REG-Fidelity Emerging Markets Ltd: Annual Financial Report
13/10/2023 07:45
FIDELITY EMERGING MARKETS LIMITED
Final Results for the year ended 30 June 2023
Financial Highlights:
* The net asset value ("NAV") of the Company returned -2.6% for the year ended
30 June 2023, outperforming the reference index (MSCI Emerging Markets Index)
which returned -2.8% over the year.
* The Board announces a dividend of 0.19 cents per Participating Preference
Share.
* The Portfolio managers' outlook for the region is optimistic given
attractive valuations and an increasingly positive fundamental backdrop for
companies.
* Transition metals, nearshoring, and demographics provide tailwinds for the
asset class.
Contacts
For further information, please contact:
Nira Mistry
Company Secretary
07778 345 517
FIL Investments International
Chairman's Statement
I am pleased to present your Company's 34th annual report, my first as
Chairman and covering the first full year under its new name and mandate as
Fidelity Emerging Markets Limited. Against a continued difficult global
economic and geopolitical backdrop, net asset value (`NAV') total return
performance for the year ended 30 June 2023 has been slightly negative, but
has outperformed the Company's benchmark, the MSCI Emerging Markets Total
Return Index (`the Index'). This is particularly encouraging during a period
in which high inflation and tightening monetary policy in the West and
disappointing data following China's hotly anticipated post-Covid reopening
have unsettled investors worldwide.
Overview
During the 12 month period to 30 June 2023, the NAV of the Company fell by
2.6% in GBP terms, compared with a 2.8% decline in the benchmark index. The
share price fell by 5.2% as the discount to NAV widened slightly during the
year, from 12.0% to 14.6% (all performance figures stated on a total return
basis).
You will find more detail on the contributors to absolute and relative
performance in the Portfolio Managers' Review on the following pages. However,
your Board believes that Fidelity's unique investment process, with its
ability to hold short as well as long positions - thereby investing in the
disruptors that can drive growth, and also making money from identifying the
disrupted - is a key differentiating factor that is starting to feed into
positive performance for the Company. It is worth noting that the open-ended
FAST Emerging Markets Fund, which is run using the same approach, has
outperformed the Index in seven of the last 10 discrete years to 30 June, in
most cases significantly. As well as having a full investment toolkit, your
Company also benefits from Fidelity's large and experienced team of portfolio
managers and analysts, the majority of whom are based in the markets they
cover, giving them an invaluable advantage in terms of identifying new
investment opportunities.
At Board level, your Directors and I have been working hard to ensure that
current and prospective investors are fully informed about the changes to the
Company and the benefits they bring. This is beginning to be reflected in our
shareholder register, where we are identifying more self-directed retail
investors buying shares through the major investment platforms. This is a
great start to our objective to increase our investor base of retail
investors, and we hope that the recent improvements in relative performance,
combined with our own efforts, can help to drive this forward. We believe a
key attraction for fee-conscious investors is our cost efficiency, underpinned
by our competitive ongoing charges ratio, which is one of the lowest in the
AIC peer group. In our view this represents competitive value for a truly
actively managed emerging markets portfolio with an extended set of tools with
which to generate returns.
Outlook
On a historical basis, emerging markets themselves offer attractive relative
valuations as well as compelling fundamentals. While the Western world
struggles with the challenges of over a decade of ultra-loose monetary policy
and the fallout from Covid stimulus packages, leading to the highest levels of
inflation and interest rates in nearly a generation, in most emerging markets
the picture is completely different. The structural case for investing in
developing economies remains extremely strong: attractive demographics, a
burgeoning middle class providing new markets for goods and services, and
economies that can grow more rapidly than those in the West. Many emerging
economies have already experienced the pain of higher interest rates and
prices that are facing the developed world, and now have greater monetary
policy flexibility as well as declining inflation. In recent years the US
stock market has dominated an enormous amount of the rest of the world's
liquidity, but outflows from emerging markets funds have begun to slow and
even reverse as investors once more get on board with the long-term growth
story, buoyed by relatively attractive valuations and in many cases decent
dividend yields. In our view, the year ahead may infuse emerging markets with
more momentum in terms of performance versus the rest of the world. We believe
that your Company's unique approach, top-class management team and
cost-efficient structure mean it is in an ideal position to make the most of
this improving environment, and we look forward to your Portfolio Managers
employing their full range of investment tools to benefit from it.
Board composition
The Company's Board has seen significant changes during the period ended
30 June 2023, with former Chairman Hélène Ploix and Director Sujit Banerji
retiring at the 2022 AGM in December and Audit and Risk Committee Chairman and
Senior Independent Director, Russell Edey also retiring in May 2023. I joined
the Board in May 2022 and became Chair upon Hélène's retirement. Julian
Healy was appointed to the Board at the 2022 AGM and took over Russell's role
as Chair of the Audit and Risk Committee in May 2023. Torsten Koster, a
Director since 2020, is now the Senior Independent Director. Now with five
Directors, the longest-serving of whom, Katherine Tsang, has been in post for
six years, we do not foresee any further changes to the Board in the near
term. We feel the board now has a strong diversity of both background and
specialist knowledge and competency.
Discount management
While we have seen some movement in the discount to NAV during the year, it
has been within a small range. We began both the first and second half of the
Company's financial year with the discount at 12.0%, and ended the year at
14.6%. At the time of writing, the discount had narrowed again to 14.3%. This
year we have focused hard on building the Company's profile in the market and
the media, alongside investor platforms. We expect this to have a positive
effect, over time, on both the shareholder register and the discount. We also
retain the ability, to buy back up to 14.99% of our Participating Preference
Shares each year in order to manage the a discount. We have confidence that
your Investment Manager has the tools and the expertise to continue to build
on the recent trend of improved relative performance. Your Board is constantly
working closely with the Manager on all these matters and has the goal to
reduce the discount as a key priority.
Dividend
A resolution to declare a final dividend of 0.19 cents per share will be
proposed at the AGM of the shareholders of the Company that will be held on
Thursday, 7 December 2023. Subject to shareholder approval, the final
dividend will be paid on 15 December 2023 to shareholders on the Register of
Members on 17 November 2023. The ex-dividend date is 16 November 2023.
Annual General Meeting
This year's AGM will be held on Thursday, 7 December 2023 at 8:30 a.m. at
the registered office of the Company, Level 3, Mill Court La Charroterie, St
Peter Port, Guernsey GY1 1EJ.
Notice of the AGM, containing full details of the business to be conducted at
the meeting, is set out in the Annual Financial Report.
Your attention is also drawn to the Directors' Report in the Annual Report,
where resolutions relating to special business are explained.
Electronic proxy voting is now available and shareholders are encouraged to
submit voting instructions using the web-based voting facility at
www.eproxyappointment.com and for institutional shareholders via the CREST
system, CREST messages must be received by the issuer's agent (ID number
3RA50) not later than 8.30 am on 5 December 2023. In order to use electronic
proxy voting, shareholders will require their shareholder registration number,
control number and pin. If you do not have access to these details please
contact the Company's Registrar, Computershare, their contact details can be
found in the Annual Financial Report.
Heather Manners
Chairman
12 October 2023
Portfolio Managers' Review
Question
How has the investment company performed in the year to 30th June 2023?
Answer
Nick:
We have seen performance continue to stabilise and improve over the year. It's
been a volatile period for markets, as we've seen the ramifications of
elevated inflation, cost of living pressures, and tightening monetary policy.
A pivotal moment was China's emergence from Covid lockdowns last autumn and
the easing of its regulatory stance towards the internet and property sectors.
Over the year the portfolio declined on an absolute basis (NAV returns of
-2.6% in sterling terms) but marginally outperformed the index (which returned
-2.8%). After a challenging initial period in 2022, performance began to
stabilise from September, and has continued to improve into 2023.
When I look at some of the top performers over the year, several of the
holdings in the financials sector stand out. This includes core long-term
positions like India's HDFC Bank, but also some of the mid-cap names like the
Greek lender Piraeus Financial Holdings, Brazilian digital challenger bank Nu
Holdings, and Kazakhstan's ecommerce and payments platform Kaspi. The Taiwan
and South Korean technology names also did well over the period as a whole
(despite a difficult 2022) after these stocks rallied following China's
reopening and growing hype around artificial intelligence. We have trimmed
many of these positions on strength and I think it's important to point out
that we are disciplined in taking profits following bouts of strong
performance.
The Chinese consumer names we hold have been the main headwind to performance.
We are marginally underweight China, but names such as sportwear company Li
Ning, dairy producer China Mengniu Dairy and Hong Kong-listed AIA Group have
all lagged the market. The moves have largely been multiple driven, although
there has also been a slight decline in earnings expectations for some of the
companies. The good news is we are seeing many of these companies behave in an
increasingly shareholder friendly manner (which I discuss later) and
valuations now appear very attractive.
So, overall, a mixed period for markets, but one where we have seen portfolio
returns stabilise as we emerge from a difficult 2022 into a year where many of
the high-conviction positions have executed well and have underpinned the
portfolio's relative performance.
Question
With the conflict in Ukraine ongoing, geopolitical tensions remain at the
forefront of investors' minds. How are you seeking to mitigate this risk?
Answer
Nick:
One of the most important ways that we look to assess geopolitical risk is by
calling on external experts. Over the year we have sought to bring more voices
to the table, for example geopolitical experts and external strategists,
including those from a military or security service background. Although no
one has a crystal ball, we focus on staying fully engaged and speaking to
people with a range of different perspectives. Fidelity is launching a series
of internal talks on geopolitics this year, with the aim to bring in more
external speakers who have expertise on governance and security, particularly
in areas such as the post-Soviet era, but also on China-Taiwan relations,
which we are closely monitoring in the run-up to the Taiwan elections
in January.
We continue to look at country positioning closely and run through exposures
on a weekly basis. Although the portfolio's active share remains high, the
country bets are more muted than they have been historically. While this is
likely not a permanent move, it does feel more appropriate in the current
environment. This broadening of the portfolio's country exposure has taken the
stock count higher, reflecting the unpredictability we see in markets. We also
examine stock level beta more closely, which has informed the portfolio's
China positioning.
The final element is the role that our research trips play (which Chris talks
about in more detail later). The end of Covid lockdowns means we've been able
to resume overseas trips, which form a crucial part of our due diligence
process. I've visited Brazil, Mexico, Indonesia, and India, among other
places, over the past year, and our entire Asia investment team spent a week
in China this summer. Speaking to local experts on their home turf is a vital
input and allows us to assess all manner of opportunities and, of course,
risks.
Question
The rising cost of living continues to pressure consumers across emerging and
developed markets. What is your outlook for inflation and interest rates?
Answer
Nick:
Elevated inflation and higher interest rates have clearly been a headwind for
both consumers and companies across the world over the past year. However,
despite some sticky inflation prints in the UK, there is an improving picture
in the US and emerging markets, and I do expect that we will see a near-term
fall-off in inflation.
The outlook for emerging markets is particularly positive because central
banks across the region have been some of the most proactive in the world and
have largely managed to bring inflation under control. That means there are
high real rates in many emerging economies, with Brazil being the poster child
of this trend. Brazil's short-term policy rate is 13.75%, while consumer price
inflation in the country stands at 3%, and its central bank has indicated that
it could cut rates as early as August. As Brazil and other emerging market
countries start to ease monetary policy, we should see a positive tailwind for
demand.
Notwithstanding this, over the medium-term, inflation will likely remain
stubbornly high, as deglobalisation, underinvestment in the energy and
commodity complex and the shift to green energy all drive prices higher.
