Fidelity Emerging - Half-year Report
14/03/2023 07:00
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RNS Number : 8174S Fidelity Emerging Markets Limited 13 March 2023
Fidelity Emerging Markets Limited (the 'Company or 'FEML')
Legal Entity Identifier: 213800HWWQPUJ4K1GS84
Half Year Report and Unaudited Financial Statements for the six months ended
31 December 2022
Total Return in GBP for the six months to 31 December 2022
Net Asset Value per
Share Price Participating Preference Share
Total Return(1,2) Total Return(1,2)
( )
-2.9% -3.2%
MSCI Emerging
Markets Index(1,3) Active Share(2)
-2.1% 119.8%
Source: Fidelity
1 Includes reinvested income.
2 Alternative Performance Measure
3 The Company's Benchmark Index
As at 31 December 2022
Equity Shareholder's Funds £623.1m
Market Capitalisation £548.4m
Capital Structure
Number of Participating Preference Shares in Issue 91,100,066
Summary of the key aspects of the Investment Policy
The Company aims to achieve long term growth by primarily investing in
securities and financial instruments providing exposure to emerging markets
companies.
The Investment Manager invests at least 80% in companies with head offices,
listings, assets, operations, income, or revenues predominantly in or derived
from emerging markets.
A diversified portfolio of at least 75 holdings in companies listed or
operating in at least 15 countries is maintained.
The Company may also invest into other transferable securities, investment
companies, money market instruments, unlisted shares, cash and deposits. It is
able to use derivatives for efficient portfolio management, to gain additional
market exposure (gearing), to seek a positive return from falling asset
prices, and for other investment purposes.
Financial Performance
31 December 30 June
Assets 2022 2022
USD
Gross Asset Exposure(1) $1,115.5m $1,120.1m
Equity Shareholders' Funds $749.5m $796.8m
NAV per Participating Preference Share(2) $8.23 $8.75
Gross Gearing(2,3) 48.8% 40.6%
Net Gearing(2,4) (1.0%) (7.6%)
GBP
Gross Asset Exposure(1,5) £927.3m £922.2m
Equity Shareholders' Funds(5) £623.1m £656.0m
NAV per Participating Preference Share(2,5) £6.84 £7.20
Participating Preference Share Price and Discount Data
Participating Preference Share Price at the period end £6.02 £6.34
Discount to NAV per Participating Preference Share at period end(2) 11.99% 12.00%
Number of Participating Preference Shares in issue 91,100,066 91,100,066
Results for the six months ended 31 December 2022 2021
Revenue Earnings per Participating Preference Share(6) $0.09 $0.02
Capital (Loss)/Earnings per Participating Preference Share(6) ($0.45) ($1.49)
Total (Loss)/Earnings per Participating Preference Share(6) ($0.36) ($1.47)
Ongoing charges ratio(2) 0.84% 0.49%
1 The value of the portfolio exposed to market price movements.
2 Alternative Performance Measure.
3 Gross Asset Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.
4 Net Market Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.
5 The Conversion from USD to GBP is based on exchange rates prevailing at the reporting dates.
6 Calculated based on weighted average number of participating preference shares in issue during the period.
Chairman's Statement
I present to the shareholders the Half Year Report of the Company for the six
months ended 31 December 2022.
I present my first report as Chair of Fidelity Emerging Markets Limited. As an
experienced Chief Investment Officer and career investor in Asia and Emerging
Markets, I look forward to working with my colleagues on the Board of the
Company and the investment teams at Fidelity to deliver strong results for
you, our shareholders. I would like to express my deep thanks to Hélène
Ploix, the outgoing Chairman for her commitment, energy, and wisdom over many
years and to the outgoing Director Sujit Banerji, also, for his long
dedication to the Company and its shareholders.
Overview
Amid slowing growth, rising global inflation, geopolitical tensions and a
market driven by sentiment rather than fundamentals, the environment in which
our portfolio managers, Nick Price and Chris Tennant, operated in the period
under review remained testing. At an especially difficult time for emerging
market equities, the portfolio faced a challenging year and lagged the index
in the fourth quarter of 2022. Russian assets remain within the portfolio.
However, sanctions on such assets remain in force making them untradeable and,
as such, written down to zero.
During the six-month period to the end of 31 December 2022 the net asset value
("NAV") total return of the Company fell by 3.2% (in GBP terms) and the share
price by 2.9%, compared with a 2.1% decline for the benchmark index (all
figures stated on a total returns basis). Weakness in Chinese material
companies amid property sector challenges, was the primary cause for the lag.
The discount saw some volatility. It stood at 12.0% at the end of June and
widened for much of the period under review, before narrowing in December and
ending the year also at 12.0%.
