ James Fischer - Nominated Adviser James Waterlow - Sales
|
+44 20 7496 3000 |
Northern Trust International Fund Administration Services (Guernsey) Limited Company secretary |
+44 1481 745001 |