Although inflation won't remain as elevated as it has been, it could settle at
3-4% in many economies over the next 5-10 years. This will have implications
for both emerging and developed markets and emphasises the importance of
having a measure of value in a portfolio, whether that be through exposure to
financials, for example, or energy companies.
Top 5 Positions
As at 30 June 2023 Sector Portfolio (%) Index (%) Relative (%)
Taiwan Semiconductor Manufacturing Information Technology 10.4 6.8 3.6
HDFC Bank Financials 6.3 - 6.3
Naspers Consumer Discretionary 4.7 0.5 4.2
Samsung Electronics Information Technology 4.4 4.5 -0.1
Kaspi.KZ Financials 4.2 - 4.2
Question
Turmoil among developed market banks has dominated headlines this year. Does
this impact your view of financials in emerging markets?
Answer
Chris:
The collapse of Silicon Valley Bank (`SVB') and Credit Suisse earlier this
year ignited fears that there could be a spillover effect to emerging markets.
We think that the risk of any contagion is low. The problems we saw at US
banks were down to overly concentrated deposits and a mismatch between assets
and liabilities, and we see a much more stable backdrop in emerging markets,
where banks by and large are better capitalised and more tightly regulated.
Because we focus on high quality, deposit-taking franchises, with well
diversified deposit bases and closely matched assets and liabilities, the
banks we hold in the portfolio are not exposed to the sort of deposit-flight
risk that we saw at SVB.
Where the banking crisis has had an impact is on our outlook for interest rate
rises, which is much more muted than it was before (and indeed, many emerging
market central banks should start cutting rates this year, as Nick spoke about
earlier). That means the boost banks have had from rising net interest margins
has largely played out and we are limiting the portfolio's exposure to the
more rate-sensitive banks, focusing on those that benefit from structural
drivers.
These structural stories include Indian banks, which operate in an environment
where the ratio of credit to GDP could grow to three times the level it is
today, boosting demand for credit cards, savings accounts, and insurance
products. We also see strong structural drivers in the Greek banking market,
where a decade of very low loan growth has resulted in excellent asset quality
and the prevalence of many high-quality, deposit-taking banks that we expect
should start returning cash to shareholders.
Question
China's reopening from Covid lockdowns has had a significant impact on
emerging market performance this year. How do you feel about China and the
economic recovery?
Answer
Nick:
We have seen the initial exuberance of the China reopening trade unwind as the
market realises that the recovery in China will not follow the same rapid
trajectory as it did across developed markets. The recovery in China this year
has certainly been weaker than I expected. The country had an incredibly
strict and prolonged lockdown experience, during which households saved an
additional $1.5-2 trillion of their income. Given savings rates were already
high, there was every expectation there would be a strong consumption
recovery.
Why has this disappointed? This is firstly due to weakness in the property
sector. There's no doubt that property won't be the strong driver of GDP
growth that it has been in the past. Because Chinese consumers typically
invest much of their wealth in property, weakness in the market has a knock-on
effect on consumer confidence. The second factor is government regulation and
particularly that towards the internet sector. Although this has eased, the
regulatory crackdown over the past few years has dampened spirits. Internet
companies were big employers of graduates, and the regulatory intervention has
contributed to elevated levels of youth unemployment.
This all means a tougher backdrop for consumption. I do believe that over the
medium-term consumption will recover, given the excess savings among
households. Savings rates in China are the highest of any major economy and
have been consistently elevated over the past decade. We will likely see
government stimulus, which is already happening at the local level. It is
probable that the recovery will be k-shaped, however, given that these excess
savings are not evenly distributed throughout the country.
Where I see more encouraging signals is the increasingly shareholder-friendly
approach of companies in China, where there are many businesses returning
capital and buying back shares. The days of investing in China solely for
growth are likely over, and the acid test now is really whether companies are
buying back shares or paying out dividends. Internet platforms NetEase,
Alibaba Group Holding and Tencent are all good examples of companies that have
progressive buyback policies, but which are trading on very attractive
valuations given weak sentiment towards the Chinese market.
Question
Emerging markets are a diverse region. Looking beyond China, where do you
currently see the best opportunities?
Answer
Chris:
One of the areas I am most excited about is the `transition metals' that will
power the low carbon economy. Clean energy technologies are commodity
intensive, with, for example, electric vehicles requiring six times the amount
of minerals that a conventional car does. Looking specifically at copper, the
anticipated uptick in demand is combined with a significant shortfall in
supply, due to a decade of underinvestment in the commodity complex and
limited projects in the pipeline. With the market only set to get tighter, we
have a positive outlook over the medium term for copper miners and companies
producing other transition metals. We hold copper producers based in Mexico
and Peru, and own several other copper, zinc, lead, cobalt, and tin miners
with assets across Latin America, eastern Europe, and Africa.
Another area of opportunity is demographics. India is one example of a market
benefiting from several long-term drivers, with the economy offering
considerable scope for growth given its low level of GDP per capita and
expanding working-age population. We expect growing consumption and demand for
everything from consumer goods to financial products and IT services. The
portfolio's exposure to the Indian market is predominantly via financials,
where we see several opportunities to take advantage of the growing
penetration of consumer finance in the country.
One other interesting driver for some emerging economies is that of
deglobalisation and nearshoring. This will predominantly benefit Mexico, where
we anticipate considerable growth as the US looks to shift its supply chains
away from China and closer to its own borders. I visited Mexico earlier in the
year and saw first-hand the positive impetus that nearshoring is set to have
on the country. Our meetings during the trip indicated that this is set to be
a real tailwind as companies build factories and support employment growth in
the region. Currently Mexico exports just under US$400 billion a year to the
US and some estimates suggest that nearshoring could add an incremental
USD$100-150 billion to this.
Question
Emerging markets have clearly had a difficult few years. Looking ahead, what
is your outlook for emerging markets?
Answer
Nick:
July marks my 14-year anniversary managing a global emerging markets
portfolio. That creates a good opportunity to reflect on market performance
over the period. A look back to 2009 shows that emerging markets have been
broadly flat over the last 14 years. The index is as cheap as it has ever
been and is trading at multi-decade lows relative to developed markets.
So, emerging markets are clearly deeply out of favour. The relative
performance of emerging markets used to follow the commodity cycle, but the
relationship has decoupled of late. Weakness in China and concerns around
geopolitics explain part of this, but I do think the extent of the discount is
at odds with the improving fundamental picture - not least because inflation
has seemingly peaked, interest rates are set to start coming down, and we are
seeing more and more companies in emerging markets return capital to
shareholders.
So yes, when I look ahead, I am broadly optimistic. Emerging markets are by
their very nature volatile, which is not surprising given they are the factory
of the world. But I do think that over the next decade we should see decent
returns, particularly relative to regions such as the US, which will struggle
with elevated levels of government debt and an ageing population. Given that
emerging market equities have underperformed over more than a decade now,
valuations are very attractive and appear out of sync with what I think is an
increasingly positive fundamental backdrop for many companies.
Question
The portfolio has an extensive investment toolkit and can use derivatives as
outlined in the investment policy. How have you looked to take advantage of
this enhanced toolkit over the past year?
Answer
Chris:
One of the tools we have at our disposal is the ability to take out short
positions. This allows us to profit not only from the winning businesses in
each industry, but also from the losers. One of the ways we do this is by
looking for companies that have a deteriorating fundamental outlook, or red
flags such as a broken balance sheet, bad corporate governance, poor relations
with regulators, or a shareholder that is acting to the detriment of minority
investors.
A good example of this is Americanas, a Brazilian retailer that was struggling
to compete with peers and was losing market share. Because of this, it
resorted to fraud and hiding its debts off balance sheet. We spotted these red
flags and took out a short position in Americanas. The company subsequently
went bankrupt, and we closed the position at a profit earlier this year.
We also take out `pair trades' in companies, where a long position in what we
see as a winning business is matched with a short position in what we deem to
be the loser in the industry. An example is the portfolio's positioning in the
South African food retail space, where elevated inflation has created a very
competitive operating environment. We have a long position in a company called
Shoprite, which has consistently gained market share over the years due to its
strong value proposition and cost control. We have matched this with a short
position in a competitor of Shoprite that is struggling to keep up and is
losing market share.
Another example of a pair trade is the portfolio's exposure to the Chinese
real estate market, where state-owned enterprises have rapidly gained market
share since 2017 and are benefiting as many private developers go bankrupt. We
have a long position in state-owned company China Resources Land, which is
matched with several short positions in indebted private developers.
An important aspect of the toolkit I would also highlight is the ability we
have to increase the portfolio's gross exposure to the companies we have the
most conviction in. This is a nice feature of the investment company, with its
closed-end nature allowing us to take out leveraged long positions, making the
money we invest work even harder for shareholders. And finally, we also use
options overwriting in the portfolio, both to generate additional income and
to control risk.
Question
Another aspect of the company's broad toolkit is the ability to invest in
smaller companies. Can you outline some of the most exciting opportunities you
are seeing in this space?
Answer
Chris:
As I said earlier, one of the key benefits of the investment company structure
is its closed-ended nature. This means we can take a longer investment horizon
and move further down the market cap spectrum. These might be into smaller
companies that are less well known by investors and are often poorly covered
by the sell side. We're currently seeing lots of exciting opportunities among
mid-cap companies and there is a concerted effort within the team to look for
the smaller names that can really differentiate the investment company.
Recently, a lot of the negative sentiment we've seen around emerging markets
has led to some of these smaller businesses being overlooked, which has thrown
up some exciting opportunities from a valuation perspective.
There are a couple of examples of this in the Mexican market, and we added
several names to the portfolio following our trip to the country earlier this
year. One of these is Gentera, a lender to female entrepreneur clubs. We have
seen the company continue to penetrate what is an uncontested market, with an
estimated 34 million women working in the informal sector in Mexico and Peru.
It is trading on very low multiples, and we see scope for considerable upside,
given that non-performing loan formation is under control and should allow for
sustained loan growth. Railroad operator Grupo Mexico Transportes is another
example of a mid-cap company that is trading on depressed multiples, but which
should benefit enormously from the trend of nearshoring, with political change
in Mexico also a catalyst for a potential rerating of its share price.
Question
Finally, how does Fidelity actively and efficiently manage the portfolio,
given the extensive universe of companies to choose from in emerging markets?
Answer
Chris:
Fidelity's extensive emerging market research team is one of the key
mechanisms that lets us effectively manage the portfolio. We are incredibly
lucky to have more than 50 analysts across the globe looking only at emerging
market companies, which means we can develop a deep, unrivalled view of their
dynamics, and explore the opportunities in the small and mid-cap space that I
mentioned earlier. There is excellent collaboration between all our analysts
across regions and sectors, with those focused on global sectors like oil and
gas, metals and mining, and technology helping us piece together what is going
on in emerging markets with developments in the US, Japan, and Europe.
I joined Fidelity 12 years ago as a research analyst, working across the
metals and mining sector and then on shorting opportunities, so I know
first-hand how effective this research resource is. Our research team really
allows us to have `boots on the ground' across emerging markets. For example,
this year I have travelled to several countries, including Mexico and Poland
and spent time meeting with companies, their competitors, and their suppliers,
seeing the assets and operations of companies first hand. There's really no
substitute for this sort of on the ground presence, and Fidelity research
analysts carry out around 16,000 company meetings a year, which really
emphasises how wide our research coverage is.
The way our global emerging markets investment team is structured also allows
us to effectively cover different regions. The broader team manages three
regional portfolios, each encompassing Latin America, emerging EMEA, and
emerging Asia, which all feed ideas into our global emerging markets
portfolio, and within this the investment company. This structure is an
acknowledgement of the fact that the emerging market universe is vast and
means we can apply multiple layers of due diligence to the stocks we invest
in. It also allows information to be transmitted quickly as the regional
specialists communicate their conclusions to us, enabling both of us to come
to informed conclusions about the events occurring across what is clearly a
vast and diverse investment universe.