While this is disappointing in the near-term, our longer-term prospects remain
compelling. Viewed in aggregate, the long book exhibits particularly
attractive, high-quality characteristics, comprising of companies with well
above average returns on assets and strong balance sheets. Periods of
underperformance are inevitable in almost any investment strategy and a
committed and disciplined focus on a strong process - one which has proven
itself at Fidelity over a multi-year period - remains critical for future
success. In an environment where recessionary risks are front of mind, the
prudent approach of our managers is reassuring, as is their acknowledgement of
the importance of value in the prevailing environment of uncertainty. The
ability to short, too, is a helpful lever. The investment team's successful
analysis of a weakening consumer environment and thus reduced demand in the
Apple supply chain is just one successful example.
After many months of travel restrictions, fellow Board members and I had the
privilege of travelling to Singapore and Indonesia in September 2022 to visit
Fidelity's office as part of our due diligence visit. We met with investment
risk specialists, ESG professionals and senior management within the
investment team in Asia to discuss how equity analysts are best placed to
deliver alpha for your Company's portfolio. We gained tremendous insight by
accompanying senior analysts, alongside Nick Price, to observe Fidelity's
powerful corporate access and thorough research process, meeting with Sea Ltd
and GoTo in Singapore. We also saw how far Fidelity's research capabilities
extend and their deep penetration in markets by meeting Bank Rakyat Indonesia,
Bank Central Asia and Unilever Indonesia, as well as some less well known but
very interesting opportunities in Jakarta. The prospects in Indonesia are an
exciting and differentiated way to diversify the portfolio. The Board and I
were impressed with Fidelity's bottom-up stock picking approach. To read the
latest investment thinking of the team, please refer to the website
fidelity.co.uk/emergingmarkets.
2022 AGM and Final Dividend
The Company held its Annual General Meeting ('AGM') on 8 December 2022, and I
appreciate the shareholders' support and thank you for your approval of all
resolutions presented at the meeting. A final dividend of $0.16 per
Participating Preference Share was approved by shareholders and paid on 16
December 2022.
Changes to the Board of Directors
In the period under review, we welcomed Julian Healy to the Board after Sujit
Banerji and Hélène Ploix stepped down at the AGM on 8 December 2022.
Outlook
Coming to the portfolio with 'fresh eyes' it is clear there are considerable
opportunities and potential upside in the companies we hold and, in the months
and years ahead we will be engaging closely with our investment managers to
strive to deliver excellent results for you, our shareholders. We, and they,
will also be closely monitoring the progress, and most importantly risk
management, of geopolitical events. Consequently, country positioning and
diversification will be core to future positioning. Against a backdrop of the
recent and global large-scale stock deratings and volatility, the portfolio
managers are looking to capitalise the underlying inherent value in the
portfolio going forward. Despite global gloom, there is much at a local level
to be encouraged by, not least China's reopening post - Covid and new
supportive policies there around property. This combined with now falling
inflation and the pullback in the US dollar, should prove a supportive
environment in the coming months.
I look forward to reporting on our progress.
Heather Manners
Chairman
13 March 2023
Investment Manager's Half Year Review
Macroeconomic review
During the second half of 2022, oscillating sentiment continued to act as the
main determinant of market direction. The decline in emerging market stocks
over the period was concentrated in Q3, when the index fell by 3.8%, before
rallying by 1.8% (in GBP terms) in the final quarter.
The Q3 decline marked the sharpest fall in emerging markets since the pandemic
outbreak in the first quarter of 2020. Consecutive interest rate hikes from
the Federal Reserve rattled nerves and triggered a particularly severe
sell-off in September. Emerging market central banks also continued to
tighten.
Unsurprisingly given volatile conditions, there were significant differences
in regional performance over the second half of the year. Latin America led
the gains, supported by its strength during the first part of the period,
although the region's equities lost their shine in Q4. Emerging Europe, the
Middle East and Africa (EMEA) equities made some gains towards the end of the
period, but performance was lacklustre over the six-month period, while
emerging Asian equities performed broadly in line with the broader benchmark.
Increased optimism following China's National Congress, and signs that Beijing
would start to rein back regulation on a beleaguered internet sector brought
further relief. This, coupled with supportive property policies and
indications that China's zero-Covid policy was coming to an end, resulted in
emerging market equities outperforming their developed market counterparts
over the year's final quarter. Value stocks fared marginally better than their
growth counterparts over the period.
Portfolio performance for the six months to 31 December 2022
Over the six-month period ending 31 December 2022, the net asset value ("NAV")
total return of Fidelity Emerging Markets Limited fell by 3.2% (in GBP terms)
and the share price declined by 2.9%, compared with a 2.1% decline for the
benchmark index (all figures are stated on a total return basis).
When sentiment, rather than fundamentals, influences the market in the
short-term this is a challenging backdrop for stock pickers. The portfolio
underperformed the benchmark index, largely due to weakness in Chinese
material names. As a counter to this, the financials holdings in the portfolio
added considerable value over the period, as did stock picking in Kazakhstan,
South Africa, and India.
Financials positions drive gains in a rising rate environment
With central bank policy front and centre across the developed and emerging
world, exposure to a series of banks across all regions made a meaningful
contribution to portfolio performance.