Nick Price
Chris Tennant
Portfolio Managers
12 October 2023
Principal and Emerging Risks and Uncertainties, Risk Management
In accordance with the AIC Code, the Board has a robust ongoing 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 (FIL Investment Services (UK)
Limited/the "Manager"), has developed a risk matrix which, as part of the risk
management and internal controls process, identifies the key existing and
emerging risks and uncertainties that the Company faces. The Audit and Risk
Committee continues to identify any new emerging risks and take any action
necessary 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.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks
and uncertainties and to ensure that the Board can continue to meet its
Corporate Governance obligations.
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 or an increase in tensions in the South China
Sea; 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. The Board
notes that the Manager monitors these issues, and has integrated macro and ESG
considerations, including climate change, into the Company's investment
process. Further details are in the Annual Financial Report. The Board will
continue to monitor how this may impact the Company as a risk, the main risk
being the impact on investment valuations.
The Board considers the following as the principal risks and uncertainties
faced by the Company.
Principal Risks Risk Description and Impact Risk Mitigation Trend
Volatility of Emerging Markets and Market Risks * The economies, currencies and financial markets of a number of developing countries in which the Company invests may be * The Company's investments are geographically diversified in order to manage risks from adverse price fluctuations. Increasing
extremely volatile. * Russian securities already held at nil value.
* Further risks on emerging markets from rising inflation, a resurgent pandemic and tightening financial conditions exacerbated * The exposure to any one company is unlikely to exceed 5% of the Company's net assets at the time the investment is made.
by the war in Ukraine. * Review of material economic or market changes and major market contingency plans for extreme events.
* Market volatility from worsening Chinese/Taiwanese relations that could prompt the US to intervene. * China's integration into the global financial system and into global supply chains.
* US imposed Executive Orders prohibiting US investments in certain Chinese companies and the passing of the Holding Foreign * Companies that were solely listed in the US are listing on the HK or mainland markets.
Companies Accountable Act (HFCAA).
* Rising geopolitical tensions, including contagion of the Ukraine crisis or tensions between China and Taiwan into the wider
region.
* Regulatory measures impacting the IT sector and a lingering weakness in the real estate sector.
Investment Performance Risk * The Portfolio Manager fails to outperform the Benchmark Index over the longer-term. * An investment strategy overseen by the Board to optimise returns. Increasing
* A well-resourced team of experienced analysts covering the market.
* Board scrutiny of the Manager and the ability in extreme circumstances to change the Manager.
Changing Investor Sentiment * As a Company investing in emerging markets, changes in investor sentiment may lead to the Company becoming unattractive to * The Company has an active investor relations programme. Stable
investors and reduced demand for its shares, causing the discount to widen. * The Board is updated regularly by the Investment Manager on developments in emerging markets and on the portfolio.
* The Chairman communicates regularly with major shareholders.
* The Company pays a regular dividend and considers regularly when and how to use share buybacks.
Cybercrime and Information Security Risks * Cybersecurity risk to the functioning of global markets and to national infrastructure, as a targeted attack or overspilling * The risk is monitored by the Board with the help of the extensive Fidelity global cybersecurity team and assurances from outsourced suppliers. Increasing
from the Russia/Ukraine war. * Development of systems and procedures by the AIFM resulting from the experience of the Covid pandemic and cyber activity following the Russian invasion of Ukraine.
* Cybersecurity risk from Covid or successor pandemics affecting the functioning of businesses and global markets.
* External cybercrime threats such as spam attacks and DDoS (Distributed Denial of Service) attacks and reputational risk
arising from accidental data leakage.
Discount to Net Asset Value ("NAV") Risk * The share price performance lags NAV performance. * The Board reviews the discount on a regular basis and has the authority to repurchase shares so shares can trade at a level close to the NAV. Stable
* The Board fails to implement its discount management policy. * If the NAV for the five years ending 30 September 2026 does not exceed the Benchmark Index, the Company will make a tender offer of up to 25% of the shares in issue at that time.
* Rising energy costs and cost of living crisis impact on retail demand for shares.
Lack of Market Liquidity Risk * Low trading volumes on stock exchanges of less developed markets. * Restrictions on concentration and diversification of the assets in the Company's portfolio to protect the overall value of the investments and lower risks of lack of liquidity. Stable
* Lack of liquidity from temporary capital controls in certain markets.
* Exaggerated fluctuations in the value of investments from low levels of liquidity.
Business Continuity & Event Management Risks * The aftermath of the Covid pandemic continues to pose risks to the Company (albeit reducing in part), such as liquidity risks * Event and Crisis Management teams meet regularly to ensure readiness for a multitude of scenarios, including communication, power failure and the potential escalation of conflicts and actions taken by other nations including Russia, China and other Stable
to markets, risks associated with the maintenance of the current dividend policy and business continuity risks for the Company's emerging markets.
key service providers. * Digital teams continue to maintain solutions to allow business continuity and operational.
* The Russian/Ukraine conflict has increased the risk for working from home or in offices, specifically concerning the potential
loss of network outages.
Gearing Risk * The Portfolio Manager fails to use gearing effectively, resulting in a failure to outperform in a rising market or to * The Board sets a limit on gearing and provides oversight of the Manager's use of gearing. Stable
underperform in a falling market.
Foreign Currency Exposure Risk * The functional currency in which the Company reports its results is US dollars, whilst the underlying investments are in * The Portfolio Manager does not hedge the underlying currencies of the holdings in the portfolio but will take currency risk into consideration when making investment decisions. Stable
different currencies. The value of assets is subject to fluctuations in currency rates and exchange control regulations.
Environmental, Social and Governance (ESG) Risk * The adoption of international standards may adversely impact the profitability of companies in the portfolio. * Fidelity has adopted a sophisticated and comprehensive system for analysing ESG risks, including climate risk, in investee companies. Stable
* The Manager fails to meet its regulatory requirements on ESG, including climate risk, in relation to the Company. * The Portfolio Manager is active in analysing the effects of ESG when making investment decisions.
* Higher degree of valuation and performance uncertainties and liquidity risks.
Key Person Risk * Loss of the Portfolio Manager or other key individuals could lead to potential performance and/or operational issues. * Succession planning for key dependencies. Stable
* Depth of the team within Fidelity.
* Experience of the analysts covering the Company's investments.
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with the regulatory requirements
of the Guernsey Financial Services Commission, UK listing rules, corporate
governance requirements or local tax requirements that could result in loss of
status as an Authorised Closed Ended Investment Scheme, becoming subject to
additional tax charges or to exclusion from trading in particular markets.
The Board monitors tax and regulatory changes at each Board meeting and
through active engagement with regulators and trade bodies by the Manager.
Operational Risks
The Company relies on a number of third-party service providers, principally
the Manager, Registrar and Custodian. It is dependent on the effective
operation of the Manager's control systems and those of its service providers
with regard to the security of the Company's assets, dealing procedures,
accounting records and the maintenance of regulatory and legal requirements.
The Registrar and Custodian are all subject to a risk-based programme of
internal audits by the Manager. In addition, service providers' own internal
control reports are received by the Board on an annual basis and any concerns
are investigated. Risks associated with these service providers is rated as
low, but the financial consequences could be serious, including reputational
damage to the Company.
Viability statement
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 from an actively managed portfolio made up primarily of
securities and financial instruments providing exposure to emerging market
companies, both listed and unlisted. 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. In making an assessment on the viability of the Company, the
Board has considered the following:
· The ongoing relevance of the investment objective in prevailing market
conditions;
· The Company's NAV and share price performance;
· The principal and emerging risks and uncertainties facing the Company as
set out above and their potential impact;
· The future demand for the Company's shares;
· The Company's share price discount to the NAV;
· The liquidity of the Company's portfolio;
· Consideration of the continuation vote in 2026;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company has assumed for the purposes of the viability statement that the
continuation vote in 2026 would be passed.
The Company's performance for the five year reporting period to 30 June 2023
lagged the Benchmark Index, with a NAV total return of -5.3%, a share price
total return of -7.3% compared to the Benchmark Index total return of +10.1%.
The Board regularly reviews the investment policy and considers whether it
remains appropriate. The Board has concluded that there is a reasonable
expectation that the Company will be able to continue in operation and meet
its liabilities as they fall due over the next five years based on the
following considerations:
· The Investment Manager's compliance with the Company's investment
objective and policy, its investment strategy and asset allocation;
· The fact that the portfolio comprises sufficient readily realisable
securities which can be sold to meet funding requirements if necessary; and
· The ongoing processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company's total assets.
When considering the risk of under-performance, a series of stress tests were
carried out including in particular the effects of any substantial future
falls in investment value on the ability to maintain dividend payments and
repay obligations as and when they arise.
In preparing the Financial Statements, the Directors have considered the
impact of climate change, particularly in the context of the climate change
risk identified within the ESG Risk in the Annual Financial Report . The Board
has also considered the impact of regulatory changes and significant market
events and how this may affect the Company. In addition, the Directors'
assessment of the Company's ability to operate in the foreseeable future is
included in the Going Concern Statement which is included in the Directors'
Report in the Annual Financial Report.
Promoting the Success of the Company
Under Section 172(1) of the Companies Act 2006, the Directors of a company
must act in a way they consider, in good faith, would be most likely to
promote the success of the Company for the benefit of its members as a whole,
and in doing so have regard (amongst other matters) to the likely consequences
of any decision in the long-term; the need to foster relationships with the
Company's suppliers, customers and others; the impact of the Company's
operations on the community and the environment; the desirability of the
Company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the Company.
As an externally managed Investment Company, the Company has no employees or
physical assets, and a number of the Company's functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services by the Manager, but other professional service providers
support the Company by providing administration, custodian, banking and audit
services. The Board considers the Company's key stakeholders to be the
existing and potential shareholders, the external appointed Manager and other
third-party professional service providers. The Board considers that the
interest of these stakeholders is aligned with the Company's objective of
delivering long-term capital growth to investors, in line with the Company's
stated objective and strategy, while providing the highest standards of legal,
regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy
and reviews this regularly. In order to ensure good governance of the Company,
the Board has set various limits on the investments in the portfolio, whether
in the maximum size of individual holdings, the use of derivatives, the level
of gearing and others. These limits and guidelines are regularly monitored and
reviewed and are set out in the Annual Financial Report.
The Board places great importance on communication with shareholders and is
committed to listening to their views. The primary medium through which the
Company communicates with shareholders is through its Annual and Half Year
Financial Reports. Monthly factsheets are also produced. Company related
announcements are released via the Regulatory News Service (`RNS') to the
London Stock Exchange. All of the aforementioned information is available on
the Company's website www.fidelity.co.uk/emergingmarkets. Shareholders may
also communicate with Board members at any time by writing to the Company
Secretary at FIL Investments International, Beech Gate, Millfield Lane,
Tadworth, Surrey KT20 6RP or by email at investmenttrusts@fil.com. The
Portfolio Managers meet with major shareholders, potential investors, stock
market analysts, journalists and other commentators throughout the year. These
communication opportunities help inform the Board in considering how best to
promote the success of the Company over the long-term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of
strong governance, while encouraging open and constructive debate, in order to
ensure appropriate and regular challenge and evaluation. This aims to enhance
service levels and strengthen relationships with service providers, with a
view to ensuring shareholders' interests are best served, by maintaining the
highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company's direct operations are limited, the Board recognises the
importance of considering the impact of the Company's investment strategy on
the wider community and environment. The Board believes that a proper
consideration of ESG issues aligns with the Company's investment objective to
deliver long-term growth in both capital and income, and the Board's review of
the Manager includes an assessment of their ESG approach, which is set out in
the Annual Financial Report .
In addition to ensuring that the Company's investment objective was being
pursued, key decisions and actions taken by the Directors during the reporting
year, and up to the date of this report, have included:
· Marketing & PR - Establishing a corporate identity for the Company
The Board has worked closely with the Manager in tandem with various public
relations and communications firms to establish a new corporate identity for
the Company since moving to the new Manager, Fidelity.
· Audit Tender
In adherence to the Competition and Market Authority Order 2014, FTSE 350
companies are required to retender their audit at least every ten years or
more frequently. On this basis the Board decided to review its external audit
arrangements for the year ending 30 June 2024 noting the incumbent KPMG
Channel Islands Limited has been the Company's auditor since 2018. The
thorough audit tender process resulted in the Board's recommendation to
re-appoint KPMG Channel Islands Limited as the Company's independent auditor
for the year ending 30 June 2024 and subsequent years.
· Company Secretarial Service
The Board regularly discusses its service providers with the Manager and in
a review during the year the Board took the decision to appoint FIL
Investments International Ltd as Company Secretary with effect from 15 May
2023. J.P. Morgan Administration Services (Guernsey) Limited remains the
Company's Administrator and registered office.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Financial Report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with International Financial Reporting
Standards as adopted by the European Union to meet the requirements of
applicable law and regulations.
Under company law the Directors must not approve the financial statements
unless they are satisfied that taken as a whole, they give a true and fair
view of the state of affairs of the Company and of its profit or loss for that
period. In preparing these financial statements, the Directors are required
to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
· assess the Company's ability to continue as a going concern, disclosing,
as applicable, matters related to going concern; and
· use the going concern basis of accounting unless they either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
The Directors are responsible for keeping proper accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
(Guernsey) Law, 2008. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error, and have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions. The
work carried out by the auditor does not include consideration of the
maintenance and integrity of the website and, accordingly, the auditor accepts
no responsibility for any changes that have occurred to the accounts when they
are presented on the website.
The Directors who hold office at the date of approval of this Directors'
Report confirm that so far as they are aware, there is no relevant audit
information of which the Company's auditor is unaware, and that each Director
has taken all the steps he/she ought to have taken as a Director to make
himself or herself aware of any relevant audit information and to establish
that the Company's auditor is aware of that information.
Responsibility statement of the Directors in respect of the Annual Report
The Directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
· the Chairman's statement, Strategic Report and Portfolio Managers' Review
includes a fair review of the development and performance of the business and
the position of the Company, together with a description of the principal and
emerging risks and uncertainties that the Company faces.
The Directors consider the Annual Report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company's performance, business model and strategy.
There were no instances where the Company is required to make disclosures in
respect of Listing Rule 9.8.4 during the financial period under review.
For and on behalf of the Board
Heather Manners
Chairman
12 October 2023
Statement of Comprehensive Income
for the year ended 30 June 2023
Year ended 30 June 2023 Year ended 30 June 2022
Note Revenue $'000 Capital $'000 Total $'000 Revenue $'000 Capital $'000 Total $'000
Revenue
Investment income 3 22,272 - 22,272 24,399 - 24,399
Derivative income 3 17,709 - 17,709 10,849 - 10,849
Other income 3 620 - 620 137 - 137
Total Income 40,601 - 40,601 35,385 - 35,385
Net gains/(losses) on financial assets at fair value through profit or loss 1 10 - 36,553 36,553 - (535,032) (535,032)
Net (losses)/gains on derivative instruments 11 - (37,809) (37,809) - 23,229 23,229
Net foreign exchange losses - (933) (933) - (2,707) (2,707)
Total income and gains/(losses) 40,601 (2,189) 38,412 35,385 (514,510) (479,125)
Expenses
Management fees 4 (923) (3,690) (4,613) (927) (3,709) (4,636)
Other expenses 1 5 (1,619) - (1,619) (2,451) (1,318) (3,769)
Profit/(loss) before finance costs and taxation 38,059 (5,879) 32,180 32,007 (519,537) (487,530)
Finance costs 6 (15,653) - (15,653) (13,946) - (13,946)
Profit/(loss) before taxation 22,406 (5,879) 16,527 18,061 (519,537) (501,476)
Taxation 7 (2,622) 644 (1,978) (2,954) 6,948 3,994
Profit/(loss) after taxation for the year attributable to Participating Preference Shares 19,784 (5,235) 14,549 15,107 (512,589) (497,482)
Earnings/(loss) per Participating Preference Share (basic and diluted) 8 $0.22 $(0.06) $0.16 $0.15 $(5.11) $(4.96)
1 Transaction costs directly associated with purchases and sales of
non-derivative securities changed presentation to be included under the `Net
gains/(losses) on financial assets at fair value through profit or loss' line
in the capital column of the Statement of Comprehensive Income. In the prior
periods the transaction costs were included under `Other expenses'. The change
in presentation is consistently applied for both for the current year and
comparative reporting period. The change in presentation of transaction costs
was applied in order to align with best market practice as relevant for
investment companies.
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.
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 year and all items in the
above statement derive from continuing operations.
The notes below form an integral part of these financial statements
Statement of Changes in Equity
for the year ended 30 June 2023
Note Share premium account $'000 Capital reserve $'000 Revenue reserve $'000 Total equity $'000
Total equity at 30 June 2022 6,291 741,095 49,375 796,761
(Loss)/profit after taxation for the year - (5,235) 19,784 14,549
Dividend paid to shareholders 9 - - (14,576) (14,576)
Total equity at 30 June 2023 6,291 735,860 54,583 796,734
Note Share premium account $'000 Capital reserve $'000 Revenue reserve $'000 Total equity $'000
Total equity at 30 June 2021 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 receivable for shares - (134) - (134)
Repurchase and cancellation of the Company's own shares 14 - (388,300) - (388,300)
Dividend paid to shareholders 9 - - (16,398) (16,398)
Total equity at 30 June 2022 6,291 741,095 49,375 796,761
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 30 June 2023
Note 30 June 2023 $'000 30 June 2022 $'000
Non-current assets
Financial assets at fair value through profit or loss 1 10 778,608 727,342
Current assets
Derivative assets 11 9,468 20,515
Amounts held at futures clearing houses and brokers 18,210 11,901
Other receivables 12 6,480 30,419
Cash at bank 18,057 34,418
52,215 97,253
Current liabilities
Derivative liabilities 11 12,847 14,408
Other payables 13 21,242 13,426
34,089 27,834
Net current assets 18,126 69,419
Net assets 796,734 796,761
Equity
Share premium account 15 6,291 6,291
Capital reserve 15 735,860 741,095
Revenue reserve 15 54,583 49,375
Total Equity Shareholders' Funds 796,734 796,761
Net asset value per Participating Preference Share 16 $8.75 $8.75
1 The entire balance of investments in Financial assets at fair value
through profit or loss was reclassified from Current assets to Non-Current
assets. For more information please see Note 10 - Financial Assets at Fair
Value through Profit or Loss.
The Financial Statements above were approved by the Board of Directors of the
Company on 12 October 2023 and signed on its behalf by:
Heather Manners
Chairman
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 30 June 2023
30 June 2023 $'000 30 June 2022 $'000
Operating activities
Cash inflow from investment income 24,214 20,371
Cash inflow from derivative income 6,184 3,808
Cash inflow from other income 33 -
Cash inflow from securities lending income - 38
Cash outflow from taxation paid (1,063) (3,694)
Cash outflow from the purchase of investments 1 (928,894) (1,647,814)
Cash inflow from the sale of investments 1 930,627 2,064,569
Cash (outflow)/inflow from net proceeds from settlement of derivatives (4,819) 14,119
Cash outflow from amounts held at futures clearing houses and brokers (6,309) (11,901)
Cash outflow from bank charges - (63)
Cash outflow from operating expenses 1 (5,150) (11,409)
Net cash inflow from operating activities 14,823 428,024
Financing activities
Cash outflow from CFD interest paid (10,111) (4,585)
Cash outflow from short CFD dividends paid (5,564) (8,542)
Cash outflow from dividends paid to shareholders (14,576) (16,398)
Cash outflow from repurchase and cancellation of the Company's own shares - (388,300)
Net cash outflow from financing activities (30,251) (417,825)
Net (decrease)/increase in cash at bank (15,428) 10,199
Cash at bank at the start of the year 34,418 26,926
Effect of foreign exchange movements (933) (2,707)
Cash at bank at the end of the year 18,057 34,418
1 Transaction costs directly associated with purchases and sales of
non-derivative securities changed presentation to be included under the `Net
gains/(losses) on financial assets at fair value through profit or loss' line
in the capital column of the Statement of Comprehensive Income. In the prior
periods the transaction costs were included under `Other expenses'. The change
in presentation is consistently applied for both for the current year and
comparative reporting period.
The notes below form an integral part of these financial statements.
Notes to the Financial Statements
for the year ended 30 June 2023
1. Principal Activity
Fidelity Emerging Markets Limited (the `Company') was incorporated in Guernsey
on 7 June 1989 and commenced activities on 19 September 1989. The Company is
an Authorised Closed-Ended Investment Scheme as defined by The Authorised
Closed-Ended Investment Schemes Rules and Guidance, 2021 (and, as such, is
subject to ongoing supervision by the Guernsey Financial Services Commission).
The Company is listed on the London Stock Exchange and is a constituent of the
FTSE 250 Index.
The Company's registered office is at Level 3, Mill Court La Charroterie, St
Peter Port, Guernsey GY1 1EJ, Channel Islands.
The Company's investment objective is to achieve long-term capital growth from
an actively managed portfolio made up primarily of securities and financial
instruments providing exposure to emerging market companies, both listed and
unlisted.
These financial statements were approved by the Board of Directors and
authorised for issue on 12 October 2023.
2. Summary of Significant Accounting Policies
(a) Basis of preparation
The principal accounting policies applied in the preparation of these
financial statements on a going concern basis are set out below. These
policies have been consistently applied to all years presented, unless
otherwise stated. The Company's financial statements, which give a true and
fair view of the assets, liabilities, financial position and profit and loss
of the Company, have been prepared in accordance with International Financial
Reporting Standards as adopted by the European Union (`IFRS'), which comprise
standards and interpretations approved by the International Accounting
Standards Board (`IASB'), 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.
Going concern
The Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence for at least twelve months from
the date of approval of these financial statements. In making their assessment
the Directors have reviewed the income and expense projections, the liquidity
of the investment portfolio, stress testing performed and considered the
Company's ability to meet liabilities as they fall due. Accordingly, the
Directors consider it appropriate to adopt the going concern basis of
accounting in preparing these financial statements.
Significant accounting estimates, assumptions and judgements
The preparation of financial statements in conformity with IFRS may require
management to make critical accounting judgements, estimates and assumptions
that affect the application of policies and the reported amounts of assets and
liabilities, income and expense. Actual results may differ from the estimates.
Valuations use observable data to the extent practicable. Changes in any
assumptions could affect the reported fair value of the financial instruments.
The determination of what constitutes observable requires significant
judgement by the Company. The Company considers observable data to be market
data that is readily available, regularly distributed or updated, reliable and
verifiable, not proprietary, and provided by independent sources that are
actively involved in the relevant market.
Adoption of new and revised International Financial Reporting Standards
The accounting policies adopted are consistent with those of the previous
financial year.