The most significant contribution came from Kaspi, the dominant consumer
finance, e-commerce, and payments platform in Kazakhstan. Strong earnings also
drove significant gains for this highly innovative company, which has
transformed from a traditional universal bank to an app for personal lending,
credit cards, bill payments, P2P payments, e-commerce, and retail deposits.
India's HDFC Bank also rose after it grew its net interest income at the
fastest pace in nine years, and at levels that were much higher than market
expectations. Higher rates also provided a tailwind for Brazil's Bradesco,
although ultimately, we decided to sell out of the stock, as we saw a
deterioration in net interest income and the cost of risk as the period
progressed.
Key Contributors
Average Contribution
Active Weight (%) to Relative Returns (%)
Order Security
Top 5 Contributors
1 Kaspi.KZ 4.39 +2.04
2 HDFC Bank 7.38 +1.27
3 Banco Bradesco 1.13 +0.74
4 Cielo SA 1.09 +0.64
5 TotalEnergies 2.64 +0.47
Total +5.16
Key Detractors
Average Contribution
Active Weight (%) to Relative Returns (%)
Order Security
Bottom 5 Detractors
1 Beijing Oriental 1.22 -1.19
2 Daqo New Energy 1.00 -0.65
3 Itaú Unibanco 0.26 -0.60
4 Zhongsheng Group Holdings 1.49 -0.58
5 Kweichow Moutai 2.01 -0.52
Total -3.54
Source: Fidelity International, as at 31 December 2022. Based on actual
attribution. Attribution is gross of fees and exclude expenses. Holdings in
different securities issued by the same company are aggregated, therefore
country/region classification is according to that of the main issuer.
High oil prices boost energy holdings
Our holdings in energy stocks reaped benefits over the period as oil prices
remained elevated, with oil major TotalEnergies adding value after it reported
stellar results. The fourth largest global oil major, the company has a
low-cost upstream portfolio with volumes tilted to conventional on and
offshore oil in the likes of west Africa and the Middle East. A smaller
position in an Austrian-listed oil and gas company OMV also contributed to
returns after it announced strong results and a change in its long-standing
progressive dividend policy. It trades at attractive valuations and offers
healthy free cash flow and compelling shareholder returns.
Commodity producers deliver strong returns
The period was mixed for the portfolio's materials holdings, as a strong
contribution from commodity producers was counterbalanced by weakness from
Chinese building related names. Companies such as Adriatic Metals and Southern
Copper were among the top contributors to relative returns as copper prices
were relatively stable over the six months. Adriatic Metals is a UK-listed
company with a world-class zinc development project in Bosnia and a strong
pipeline of growth opportunities, with the company gaining over the review
period after it announced strong exploration results.
A volatile period for Chinese stocks
Property sector woes weighed on Chinese materials companies early in the
period, and although the People's Bank of China cut mortgage rates to invite
more real estate investment, Beijing's initial hesitance to scale back its
zero-Covid policy had an impact on many companies in the sector. Beijing
Oriental Yuhong Waterproofing, China Overseas Land and Zhejiang Weixing (which
we later sold out of) all detracted.
Online travel agent Trip.com and e-commerce group Pinduoduo were among the top
contributors over the period. South Africa's Naspers, which holds a key stake
in Chinese social media giant Tencent, also added notable value. Finally, the
decision to add exposure to the Chinese market swiftly, via a long position on
the Hang Seng Index, added value.
Mid-cap companies drive returns
One of the key benefits of the portfolio is the ability to invest in companies
further down the market cap spectrum. Among these we witnessed a strong
contribution from names such as Brazilian IT services company Cielo. Cielo
revealed that quarterly earnings had tripled due to better volumes and a
favourable pricing environment during the period. TBC Bank, the largest
banking group in Georgia, also rose as it benefited from a higher
interest-rate environment.
Portfolio positioning as of 31 December 2022
We continue to focus on owning well capitalised businesses with under-levered
balance sheets. However, we have acknowledged the importance of value in the
current environment and have taken steps to capitalise on this, while
remaining cognisant of the continued macroeconomic uncertainty.
Balance sheets are liquid and solvent across all portfolio holdings, while
also looking for value - shorter duration and compelling dividends - we do so
on a highly selective basis. Areas such as banking, and energy have offered up
attractive opportunities. The search for value does not compromise on quality,
and attributes such as high ROE businesses remain prevalent among these
additional holdings.
We have also been adding breadth and have focused on ensuring we don't become
too fixated on the macroeconomic environment, given how unpredictable
conditions are. Country diversification has therefore been a focal point.
Regional positioning
Over the second half of 2022, our positioning in China shifted in response to
the rapidly changing policy landscape. While exposure was initially reduced
over the course of Q3, as visibility started to improve and policy eased
following the National Congress in October, we started to add to China, and
continued to do so after it became clear that the country was abandoning its
zero- Covid policy. Elsewhere in the emerging Asia region we raised exposure
to Indonesia following a September trip, together with the board. Here, our
research on the ground gave rise to greater conviction in select consumer
facing businesses and the banking sector.
We trimmed exposure to Latin America; the primary drivers here were a
deterioration in the loan books of the banks and the completion of the
election cycle with the re-election of Brazil's President Lula in October.
With a clear move to the left across the region, we think it is important to
be vigilant about the risks that populist policies can pose to corporate
activity. We have added shorts in Brazilian retailers, as more public spending
and more debt could result in higher rates for longer.
We continue to see opportunities in other areas of the market, including
India, which we believe remains a great structural growth story. Our exposure
is centred on financial holdings; HDFC Bank is a very high-quality bank that
has been held in the strategy for close to a decade, as well as newer
additions such as ICICI Bank, the largest private sector bank in India that
has significantly strengthened its balance sheet in recent years.
Sector positioning
Financials remain our largest sector overweight. A more hawkish European
Central Bank has given rise to new opportunities among financial institutions
with operations in Central Eastern Europe (CEE), with examples such as Erste
Group, an Austrian bank. Overall, we are confident that financials have the
potential to be advantaged in the current environment, given their cheap
valuations and decent dividend yield. While we are nearer to the end of the
rate-rising cycle than the beginning, rates are likely to remain higher than
the preceding five years.
In energy, there are limited stocks in emerging markets that offer broad
energy price exposure but that are not expensive or carry policy risk. As a
result, we own French oil major TotalEnergies and initiated a new position in
Austrian oil and gas company OMV.
Market outlook
A recession is largely priced in
Inflation, geopolitical tensions and slowing growth all wreaked havoc on
markets throughout 2022, and investors continue to grapple with recessionary
risks. Earnings downgrades in certain industries will come, and some companies
will be particularly vulnerable. However, it's easy to become fixated on the
past and forget that the market is a forward discounting mechanism. We think a
lot is already reflected in the price given that the emerging market asset
class has derated significantly.
Inflation should ease in the near term but longer term the outlook is less
clear cut
Although markets have been buffeted by highly unusual levels of inflation over
the past year, and inflation figures have been stickier than anticipated, we
expect inflation to fall, driven by a sharp decline in M2 money supply,
restrictive monetary policies, and high levels of inventories. This should
provide a better backdrop for equities in the near term.
We should, however, acknowledge that the price trajectory of key commodities
is very hard to predict. There is currently a lot of uncertainty about the
direction of oil prices, which could range from $50 to $130 a barrel in 2023
and will have very different outcomes for the level of inflation and the
direction of markets.
We are mindful that inflationary pressures can reignite over the medium term,
driven by China's economic reopening and the resumption of exports, as well as
the inability of central banks to live with higher rates. Deglobalisation,
ageing populations and shrinking workforces should also prove inflationary
over the longer term, as will the shift to green energy and the impact of
climate change in agriculture, soft commodities, and supply chain security.
China's reopening and accommodative policy set to buoy markets
We are currently seeing a considerably more accommodative backdrop and Chinese
policy is expected to remain supportive throughout 2023. A rollback of
regulation on internet companies follows an extended period of tightening.
Policy loosening can be seen in the property market, evidenced by increasing
provisions and more local relaxations, including looser purchase restrictions
and lower down payments introduced in high-tier cities. With the relaxation of
China's zero-Covid policy and domestic mobility recovering, there appears to
be ample room for a consumer recovery, with excess household savings and cheap
mortgages offering additional fuel as China reopens.
Over the next year, market participants will need to be vigilant and judge how
the situation is evolving, given that China plays a central role in driving
sentiment towards the emerging market asset class and its influence on
returns.
Looking ahead
Although as a risk asset, emerging market equities could come under pressure
in a recessionary environment, we have witnessed bouts of dollar weakening in
recent months which lends support to the asset class and should mitigate this
to some extent.
With the emergence of more pronounced country risks, we have spent more time
examining exogenous threats - and will continue to do so this year.
Deglobalisation and geopolitics have a more profound impact, in some cases
impairing the corporate activity or weighing heavily on sentiment.
We've remained focused on what we do best, and we've been active in
repositioning and diversifying the portfolio as the period unfolded. Exposures
to banks across all regions is an area which has worked well against a
backdrop of synchronised rate hikes, as has the move to increase exposure to
China as the country eases policies and regulatory pressure on key sectors.
We are in a secular bear market, and our focus is on trying to ensure that we
buy the dips and sell the rallies. However, we see scope for the rest of the
world to outperform the US, where net profit margins have been at record
levels (and will revert), valuations are extended, and high sovereign debt
levels will serve to constrain growth and hamper the ability to fight
inflation. By contrast EM benefits from low valuation multiples by any
standard.
The market will gradually accept that the age of free money is over, and while
this volatility persists, we will continue to cast the net wide and look for
opportunities in areas of the market that offer up quality at an attractive
price.