At the date of authorisation of these financial statements, the following
revised International Accounting Standards (IAS) were in issue but not yet
effective:
· IAS 1 Classification of Liabilities as Current or Non-current -
(Amendments);
· IAS 1 Disclosure of Accounting Policies - (Amendments) and IFRS Practice
Statement 2;
· IAS 8 Definition of Accounting Estimate - (Amendments); and
· IAS 12 Deferred Tax related to Assets and Liabilities arising from a
Single Transaction
The Directors do not expect that the adoption of the above standards will have
a material impact on the financial statements of the Company in future
periods.
(b) Financial Instruments
Classification
(i) Assets
The Company classifies its investments based on both the Company's business
model for managing those financial assets and the contractual cash flow
characteristics of the financial assets. The portfolio of financial assets is
managed and performance is evaluated on a fair value basis. The Company is
primarily focused on fair value information and uses that information to
assess the assets' performance and to make decisions. The Company has not
taken the option to irrevocably designate any equity securities as fair value
through other comprehensive income. All investments are measured at fair value
through profit or loss. The Company's investments are included in the
Financial assets at fair value through profit and loss line in the Statement
of Financial Position.
(ii) Liabilities
Derivative contracts that have a negative fair value are presented as
derivative financial liabilities at fair value through profit or loss. As
such, the Company classifies all of its investment portfolio as financial
assets or liabilities at fair value through profit or loss. The Company's
policy requires the Manager and the Board of Directors to evaluate the
information about these financial assets and liabilities on a fair value basis
together with other related financial information.
Recognition/derecognition
The Company recognises a financial asset or a financial liability when, and
only when, it becomes a party to the contractual provisions of the instrument.
Regular-way purchases and sales of investments are recognised on their trade
date, the date on which the Company commits to purchase or sell the
investment. Investments are derecognised when the rights to cash flows from
the investments have expired or the Company has transferred substantially all
risks and rewards of ownership. The Company derecognises a financial liability
when the obligation under the liability is discharged, cancelled or expires.
Measurement
Financial assets at fair value through profit and loss are measured initially
at fair value being the transaction price. Transaction costs incurred to
acquire financial assets at fair value through profit or loss are expensed in
the Statement of Comprehensive Income. Transaction costs include fees and
commissions paid to agents, advisers, brokers and dealers. Subsequent to
initial recognition, all financial assets at fair value through profit or loss
are measured at fair value. Gains and losses arising from changes in the fair
value of the `financial assets at fair value through profit or loss' category
are presented in the Statement of Comprehensive Income in the year in which
they arise.
The Company includes transaction costs, incidental to the purchase or sale of
investments within Net gains/(losses) on financial assets at fair value
through profit or loss in the capital column of the Statement of Comprehensive
Income and has disclosed them in Note 10 below.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
Securities listed on active markets are valued based on their last bid price
for valuation and financial statement purposes.
Equity Linked Notes are valued based on the available price of the underlying
asset as at reporting date.
In the normal course of business, the Company may utilise Participatory notes
(`P Notes') to gain access to markets that otherwise would not be accessible
as a foreign investor. P Notes are issued by banks or broker-dealers and allow
the Company to gain exposure to local shares in foreign markets. They are
valued based on the last price of the underlying equity at the valuation date.
The Company's investment in other funds (`Investee Funds') are subject to the
terms and conditions of the respective Investee Fund's offering documentation.
The investments in Investee Funds are primarily valued based on the latest
available redemption price for such units in each Investee Fund, as determined
by the Investee Funds' administrators. The Company reviews the details of the
reported information obtained for the Investee Funds and considers the
liquidity of the Investee Fund or its underlying investments, the value date
of the net asset value provided, any restrictions on redemptions and the basis
of the Investee Funds' accounting. If necessary, the Company makes adjustments
to the net asset value of the Investee Funds to obtain the best estimate of
fair value.
The Company may make adjustments to the value of a security if it has been
materially affected by events occurring before the Company's NAV calculation
but after the close of the primary markets on which the security is traded.
The Company may also make adjustment to the value of its investments if
reliable market quotations are unavailable due to infrequent trading or if
trading in a particular security was halted during the day and did not resume
prior to the Company's NAV calculation.
In preparing these financial statements the Directors have considered the
impact of climate change risk as a principal and as an emerging risk as set
out in the Annual Financial Report, and have concluded that there was no
further impact of climate change to be taken into account as the investments
are valued based on market pricing. In line with IFRS 13 - "Fair Value
Measurement" investments are valued at fair value, which for the Company are
quoted bid prices for investments in active markets at the statement of
financial position date. Investments which are unlisted are priced using
market-based valuation approaches. All investments therefore reflect the
market participants view of climate change risk on the investments held by the
Company.
Derivative Instruments
When appropriate, permitted transactions in derivative instruments are used.
Derivative transactions into which the Company may enter include long and
short contracts for difference ("CFDs"), futures and options.
Under IFRS 9 derivatives are classified at fair value through profit or loss -
held for trading, and are initially accounted and measured at fair value on
the date the derivative contract is entered into and subsequently measured at
fair value as follows:
· Long and short CFDs - the difference between the strike price and the
value of the underlying shares in the contract;
· Futures - the difference between the contract price and the quoted trade
price;
· Exchange Traded Options - valued based on similar instruments or the
quoted trade price for the contract; and
· Over the counter options - valued based on broker statements.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in derivative
income in the revenue column of the Statement of Comprehensive Income. Where
such transactions are used to protect or enhance capital, if the circumstances
support this, the income and expenses derived are included in net gains on
derivative instruments in the capital column of the Statement of Comprehensive
Income. Any positions on such transactions open at the reporting date are
reflected on the Statement of Financial Position at their fair value within
current assets or current liabilities.
Amortised cost measurement
Cash at bank, amounts held at futures clearing houses and brokers and other
receivables are carried at amortised cost using the effective interest method
less any allowance for impairment. Gains and losses are recognised in profit
or loss when the receivables are derecognised or impaired, as well as through
the amortisation process.
Capital gains tax payable and other payables are measured at amortised cost
using the effective interest method. Gains and losses are recognised in profit
or loss when the liabilities are derecognised, as well as through the
amortisation of these liabilities.
(c) Foreign Currency Translation
Functional and presentation currency
The books and records of the Company are maintained in the currency of the
primary economic environment in which it operates (its functional currency).
The Directors have considered the primary economic environment of the Company
and considered the currency in which the original capital was raised, past
distributions have been made and ultimately the currency in which capital
would be returned on a break up basis. The Directors have also considered the
currency to which underlying investments are exposed.
On balance, the Directors believe that US dollars best represent the
functional currency of the Company. The financial statements, results and
financial position of the Company are also expressed in US dollars which is
the presentation currency of the Company and have been rounded to the nearest
thousand unless otherwise stated.
Transactions and balances
Transactions in currencies other than US dollars are recorded at the rates of
exchange prevailing on the date of the transaction. At the end of each
reporting period, monetary items and non-monetary assets and liabilities that
are fair valued and are denominated in foreign currencies are retranslated at
rates prevailing at the end of the reporting period. Gains and losses arising
on translation are included in the Statement of Comprehensive Income for the
year. Foreign exchange gains and losses relating to cash and cash equivalents
are presented in the Statement of Comprehensive Income within `Net foreign
exchange gains or losses'. Foreign exchange gains and losses relating to
financial assets at fair value through profit or loss and derivatives are
presented in the Statement of Comprehensive Income within `Net gains or losses
on investments' and `Net gains on derivative instruments' respectively.
(d) Recognition of dividend and interest income
Dividends arising on the Company's investments are accounted for on an
ex-dividend basis, gross of applicable withholding taxes. Interest on cash at
bank and collateral is accrued on a day-to-day basis using the effective
interest method. Dividends and interest income are recognised in the Statement
of Comprehensive Income.
(e) Income from derivatives
Derivative instrument income received from dividends on long (or payable from
short) CFDs are accounted for on the date on which the right to receive the
payment is established, normally the ex-dividend date. The amount net of tax
is credited (or charged) to the revenue column of the Statement of
Comprehensive Income.
Interest received on CFDs is accounted for on an accruals basis and credited
to the revenue column of the Statement of Comprehensive Income. Interest
received on CFDs represent the finance costs calculated by reference to the
notional value of the CFDs.
(f) Finance costs
Finance costs comprise bank charges and finance costs paid on CFDs, which are
accounted for on an accruals basis, and dividends paid on short CFDs, which
are accounted for on the date on which the obligation to incur the cost is
established, normally the ex-dividend date. Finance costs are charged in full
to the revenue column of the Statement of Comprehensive Income.
(g) Dividend distribution
Dividend distributions are at the discretion of the Board of Directors. A
dividend is recognised as a liability in the period in which it is approved at
the Annual General Meeting of the shareholders and is recognised in the
Statement of Changes in Equity.
(h) Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents are short-term
highly liquid investments that are readily convertible to known amounts of
cash, are subject to an insignificant risk of changes in value, and are held
for the purpose of meeting short-term cash commitments rather than for
investment or other purposes.
Bank overdrafts are accounted for as short term liabilities on the Statement
of Financial Position and the interest expense is recorded using the effective
interest rate method. Bank overdrafts are classified as other financial
liabilities.
(i) Amounts held at futures clearing houses and brokers
Cash deposits are held in segregated accounts on behalf of brokers as
collateral against open derivative contracts. These are carried at amortised
cost.
(j) Other receivables
Other receivables include amounts receivable on settlement of derivatives,
securities sold pending settlement, accrued income, taxation recoverable and
other debtors and prepayments incurred in the ordinary course of business. If
collection is expected in one year or less they are classified as current
assets. If not, they are presented as non-current assets. Other receivables
are recognised initially at fair value and, where applicable, subsequently
measured at amortised cost using the effective interest rate method and as
reduced by appropriate allowance for estimated irrecoverable amounts.
(k) Other payables
Other payables include amounts payable on settlement of derivatives,
securities purchased pending settlement, investment management fees, amounts
payable for repurchase of shares, finance costs payable and expenses accrued
in the ordinary course of business. Other payables are classified as current
liabilities if payment is due within one year or less. If not, they are
presented as non-current liabilities. Other payables are recognised initially
at fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
(l) Segment reporting
Operating Segments are reported in a manner consistent with the internal
reporting used by the chief operating decision maker (`CODM'). The CODM, who
is responsible for allocation of resources and assisting performance of the
operating segments, has been identified as the Directors of the Company, as
the Directors are ultimately responsible for investment decisions.
The Company is engaged in a single segment business and, therefore, no
segmental reporting is provided.
(m) Expenses
All expenses are accounted for on an accruals basis and are charged to the
Statement of Comprehensive Income.
Expenses are allocated wholly to revenue with the following exceptions:
· Management fees are allocated 20% to revenue and 80% to the capital, in
line with the Board's expected long-term split of revenue and capital return
from the Company's investment portfolio; and
· Expenses which are incidental to capital events are charged to capital.
(n) Taxation
The Company currently incurs withholding taxes imposed by certain countries on
investment income and capital gains taxes upon realisation of its investments.
Such income or gains are recorded gross of withholding taxes and capital gains
taxes in the Statement of Comprehensive Income. Withholding taxes and capital
gains taxes are shown as separate items in the Statement of
Comprehensive Income.
In accordance with IAS 12, `Income taxes', the Company is required to
recognise a tax liability when it is probable that the tax laws of foreign
countries require a tax liability to be assessed on the Company's capital
gains sourced from such foreign country, assuming the relevant taxing
authorities have full knowledge of all the facts and circumstances. The tax
liability is then measured at the amount expected to be paid to the relevant
taxation authorities, using the tax laws and rates that have been enacted or
substantively enacted by the end of the reporting period. There is sometimes
uncertainty about the way enacted tax law is applied to offshore investment
funds. This creates uncertainty about whether or not a tax liability will
ultimately be paid by the Company. Therefore, when measuring any uncertain tax
liabilities, management considers all of the relevant facts and circumstances
available at the time that could influence the likelihood of payment,
including any formal or informal practices of the relevant tax authorities.