Nick Price
Portfolio Manager
13 March 2023
Twenty Largest Investments
as at 31 December 2022
The Asset Exposures shown below measure the exposure of the Company's
portfolio to market price movements in the shares and equity linked notes
owned or in the shares underlying the derivative instruments. The Fair Value
is the value the portfolio could be sold for and is the value shown on the
Statement of Financial Position. Where a contract for difference ("CFD") is
held, the fair value reflects the profit or loss on the contract since it was
opened and is based on how much the price of the underlying shares has moved.
Fair
Asset Exposure value
$'000 %(1) $'000
Long Exposures - shares unless otherwise stated
Taiwan Semiconductor Manufacturing (shares and option)
Information Technology 113,968 10.0 113,968
HDFC Bank
Financials 96,775 8.5 46,176
Kaspi.KZ
Financials 67,818 6.0 67,818
AIA Group (shares and long CFD)
Financials 64,653 5.7 46,077
Naspers
Consumer Discretionary 63,573 5.6 63,573
Alibaba Group Holding (shares, option and long CFD)
Consumer Discretionary 52,923 4.7 (1,078)
China Mengniu Dairy (long CFD)
Consumer Staples 46,387 4.1 46,387
TotalEnergies (long CFD)
Energy 46,323 4.1 46,323
Infosys (long CFD)
Information Technology 43,841 3.9 39,951
ICICI Bank
Financials 41,527 3.7 1,280
Southern Copper (long CFD)
Materials 36,127 3.2 (1,953)
MediaTek
Information Technology 34,848 3.1 34,848
Chailease Holding
Financials 34,257 3.0 34,257
Li Ning (shares and option)
Consumer Discretionary 30,620 2.7 30,620
Samsung Electronics (shares and long CFD)
Information Technology 17,712 2.4 16,272
OMV
Energy 17,562 2.3 17,562
Localiza Rent a Car
Industrials 17,543 2.3 17,543
Bank Central Asia
Financials 17,061 2.3 17,061
Trip.com Group (option and long CFD)
Consumer Discretionary 16,555 2.2 481
SK Hynix (shares, option and long CFD)
Information Technology 16,539 2.1 671
Twenty largest long exposures 546,079 72.9 353,244
Other long exposures 451,601 60.3 363,390
Total long exposures before long futures and hedges 997,680 133.2 716,634
Add: long futures
Hang Seng China Enterprises Index 46,597 6.2 19
Less: hedging exposures
MSCI Emerging Markets Index (future) (115,416) (15.5) 963
Total hedging exposures (115,416) (15.5) 963
Total long exposures after the netting of hedges 928,861 123.9 717,616
Short exposures
Short CFDs (66 holdings) 183,908 24.5 (154)
Short options (6 holdings) 2,696 0.4 (206)
Total short exposures 186,604 24.9 (360)
Gross Asset Exposure2 1,115,465 148.8
Portfolio Fair Value3 717,256
Net current assets (excluding derivative assets and liabilities) 32,260
Total Shareholders' Funds/Net Assets 749,516
1 Asset Exposure is expressed as a percentage of net assets.
2 Asset Exposure comprises market exposure to investments of $720,229,000 plus
market exposure to derivative instruments of $395,236,000.
3 Portfolio Fair Value comprises investments of $720,229,000 plus derivative
assets of $10,736,000 less derivative liabilities of $13,709,000 (per the
Statement of Financial Position).
Interim Management Report
Principal and Emerging Risks and Uncertainties, Risk Management
In accordance with the AIC Code, the Board has in place a robust process for
identifying, evaluating and managing the principal risks and uncertainties
faced by the Company, including those that could threaten its business model,
future performance, solvency or liquidity. The Board, with the assistance of
the Alternative Investment Fund Manager, has developed a list of risks which,
as part of the risk management and internal controls process, identifies the
key existing and emerging risks and uncertainties faced by the Company. The
list of risks includes: volatility of emerging markets and market risk;
investment performance risk; cybercrime and information security risk;
business continuity and event management risk; gearing risk; discount to net
asset value (NAV) risk; unlisted securities risk; foreign currency exposure
risk; lack of market liquidity risk; environmental, social and governance
(ESG) risk and people risk. Full details of these risks and how they are
managed are set out on pages 25 to 27 of the Company's Annual Report for the
year ended 30 June 2022 which is available on the Company's website at
www.fidelity.co.uk/emergingmarkets. The Audit and Risk Committee continues to
identify new emerging risks and take any necessary action to mitigate their
potential impact. The risks identified are placed on the Company's risk matrix
and graded appropriately. This process, together with the policies and
procedures for the mitigation of existing and emerging risks, is updated and
reviewed regularly in the form of comprehensive reports considered by the
Audit and Risk Committee. The Board determines the nature and extent of any
risks it is willing to take in order to achieve its strategic objectives.
Key emerging issues that the Board has identified include; rising geopolitical
tensions, including contagion of the Ukraine crisis or tensions between China
and Taiwan into the wider region; rising inflation and the so-called cost of
living crisis impacting demand for UK‑listed shares; and climate change,
which is one of the most critical emerging issues confronting asset managers
and their investors. Macro and ESG considerations, including climate change
have been included into the Company's investment process. The Board continues
to monitor these issues.