(o) Share capital
Participating Preference Shares are not redeemable and there is no obligation
to pay cash or another financial asset to the holder but are entitled to
receive dividends. They are classified as equity. Incremental costs directly
attributable to the issue of new shares are shown in equity as a deduction
from the proceeds net of tax.
(p) Purchase of own shares
The cost of purchases of the Company's own shares is shown as a reduction in
Shareholders' Funds. The Company's net asset value and return per
Participating Preference Share are calculated using the number of shares
outstanding after adjusting for purchases.
(q) Securities lending
During the year ended 30 June 2022, the Company was engaged in securities
lending with third party investment companies. As of 30 June 2023, the
Company is no longer engaged in securities lending activities. JPMorgan Chase
Bank N.A. acted as the securities lending agent (the `Lending Agent')
providing the securities lending services, record keeping services and served
as securities custodian, maintaining custody of all Company-owned listed
investments. Under the terms of its lending agreement, the Company received
compensation in the form of fees, 20% of which are commissions payable to the
Lending Agent for their services. The Company received dividends on the
securities loaned and any gains and losses that occurred during the term of
the loan were accounted for by the Company. Income earned from the securities
lending agreement is recognised on the Statement of Comprehensive Income on an
accruals basis and shown net of the commissions paid to the Lending Agent.
(r) Critical accounting estimates and assumptions
As stated in Note 2(a) Basis of Preparation, the preparation of financial
statements, in conformity with IFRS, requires the use of certain critical
accounting estimates. It also requires the Board of Directors to exercise its
judgment in the process of applying the Company's accounting policies. For
example, the Company may, from time to time, hold financial instruments that
are not quoted in active markets, such as minority holdings in investment and
private equity companies. Fair values of such instruments are determined using
different valuation techniques validated and periodically reviewed by the
Board of Directors.
(s) Capital reserve
The following are transferred to capital reserve:
· Gains and losses on the disposal of financial assets at fair value through
profit and loss and derivatives instruments;
· Changes in the fair value of financial assets at fair value through profit
and loss and derivative instruments, held at the year end;
· Foreign exchange gains and losses of a capital nature;
· 80% of management fees;
· Dividends receivable which are capital in nature;
· Taxation charged or credited relating to items which are capital in
nature; and
· Other expenses which are capital in nature.
3. Income
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Investment income
UK dividends 798 608
Overseas dividends 21,474 23,595
UK and overseas scrip dividends - 196
22,272 24,399
Derivative income
Dividends received on long CFDs 5,220 4,182
Interest received on CFDs 1,414 374
Option Income 11,075 6,293
17,709 10,849
Other income
Securities lending income* - 38
Interest income from cash and cash equivalents and collateral 587 99
Fee rebate 33 -
620 137
Total income 40,601 35,385
* As of 30 June 2023, the Company is no longer engaged in securities lending
activities. As at 30 June 2022, the Company generated gross income of $47,000
from securities lending transactions and Commissions amounting to $9,000 was
paid to JPMorgan Chase Bank N.A. in respect of these transactions of which
none were outstanding at the year end.
4. Management Fees
Year ended 30 June 2023 Year ended 30 June 2022
Revenue $'000 Capital $'000 Total $'000 Revenue $'000 Capital $'000 Total $'000
Management fees 923 3,690 4,613 927 3,709 4,636
Up until 4 October 2021, the Company's Investment Manager was Genesis
Investment Management, LLP (`GIML' or `Genesis').
Under the terms of its Management Agreement and up to the end of same, GIML
was entitled to receive a Management Fee from the Company, payable monthly in
arrears equal to 0.90% (2022: 0.90%) per annum, calculated and accrued on the
Net Asset Value of the Company as at each weekly Valuation Day, except for
investments in Investee Funds, where GIML absorbed the expenses of the
management of such funds to a maximum of 1% per annum of the value of the
Company's holding in the relevant fund at the relevant time.
With effect from 4 October 2021, FIL Investment Services (UK) Limited was
appointed as the Alternative Investment Fund Manager of the Company (`the
Manager'), with the investment management of the Company undertaken by FIL
Investments International (`Fidelity International', `the Investment Manager')
collectively `Fidelity'.
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. Fees will be payable monthly in arrears and calculated
on a daily basis.
Management fees incurred by collective investment schemes or investment
companies managed or advised by the Investment Manager are reimbursed.
Fidelity International has waived its entitlement to receive a Management Fee
for a period of nine months from its date of appointment. Hence, management
fees for the financial year ended 30 June 2022 relates to the period under
GIML management.
Please see information on ongoing charges ratio as presented in the Annual
Financial Report.
5. Other Expenses
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Allocated to revenue:
Custodian fees 362 1,002
Directors' fees 279 263
Directors' expenses 74 19
Administration fees 192 359
Audit fees 1 73 159
Legal and professional fees 117 213
Sundry expenses 522 436
1,619 2,451
Allocated to capital: 2
Legal and professional fees - 1,318
- 1,318
Other expenses 1,619 3,769
1 The audit fees charged through the Statement of Comprehensive Income for
the year ended 30 June 2022 also includes an element related to the prior
year's Audit.
2 Transaction costs directly associated with purchases and sales of
non-derivative securities changed presentation to be included under the `Net
gains/(losses) on financial assets at fair value through profit or loss' line
in the capital column of the Statement of Comprehensive Income. In the prior
periods the transaction costs were included under `Other expenses'. The change
in presentation is consistently applied for both for the current year and
comparative reporting period.
Administration fees
The Administrator is entitled to receive a fee, payable monthly, based on the
Net Asset Value of the Company and time incurred. Administration fees for the
year were $192,000 and charged by JP Morgan Administration Services (Guernsey)
Limited (2022: $359,000).
Custodian fee
Under the Custodian Agreement, the Custodian to the Company is entitled to
receive a fee payable monthly, based on the Net Asset Value of the Company.
All custody services are performed by JP Morgan Chase Bank.
The Company also incurs charges and expenses of other organisations with whom
securities are held. The total of all Custodian fees for the year represented
approximately 0.05% (2022: 0.08%) per annum of the average Net Assets of the
Company. Custodian fees for the year were $362,000 (2022: $1,002,000).
6. Finance Costs
Year ended 30 June 2023 Year ended 30 June 2022
Revenue $'000 Capital $'000 Total $'000 Revenue $'000 Capital $'000 Total $'000
Bank charges - - - 63 - 63
Dividends paid on short CFDs 5,270 - 5,270 9,097 - 9,097
Interest paid on CFDs 10,383 - 10,383 4,786 - 4,786
15,653 - 15,653 13,946 - 13,946
7. Taxation
Year ended 30 June 2023 Year ended 30 June 2022
Revenue $'000 Capital $'000 Total $'000 Revenue $'000 Capital $'000 Total $'000
Capital gains tax - (644) (644) - (6,948) (6,948)
Withholding taxes 2,622 - 2,622 2,954 - 2,954
2,622 (644) 1,978 2,954 (6,948) (3,994)
The Company is exempt from taxation in Guernsey under the provisions of the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 2012. As such, the Company is
only liable to pay a fixed annual fee, currently £1,200 (2022: £1,200).
Income due to the Company is subject to withholding taxes. The Manager
undertakes regular reviews of the tax situation of the Company and believes
that withholding taxes on dividend income and capital gains taxes on capital
gains are currently the material transactions that generate the amounts of tax
payable.
In accordance with IAS 12, `Income taxes', where necessary the Company
provides for deferred taxes on any capital gains/losses on the revaluation of
securities in such jurisdictions where capital gains tax is levied.
The capital gains charge has been calculated on the basis of the tax laws
enacted or substantially enacted at the reporting date in the countries where
the Company's investments generate taxable income on realisation. The Manager,
on behalf of the Board, periodically evaluates which applicable tax
regulations are subject to interpretation and establishes provisions when
appropriate.
As at 30 June 2023, $915,000 capital gains tax provision was recognised in
the Statement of Financial Position (2022: $nil).
8. Earnings/(loss) per Participating Preference Share
Year ended 30 June 2023 Year ended 30 June 2022
Revenue earnings per Participating Preference Share $0.22 $0.15
Capital loss per Participating Preference Share $(0.06) $(5.11)
Total earnings/(loss) per Participating Preference Share - basic and diluted $0.16 $(4.96)
The earnings/(loss) per Participating Preference Share is based on the
profit/(loss) after taxation for the year divided by the weighted average
number of Participating Preference Shares in issue during the year, as shown
below:
$'000 $'000
Revenue profit after taxation for the year 19,784 15,107
Capital loss after taxation for the year (5,235) (512,589)
Total profit/(loss) after taxation for the year attributable to Participating Preference Shares 14,549 (497,482)
Number Number
Weighted average number of Participating Preference Shares in issue 91,100,066 100,251,671
9. Dividends Paid to Shareholders
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Dividend paid
2022 final dividend of 16.0¢ (2021: 18.0¢) per Participating Preference Share 14,576 16,398
Total dividend paid 14,576 16,398
Dividend proposed
2023 final dividend of 19.0¢ (2022: 16.0¢) per Participating Preference Share 17,309 14,576
Total dividend proposed 17,309 14,576
The Directors have proposed the payment of a dividend for the year ended
30 June 2023 of 19.0¢ per Participating Preference Share which is subject to
approval by shareholders at the Annual General Meeting on 7 December 2023 and
has not been included as a liability in these financial statements. The
dividend will be paid on 15 December 2023 to shareholders on the register at
the close of business on 17 November 2023 (ex-dividend date 16 November
2023).
10. Financial Assets at Fair Value through Profit or Loss
30 June 2023 $'000 30 June 2022 $'000
Financial Assets:
Equity securities 752,126 642,794
Equity linked notes 17,433 78,739
Investee funds 9,049 5,809
Total financial assets at fair value through profit or loss 1 778,608 727,342
Opening book cost 907,801 1,184,256
Opening unrealised (losses)/gains on financial assets at fair value through profit or loss (180,459) 495,679
Opening fair value of financial assets at fair value through profit or loss 727,342 1,679,935
Movements in the year
Purchases at cost 2 932,911 1,659,847
Sales - proceeds 2 (918,198) (2,077,408)
Gains/(losses) on financial assets at fair value through profit or loss 2 36,553 (535,032)
Closing fair value 778,608 727,342
Closing book cost 884,753 907,801
Closing unrealised losses on financial assets at fair value through profit or loss (106,145) (180,459)
Closing fair value of financial assets at fair value through profit or loss 778,608 727,342
1 The fair value hierarchy of the financial assets at fair value through
profit or loss shown in Note 17 below.
2 Transaction costs directly associated with purchases and sales of
non-derivative securities changed presentation to be included under the `Net
gains/(losses) on financial assets at fair value through profit or loss' line
in the capital column of the Statement of Comprehensive Income. In the prior
periods the transaction costs were included under `Other expenses'. The change
in presentation is consistently applied for both for the current year and
comparative reporting period.
Under the previous Investment Manager and until the re-balancing of the
portfolio by the new Investment Manager, the entire balance of investments in
Financial assets at fair value through profit or loss was classified under
Current assets. Under the investment approach adopted by the current
Investment Manger, the portfolio does not meet the definition of current
assets, therefore the entire balance of investments in Financial assets at
fair value through profit or loss is classified as Non-current assets. This
led to a restatement of the entire balance of Financial assets at fair value
through profit or loss as at 30 June 2022 reducing the Current assets from
$824,595,000 to $97,253,000 and increasing the Non-current assets from Nil to
$727,342,000. The restatement of the 30 June 2022 balance has no impact on
the Net Asset Value of the Company or any other indicators, including the
Alternative Performance Measures as at 30 June 2022.
As the investment objective of the Company is to achieve long-term capital
growth, the classification of investments in Financial assets at fair value
through profit or loss as Non-current assets is representative of the way the
portfolio is managed.
The appropriate classification for periods prior to the change of Investment
Manager (4 October 2021) and accounting periods prior to that is considered
to be impracticable to determine, due to the change in Investment Manager and
directors.
Gains/(losses) on financial assets at fair value through profit or loss
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Realised gains/(losses) on financial assets at fair value through profit or loss
Realised gains 75,936 385,792
Realised losses (113,697) (244,686)
Net realised (losses)/gains on financial assets at fair value through profit or loss (37,761) 141,106
Change in unrealised gains/(losses) on financial assets at fair value through profit or loss
Change in unrealised gains on financial assets at fair value through profit or loss 20,750 (499,923)
Change in unrealised losses on financial assets at fair value through profit or loss 53,564 (176,215)
Net change in unrealised gains/(losses) on financial assets at fair value through profit or loss 74,314 (676,138)
Net gains/(losses) on financial assets at fair value through profit or loss 36,553 (535,032)
The Company received $918,198,000 (2022: $2,077,408,000) from financial assets
at fair value through profit or loss sold in the year. The book cost of these
financial assets at fair value through profit or loss when they were purchased
was $955,959,000 (2022: $1,936,302,000). These financial assets at fair value
through profit or loss have been revalued over time and until they were sold
any unrealised gains/losses were included in the fair value of the financial
assets at fair value through profit or loss.
Transaction costs incurred during the year in the acquisition and disposal of
financial assets at fair value through profit or loss, which are included in
the Net realised gains/(losses) on financial assets at fair value through
profit or loss were as follows:
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Purchases transaction costs 1,403 2,094
Sales transaction costs 1,123 2,945
2,526 5,039
Transaction costs for the year ended 30 June 2022 were higher due to the
rebalancing of the investment portfolio following the change of Investment
Manager to Fidelity.
11. Derivative Instruments
Year ended 30 June 2023 $'000 Year ended 30 June 2022 $'000
Realised (losses)/gains on derivative instruments
Gains on CFDs 163,817 129,741
Gains on futures 19,508 117,231
Gains on options 10,947 6,269
Losses on CFDs (187,154) (227,268)
Losses on futures (21,287) (3,963)
Losses on options (13,600) (6,068)
Net realised (losses)/gains on derivative instruments (27,769) 15,942
Change in unrealised (losses)/gains on derivative instruments
Change in unrealised gains on CFDs (11,177) 19,541
Change in unrealised gains on futures 849 -
Change in unrealised gains on options 138 948
Change in unrealised losses on CFDs (15) (10,890)
Change in unrealised losses on futures 277 (277)
Change in unrealised losses on options (112) (2,035)
Net change in unrealised (losses)/gains on derivative instruments (10,040) 7,287
Net (losses)/gains on derivative instruments (37,809) 23,229
30 June 2023 Fair value $'000 30 June 2022 Fair value $'000
Fair value of derivative instruments recognised on the Statement of Financial Position*
Derivative instrument assets 9,468 20,515
Derivative instrument liabilities (12,847) (14,408)
(3,379) 6,107
* The fair value hierarchy of the derivative instruments is shown in Note 17
below.
30 June 2023 30 June 2022
Fair value $'000 Asset exposure $'000 Fair value $'000 Asset exposure $'000
At the year end the Company held the following derivative instruments
Long CFDs (4,598) 312,737 3,781 249,053
Short CFDs 2,057 203,746 4,967 188,830
Short CFD (hedging exposure) - - (97) (7,938)
Futures (hedging exposure) 849 (130,176) (277) (60,312)
Long call options 254 2,879 973 3,675
Short put options (1,557) 10,789 (2,954) 16,092
Short call options (384) 6,406 (286) 3,334
(3,379) 406,381 6,107 392,734
12. Other Receivables
30 June 2023 $'000 30 June 2022 $'000
CFD dividend receivable 827 377
Securities sold pending settlement 789 13,218
Amounts receivable on settlement of derivatives - 9,770
Accrued income 4,834 6,189
Other receivables 30 865
6,480 30,419
13. Other Payables
30 June 2023 $'000 30 June 2022 $'000
CFD interest payable 473 201
CFD dividend payable 261 555
Securities purchased pending settlement 16,050 12,033
Amounts payable on settlement of derivatives 2,762 103
Management fees 391 -
Custodian fees 89 108
Directors' fees 45 76
Capital gains tax payable 915 -
Accrued expenses 256 350
21,242 13,426
14. Share Capital
2023 Number of shares 2022 Number of shares
Authorised
Founder shares of no par value 1,000 1,000
Issued
Participating Preference Shares of no par value adjusted for purchase of own shares 91,100,066 121,466,754
Repurchase and cancellation of the Company's own shares - (30,366,688)
Participating Preference Shares as at 30 June 91,100,066 91,100,066
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.
Founder Shares
All of the Founder Shares were issued on 6 June 1989 to GIML or its nominees.
The Founder Shares were issued at $1 each par value. The Founder Shares are
not redeemable. At the Extraordinary General Meeting of the Company on
30 October 2009 and in accordance with The Companies (Guernsey) Law, 2008 it
was approved that each Founder Share be redesignated as no par value shares.
The Founder Shares confer no rights upon holders other than at general
meetings, on a poll, every holder is entitled to one vote in respect of each
Founder Share held.
On 7 October 2021, all of the Founder shares were transferred from GIML to
FIL Investment Services (UK) Limited.
Treasury Shares
The Company does not hold treasury shares as all historical repurchases of its
own shares have been cancelled.
Participating Preference Shares
At the Extraordinary General Meeting of the Company held on 30 October 2009
it was approved that each Participating Preference Share be divided into ten
Participating Preference Shares. Under The Companies (Guernsey) Law, 2008 (as
amended), the nominal values of the shares were also converted into sterling
and redesignated as no par value shares.
The holders of Participating Preference Shares rank ahead of holders of any
other class of share in issue in a winding up. They have the right to receive
any surplus assets available for distribution. The Participating Preference
Shares confer the right to dividends declared, and at general meetings, on a
poll, confer the right to one vote in respect of each Participating Preference
Share held. Participating Preference Shares are classed as equity as they have
a residual interest in the assets of the Company.
All of the above classes of shares are considered as Equity under the
definitions set out in IAS 32, `Financial instruments: Disclosure and
presentation', because the shares are not redeemable and there is no
obligation to pay cash or another financial asset to the holder.
15. Capital and Reserves
Share premium account $'000 Capital reserve $'000 Revenue reserve $'000 Total equity $'000
At 1 July 2022 6,291 741,095 49,375 796,761
Net gains on investments at fair value through profit or loss (see Note 10) - 36,553 - 36,553
Net losses on derivative instruments (see Note 11) - (37,809) - (37,809)
Net foreign exchange losses - (933) - (933)
Management fees (see Note 4) - (3,690) - (3,690)
Tax charged to capital (see Note 7) - 644 - 644
Revenue profit after taxation for the year - - 19,784 19,784
Dividends paid to shareholders (see Note 9) - - (14,576) (14,576)
At 30 June 2023 6,291 735,860 54,583 796,734
Share premium account $'000 Capital reserve $'000 Revenue reserve $'000 Total equity $'000
At 1 July 2021 6,291 1,642,118 50,666 1,699,075
Net losses on investments at fair value through profit or loss (see Note 10) - (535,032) - (535,032)
Net gains on derivative instruments (see Note 11) - 23,229 - 23,229
Net foreign exchange losses - (2,707) - (2,707)
Management fees (see Note 4) - (3,709) - (3,709)
Other expenses (see Note 5) - (1,318) - (1,318)
Tax charged to capital (see Note 7) - 6,948 - 6,948
Write off receivable for shares - (134) - (134)
Repurchase and cancellation of the Company's own shares (see Note 14) - (388,300) - (388,300)
Revenue profit after taxation for the year - - 15,107 15,107
Dividends paid to shareholders (see Note 9) - - (16,398) (16,398)
At 30 June 2022 6,291 741,095 49,375 796,761
Share Premium
Share Premium is the amount by which the value of shares subscribed for
exceeded their nominal value at the date of issue.
The capital reserve balance at 30 June 2023 includes unrealised losses on the
revaluation of financial assets at fair value through profit or loss of
$106,145,000 (2022: losses of $180,459,000) as detailed in Note 10 above.
16. Net Asset Value per Participating Preference Share
The calculation of the net asset value per Participating Preference Share is
based on the following:
30 June 2023 30 June 2022
Net assets $796,734,000 $796,761,000
Participating Preference Shares in issue 91,100,066 91,100,066
Net Asset Value per Participating Preference Share $8.75 $8.75
17. Financial Instruments
Management of risk
The Company's investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the
Company. The Board with the assistance of the Investment Manager, has
developed a risk matrix which, as part of the internal control process,
identifies the risks that the Company faces. Principal risks identified are
investment performance, cybercrime and information security, business
continuity & event management, gearing, discount to NAV, unlisted securities,
foreign currency exposure, lack of market liquidity, environmental, social and
governance (ESG) and key person risks. Other risks identified are tax and
regulatory and operational risks, including those relating to third party
service providers covering investment management, marketing and business
development, company secretarial, fund administration and operations and
support functions. Risks are identified and graded in this process, together
with steps taken in mitigation, and are updated and reviewed on an ongoing
basis. Risks identified are shown in the Strategic Report.
This note is incorporated in accordance with IFRS 7: Financial Instruments:
Disclosures and refers to the identification, measurement and management of
risks potentially affecting the value of financial instruments.
The Company's financial instruments may comprise:
· Equity shares (listed and unlisted), preference shares, equity linked
notes, convertible bonds, rights issues, holdings in investment companies and
private placements;
· Derivative instruments including CFDs, warrants, futures and options
written or purchased on stocks and equity indices and forward currency
contracts; and
· Cash, liquid resources and short-term receivables and payables that arise
from its operations.
The risks identified by IFRS 7 arising from the Company's financial
instruments are market price risk (which comprises interest rate risk, foreign
currency risk and other price risk), liquidity risk, credit and counterparty
risk and derivative instrument risk. The Board reviews and agrees policies for
managing each of these risks, which are summarised below.
Interest rate risk
The Company has the ability to borrow up to 10% of the Company's NAV in order
to increase the amount of capital available for investment. The Company aims
to keep its use of an overdraft facility for trading purposes to a minimum
only using a facility to enable settlements. It may also hold interest bearing
securities and cash.
The Company finances its operations through its share capital and reserves. In
addition, the Company has gearing through the use of derivative instruments.
The Board imposes limits to ensure gearing levels are appropriate. The Company
is exposed to a financial risk arising as a result of any increases in
interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company's financial instruments that are exposed to
movements in interest rates are shown below:
30 June 2023 $'000 30 June 2022 $'000
Exposure to financial instruments that bear interest
Long CFDs - exposure less fair value 317,335 245,272
317,335 245,272
Exposure to financial instruments that earn interest
Short CFDs - exposure plus fair value 205,804 201,638
Amounts held at futures clearing houses and brokers 18,210 11,901
Cash and cash equivalents 18,057 34,418
242,071 247,957
Net exposure to financial instruments that (bear)/earn interest (75,264) 2,685
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at the statement of
financial position date, an increase of 1% in interest rates throughout the
year, with all other variables held constant, would have decreased the profit
after taxation for the year and decreased the net assets of the Company by
$753,000 (2022: decreased the loss after taxation for the year and increased
the net assets of the Company by $27,000). A decrease of 1% in interest rates
throughout the year would have had an equal but opposite effect.