The Board seeks to ensure high standards of business conduct are adhered to by
all of the Company's service providers and that agreed service levels are met.
The Board is responsible for promoting the long-term success of the Company
for the benefit of all stakeholders and in particular its shareholders.
Although the majority of the day-to-day activities of the Company are
delegated to the Manager, the Investment Manager, and other third-party
service providers, the responsibilities of the Board are set out in the
schedule of matters reserved for the Board and the relevant terms of reference
of its committees, all of which are reviewed regularly by the Board.
Related Party Transactions
During the period under review, there were no transactions with related
parties which materially affected the financial position or performance of the
Company. Details of related party transactions are contained in the Company's
Annual Report for the year ended 30 June 2022, which should be read in
conjunction with this Half Year Report. Details of the current related parties
are given in Note 12 below.
Going Concern
In accordance with provision 35 of the 2019 AIC Code of Corporate Governance,
the Directors have assessed the prospects of the Company over a longer period
than the twelve month period required by the "Going Concern" basis. The
Company is an investment fund with the objective of achieving long-term
capital growth by investing in emerging markets. The Board considers long-term
to be at least five years, and accordingly, the Directors believe that five
years is an appropriate investment horizon to assess the viability of the
Company, although the life of the Company is not intended to be limited to
this or any other period.
The Directors have considered the Company's investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. In preparing the Financial Statements, the Directors have
measured the impacts of the war in Ukraine and how the conflict has increased
the risk for business continuity as well as the impact of climate change
risks. The Board has considered the impact of regulatory changes and how this
may affect the Company.
The Board has also assessed the ongoing risks posed on the Company by Covid-19
such as liquidity risks to markets, risks associated with the maintenance of
the current dividend policy and business continuity risks for the Company's
key service providers. The Board continues to review emerging risks that could
have a potential impact on the operational capability of the Investment
Manager and the Company's other key service providers. During the year under
review, the Board received updates from Fidelity and other key service
providers confirming that they continued to service the Company in line with
service level agreements and have suitable arrangements in place to ensure
that they can continue to provide their services to the Company during the
ongoing pandemic.
The Directors, having considered the liquidity of the Company's portfolio of
investments (being mainly securities which are readily realisable) and the
projected income and expenditure, are satisfied that the Company is
financially sound and has adequate resources to meet all of its liabilities
and ongoing expenses and can continue in operational existence for a period of
at least twelve months from the date of this Half Year Report.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
Responsibility Statement
In accordance with Chapter 4 of the Disclosure Guidance and Transparency
Rules, the Directors confirm that to the best of their knowledge:
The condensed set of financial statements contained within the Half Year
Report has been prepared in accordance with IAS 34 'Interim Financial
Reporting' and gives a true and fair view of the assets, liabilities,
financial position and return of the Company.
The Half Year Report includes a fair review of the development and performance
of the Company and important events that have occurred during the first six
months of the financial year and their impact on the condensed financial
statements.
The Half Year Report includes a description of the principal risk and
uncertainties for the remaining six months of the financial year.
The Half Year Report includes a fair review of the information concerning
related party transactions.
The Half Year Report has not been audited or reviewed by the Company's
Independent Auditor.
For and on behalf of the Board
Heather Manners
Chairman
13 March 2023
Statement of Financial Position
as at 31 December 2022
31 December 30 June 31 December
2022 2022 2021
unaudited audited unaudited
$'000 $'000 $'000
Non-current assets
Financial assets at fair value through profit and loss 720,229 727,342 1,108,992
Current Assets
Derivative assets 10,736 20,515 7,668
Amounts held at futures clearing houses and brokers 23,308 11,901 17,651
Other receivables 2,697 30,419 2,265
Cash at bank 14,277 34,418 22,435
51,081 97,253 50,019
Current Liabilities
Derivative liabilities 13,709 14,408 16,241
Other payables 8,022 13,426 8,742
21,731 27,834 24,983
Net current assets 29,287 69,419 25,036
Net assets 749,516 796,761 1,134,028
Equity
Share premium account 6,291 6,291 6,291
Capital reserve 700,482 741,095 1,091,257
Revenue account 42,743 49,375 36,480
Total equity 749,516 796,761 1,134,028
Net Asset Value per Participating Preference Share $8.23 $8.75 $12.45
Statement of Comprehensive Income
for the six months ended 31 December 2022
Six months ended 31 December 2022
unaudited
Revenue Capital Total
$'000 $'000 $'000
Net losses on financial assets at fair value through
profit or loss
- (1,235) (1,235)
Net (losses)/gains on derivative instruments - (34,477) (34,477)
Net foreign exchange losses - (686) (686)
Investment Income 8,476 - 8,476
Derivative Income 7,653 - 7,653
Other Income 344 - 344
Total income and losses 16,473 (36,398) (19,925)
Expenses
Management fees (452) (1,810) (2,262)
Other expenses (910) (1,608) (2,518)
Total operating expenses (1,362) (3,418) (4,780)
Profit/(loss) before finance costs and taxation 15,111 (39,816) (24,705)
Finance costs (6,443) - (6,443)
Profit/(loss) before taxation 8,668 (39,816) (31,148)
Taxation (724) (797) (1,521)
Profit/(loss) after taxation for the period
attributable to Participating Preference Shares
7,944 (40,613) (32,669)
Earnings/(loss) per Participating
Preference Share (basic and diluted)
$0.09 ($0.45) ($0.36)
The total column of this statement represents the Company's Statement of Other
Comprehensive Income prepared in accordance with IFRS. The supplementary
information on the allocation between the revenue account and the capital
reserve is presented under guidance published by the AIC.
The Company does not have any other comprehensive income. Accordingly, the
profit/(loss) after taxation for the period is also the total comprehensive
income for the period.
All the profit/(loss) and total comprehensive income is attributable to the
equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the period and all items in the
above statement derive from continuing operations.
Statement of Comprehensive Income (continued)
for the six months ended 31 December 2022
Year ended 30 June 2022
audited
Revenue Capital Total
$'000 $'000 $'000
Net losses on financial assets at fair value through
profit or loss
- (529,993) (529,993)
Net (losses)/gains on derivative instruments - 23,229 23,229
Net foreign exchange losses - (2,707) (2,707)
Investment Income 24,399 - 24,399
Derivative Income 10,849 - 10,849
Other Income 137 - 137
Total income and losses 35,385 (509,471) (474,086)
Expenses
Management fees (927) (3,709) (4,636)
Other expenses (2,451) (6,357) (8,808)
Total operating expenses (3,378) (10,066) (13,444)
Profit/(loss) before finance costs and taxation 32,007 (519,537) (487,530)
Finance costs (13,946) - (13,946)
Profit/(loss) before taxation 18,061 (519,537) (501,476)
Taxation (2,954) 6,948 3,994
Profit/(loss) after taxation for the period
attributable to Participating Preference Shares
15,107 (512,589) (497,482)
Earnings/(loss) per Participating
Preference Share (basic and diluted)
$0.15 ($5.11) ($4.96)
.
Statement of Comprehensive Income (continued)
for the six months ended 31 December 2022
Six months ended 31 December 2021
unaudited
Revenue Capital Total
$'000 $'000 $'000
Net losses on financial assets at fair value through
profit or loss
- (182,894) (182,894)
Net (losses)/gains on derivative instruments - 24,121 24,121
Net foreign exchange losses - (2,478) (2,478)
Investment Income 12,283 - 12,283
Derivative Income 1,366 - 1,366
Other Income 118 - 118
Total income and losses 13,767 (161,251) (147,484)
Expenses
Management fees (927) (3,709) (4,636)
Other expenses (1,170) (5,155) (6,325)
Total operating expenses 2,097) (8,864) (10,961)
Profit/(loss) before finance costs and taxation 11,670 (170,115) (158,445)
Finance costs (7,901) - (7,901)
Profit/(loss) before taxation 3,769 (170,115) (166,346)
Taxation (1,557) 7,688 6,131
Profit/(loss) after taxation for the period
attributable to Participating Preference Shares 2,212 (162,427) (160,215)
Earnings/(loss) per Participating
Preference Share (basic and diluted) $0.02 ($1.49) ($1.47)
Statement of Changes in Equity
for the six months ended 31 December 2022
Share
premium Capital Revenue Total
account reserve reserve equity
$'000 $'000 $'000 $'000
Six months ended 31 December 2022
(unaudited)
Total equity at 30 June 2022 6,291 741,095 49,375 796,761
(Loss)/profit after taxation for the period - (40,613) 7,944 (32,669)
Dividend paid to shareholders - - (14,576) (14,576)
Total equity as at 31 December 2022 6,291 700,482 42,743 749,516
Year ended 30 June 2022 (audited)
Total equity at 30 June 2020 6,291 1,642,118 50,666 1,699,075
(Loss)/profit after taxation for the year - (512,589) 15,107 (497,482)
Write off receivables for shares - (134) - (134)
Repurchase and cancellation of the
Company's own shares
- (388,300) - (388,300)
Dividend paid to shareholders - - (16,398) (16,398)
Total equity at 30 June 2022 6,291 741,095 49,375 796,761
Six months ended 31 December 2021
((unaudited)
Total equity at 30 June 2021 6,291 1,642,118 50,666 1,699,075
(Loss)/profit after taxation for the year - (162,427) 2,212 (160,215)
Write off receivables for shares - (134) - (134)
Repurchase and cancellation of the
Company's own shares
- (388,300) - (388,300)
Dividend paid to shareholders - - (16,398) (16,398)
Total equity at 31 December 2021 6,291 1,091,257 36,480 1,134,028
Statement of Cash Flows
for the six months ended 31 December 2022
Six months Year Six months
ended ended ended
31 December 31 June 31 December
2022 2022 2021
unaudited unaudited unaudited
$'000 $'000 $'000
Operating activities
Dividend and interest income received 12,298 20,371 15,422
Derivative income received 2,560 3,808 929
Securities lending income received - 38 38
Taxation paid (724) (3,694) (1,557)
Purchase of investments (569,308) (1,645,720) (1,217,956)
Proceeds from sale of investments 577,662 2,067,514 1,604,773
Net proceeds from the settlement of derivatives (5,401) 14,119 32,121
Net cash outflow from amounts held at futures clearing
houses and brokers (11,407) (11,901) (17,651)
Bank charges (80) (63) (11)
Bank charges (80) (63) (11)
Operating expenses paid (4,249) (16,448) (12,362)
Net cash inflow from operating activities 1,351 428,024 403,746
Financing activities
CFD interest paid (3,061) (4,585) (1,061)
CFD dividends paid (3,169) (8,542) -
Dividend paid (14,576) (16,398) (16,398)
Repurchase and cancellation of the Company's own shares - (388,300) (388,300)
Net cash outflow from financing activities (20,806) (417,825) (405,759)
Effect of foreign exchange movements (686) (2,707) (2,478)
Net (decrease)/increase in cash at bank (20,141) 7,492 (4,491)
Cash at bank at the beginning of the period 34,418 26,926 26,926
Cash at bank at the end of the period 14,277 34,418 22,435
Notes to the Financial Statements
for the six months ended 31 December 2022
1. Publication of Non-statutory Accounts
The interim financial statements in this Half Year Report have not been
audited by the Company's Independent Auditor. The financial information for
the year ended 30 June 2022 is extracted from the latest published Annual
Report of the Company which was delivered to the Guernsey Financial Services
Commission.
2. Accounting Policies
(i) Basis of Preparation
The interim financial statements for the six months ended 31 December 2021
have been prepared in accordance with International Accounting Standards 34,
'Interim Financial Reporting'. The interim financial statements should be read
in conjunction with the annual financial statements for the year ended 30 June
2021, which have been prepared in accordance with International Financial
Reporting Standards ('IFRS'), the IFRS Interpretations Committee and
interpretations approved by the International Accounting Standards Committee
('IASC') that remain in effect and the Companies (Guernsey) Law, 2008.
The financial statements have been prepared under the historical cost
convention, as modified by the revaluation of financial assets and financial
liabilities at fair value through profit or loss.
(ii) Going Concern
The Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence for a period of at least twelve
months from the date of approval of these financial statements. Accordingly,
the Directors consider it appropriate to adopt the going concern basis of
accounting in preparing these financial statements. This conclusion also takes
into account the Board's assessment of the continuing conflict between Russia
and Ukraine and the risks related to Covid-19, as disclosed in the Going
Concern Statement on page 22 of the report.
Management Fees
Under the Investment Management Agreement ('the IMA'), Fidelity International
is entitled to receive a Management Fee of 0.60% per annum of the Net Asset
Value of the Company.
Fidelity International waived its entitlement to receive a Management Fee for
a period of nine months from its date of appointment. The Management Fee is
payable from 1 July 2022. Fees are payable monthly in arrears and calculated
on a daily basis.
No Management Fee is payable by the Company in respect of the Company's
holdings in collective investment schemes or investment trusts managed or
advised by the Investment Manager.
3. Dividend paid to shareholders
Six months Six months
ended Year ended ended
31 December 31 June 31 December
2022 2022 2021
$'000 $'000 $'000
Dividend of 16.00 cents pence per ordinary
share paid for the year ended 30 June 2022
14,576 - -
Dividend of 18.00 cents pence per ordinary
Share paid for the year ended 30 June 2021
- 16,398 16,398
4. Share capital
On 6 September 2021, the Company launched a tender offer to buy back up to 25%
of its issued share capital. As a result of the tender offer, on 22 October
2021, the Company repurchased 30,366,688 Participating Preference Shares for
cancellation. The resultant number of shares in issue is 91,100,066
Participating Preference Shares.
The costs associated with the cancellation of the shares of $388,300,000 were
charged to the capital reserve for the year ended 30 June 2022.
The Company may issue an unlimited number of Unclassified Shares of no par
value.
5. Availability of Half Year Report
The calculation of the net asset value per Participating Preference Share is
based on the following:
31 December 30 June 31 December
2022 2022 2021
unaudited audited unaudited
Net assets $749,516,000 $796,761,000 $1,134,028,000
Participating Preference Shares in issue 91,100,066 91,100,066 91,100,066
Net asset value per Participating
Preference Share
$8.23 $8.75 $12.45
6. Availability of Half Year Report
The Half Year Report and Unaudited Financial Statements will shortly be
available from the Company's website fidelity.co.uk/emergingmarkets and via
the National Storage Mechanism, which is located at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism where users can access
the regulated information provided by listed entities.
For further information, please contact:
Natalia De Sousa
FIL Investments International
J.P. Morgan Administration Services (Guernsey) Limited
Company Secretary
01481 758 620
13 March 2023
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