Foreign currency risk
The Company invests in financial instruments and enters into transactions
denominated in currencies other than its functional currency. Consequently,
the Company is exposed to risks that the exchange rate of its functional
currency relative to other foreign currencies may change in a manner that has
an adverse effect on the value of that portion of the Company's assets or
liabilities denominated in currencies other than US dollars (functional
currency) or UK sterling (the currency in which shares are traded on the
London Stock Exchange).
Three principal areas have been identified where foreign currency risk could
impact the Company:
· movements in currency exchange rates affecting the value of investments
and derivatives exposures;
· movements in currency exchange rates affecting short-term timing
differences, for example, between the date when an investment is bought or
sold and the date when settlement of the transaction occurs; and
· movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The Company's financial assets comprise of investments, positions on
derivative instruments, short-term debtors and cash and cash equivalents.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. The Company's financial liabilities comprise positions
on derivative instruments and other payables.
The net currency exposure profile of these financial assets/(liabilities) is
shown below:
Currency Investments held at fair value through profit or loss $'000 Asset/ (liabilities) exposure of derivative instruments 1 $'000 Cash, cash equivalents and other receivables/ (payables) 2 $'000 2023 Total foreign currency risk $'000
Brazilian real 70,992 263 (74) 71,181
Canadian dollar 23,451 19,717 15 43,183
Chinese yuan renminbi 6,364 - 30 6,394
Euro 35,411 3,570 5 38,986
Hong Kong dollar 77,538 53,348 1,265 132,151
Indian rupee 93,561 - 136 93,697
Indonesian rupiah 36,602 - - 36,602
Korean won 9,563 (604) 36 8,995
Mexican peso 34,214 18,890 (65) 53,039
Nigerian naira 9,356 - 1,319 10,675
Poland zloty 12,087 (7,503) 21 4,605
South African rand 80,608 (4,512) (237) 75,859
UK sterling 20,784 9,044 (27) 29,801
Swedish krona 10,837 - - 10,837
Taiwan dollar 107,225 - 1,835 109,060
United Arab Emirates dirham 4,124 - - 4,124
United States dollar 92,384 (90,177) 17,175 19,382
Vietnamese dong 15,131 - 68 15,199
Other currencies 38,376 (15,959) 3 22,420
778,608 (13,923) 21,505 786,190
1 The asset exposure of long and short derivative positions is after the
netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing
houses and brokers.
Currency Investments held at fair value through profit or loss $'000 Asset/ (liabilities) exposure of derivative instruments 1 $'000 Cash, cash equivalents and other receivables/ (payables) 2 $'000 2022 Total foreign currency risk $'000
Brazilian real 71,653 - 1,363 73,016
Canadian dollar 50,696 (18) 302 50,980
Chinese yuan renminbi 43,529 - 148 43,677
Euro 13,162 (2,746) 35 10,451
Hong Kong dollar 62,006 105,454 4,893 172,353
Indian rupee 68,882 - 472 69,354
Indonesian rupiah 10,611 - - 10,611
Korean won 37,393 2,275 82 39,750
Mexican peso 1,737 16,545 (67) 18,215
Nigerian naira 15,731 - 1,602 17,333
Polish zloty 2,118 (391) 1 1,728
South African rand 60,046 (3,091) 2 56,957
UK sterling 20,936 (7,209) 112 13,839
Swedish krona 3,251 - - 3,251
Taiwan dollar 99,327 - 2,971 102,298
United Arab Emirates dirham 26,679 - - 26,679
United States dollar 132,765 (85,971) 47,516 94,310
Vietnamese dong 5,784 - 4,134 9,918
Other currencies 1,036 (16,442) (254) (15,660)
727,342 8,406 63,312 799,060
1 The asset exposure of long and short derivative positions is after the
netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing
houses and brokers.
Foreign currency risk management
The degree of sensitivity of the Company's assets to foreign currency risk
depends on the net exposure of the Company to each specific currency and the
volatility of that specific currency in the year. At 30 June 2023, had the
average exchange rate of the US dollar weakened by a reasonable possible
movement of 5% (2022: 5%) in relation to the basket of currencies in which the
Company's net assets are denominated, weighted by the Company's exposure to
each currency with all other variables held constant, the Company estimates
the profit after taxation for the year would have increased and net assets
would have increased by $38,340,000 (2022: decreased the loss after taxation
for the year and increased the net assets of the Company by $35,238,000).
An increase in the US dollar by 5% in relation to the basket of currencies in
which the Company's net assets are denominated would have resulted in a
decline in net assets by the same amount, under the assumption that all other
factors remain constant.
The Investment Manager does not consider it realistic or useful to examine
foreign currency risk in isolation. The Investment Manager considers the
standard deviation of the NAV (which is struck in US dollars) as the
appropriate risk measurement for the portfolio as a whole as it reflects
market price risk generally. Please see Market Price Risk section.
Market price risk
Market price risk is the risk that value of the instrument will experience
unanticipated fluctuations as a result of changes in market prices (other than
those arising from foreign currency risk and interest rate risk), whether
caused by factors specific to an individual investment, its issuer, or all
factors influencing all instruments traded in the market.
Market price risk management
Market price risk can be moderated in a number of ways by the Investment
Manager through:
(i) a disciplined stock selection and investment process; and
(ii) limitation of exposure to a single investment through diversification
and through amongst others, the implementation of investment restrictions.
The Board reviews the prices of the portfolio's holdings and investment
performance at their meetings. Country and Sector Exposure of the Portfolio
and Forty Largest Holdings illustrate the Company's portfolio at the end of
reporting period reflects the diversified strategy.
The Investment Manager has identified the MSCI Emerging Markets Index as a
relevant reference point for the markets in which it operates. However, the
Investment Manager does not manage the Company's investment strategy to track
the MSCI Emerging Markets Index or any other index or benchmark. The
short-term performance of the Company and its correlation to the MSCI Emerging
Markets Index is shown in the Financial Highlights section and is expected to
change over time.
Market price risk - Investee Funds
The Company's investments in Investee Funds are subject to the terms and
conditions of the respective Investee Fund's offering documentation and are
susceptible to market price risk arising from uncertainties about future
values of those Investee Funds. The Investment Manager makes investment
decisions after extensive due diligence of the underlying fund, its strategy
and the overall quality of the underlying fund's manager. All of the Investee
Funds in the investment portfolio are managed by portfolio managers who are
compensated by the respective Investee Funds for their services. Such
compensation generally consists of an asset based fee and a performance based
incentive fee and is reflected in the valuation of the Company's investment in
each of the Investee Funds.
The exposure to investments in Investee Funds at fair value is disclosed as
part of Note below. These investments are included in `Financial assets at
fair value through profit or loss' in the Statement of Financial Position. The
Company's maximum exposure to loss from its interests in Investee Funds is
equal to the total fair value of its investments in Investee Funds.
Total purchases in Investee Funds amounted $3,846,000 (2022: none). Total
sales amounted to $4,045,000 (2022: $1,473,000). As at 30 June 2023 and 2022
there were no capital commitment obligations and no amounts due to Investee
Funds for unsettled purchases. During the year ended 30 June 2023 total net
losses incurred on investments in Investee Funds were $1,154,000 (2022: losses
of $1,488,000).
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments. It represents the potential loss the Company might
suffer through price movements in its investment positions. The Board meets
quarterly to consider the asset allocation of the portfolio and the risk
associated with particular industry sectors within the parameters of the
investment objective.
The Investment Manager is responsible for actively monitoring the portfolio
selected in accordance with the overall asset allocation parameters and seeks
to ensure that individual stocks also meet an acceptable risk/reward profile.
Other price risks arising from derivative positions, mainly due to the
underlying exposures, are assessed by the Investment Manager's specialist
derivative instruments team.
Other price risk sensitivity
The following table illustrates the sensitivity of loss after taxation for the
year and net assets to an increase or decrease of 10% (year ended 30 June
2022: 10%) in the fair value of investments. This level of change is
considered to be a reasonable illustration based on observation of current
market conditions. The sensitivity analysis is based on investments with all
other variables held constant.
The other price sensitivity analysis is based on the valuation of investments
directly held by the Company. For underlying investment funds this is based on
the net assets of such underlying funds as included in the Company's portfolio
of investments at reporting date.
The value of certain investments, in particular positions held in underlying
funds may vary due to currency, interest rate and credit risks and such risks
are not directly considered in the other price risk sensitivity analysis.
Effect of a 10% increase/(decrease) in fair value:
2023 2022
10% increase in fair value $'000 10% decrease in fair value $'000 10% increase in fair value $'000 10% decrease in fair value $'000
Statement of Comprehensive Income - profit/(loss)after taxation
Total profit/(loss) after taxation for the year 77,861 (77,861) 72,734 (72,734)
Net assets 77,861 (77,861) 72,734 (72,734)
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company's
assets mainly comprise readily realisable securities and derivative
instruments which can be sold easily to meet funding commitments if necessary.
Short-term flexibility is achieved by the use of a bank overdraft, if
required.
The liquidity risk profile of the Company was as follows:
30 June 2023 $'000 30 June 2022 $'000
Amounts due within one month
Securities purchased pending settlement 16,050 12,033
Amounts payable on settlement of derivatives 2,762 103
Derivative liabilities 12,847 12,494
CFD interest payable 473 201
CFD dividend payable 261 555
Custodian fees 89 108
Management fees 391 -
Directors' fees 45 76
Accrued expenses 256 350
Amounts due within one year
Derivative liabilities - 1,914
Capital gains tax payable 915 -
Total liabilities 34,089 27,834
Liquidity risk management
The restrictions on concentration and the diversification requirements
detailed above (see market price risk) also serve normally to protect the
overall value of the Company from the risks created by the lower level of
liquidity in the markets in which the Company operates.
The Company has no payables past their due dates as at 30 June 2023 (2022:
nil).
Credit and counterparty risk
Credit risk is the risk that a counterparty to a financial instrument will
fail to discharge an obligation or commitment it has entered into with the
Company. Financial instruments may be adversely affected if any of the
institutions with which money is deposited suffer insolvency or other
financial difficulties. All transactions are carried out with brokers that
have been approved by the Investment Manager and are settled on a delivery
versus payment basis. Limits are set on the amount that may be due from any
one broker and are kept under review by the Investment Manager. Exposure to
credit risk arises on outstanding security transactions and derivative
instrument contracts and cash at bank. The Company only engages with approved
counterparties that are rated investment grade or above.
The Company has no receivables past their due dates as at 30 June 2023 (2022:
nil).
Credit risk management
Certain derivative instruments in which the Company may invest are not traded
on an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association's ("ISDA") market standard derivative legal
documentation. These are known as Over The Counter ("OTC") trades. As a
result, the Company is subject to the risk that a counterparty may not perform
its obligations under the related contract. In accordance with the risk
management process which the Investment Manager employs, this risk is
minimised by only entering into transactions with counterparties which are
believed to have an adequate credit rating at the time the transaction is
entered into, by ensuring that formal legal agreements covering the terms of
the contract are entered into in advance, and through adopting a counterparty
risk framework which measures, monitors and manages counterparty risk by the
use of internal and external credit agency ratings and evaluates derivative
instrument credit risk exposure.
The maximum exposure to credit risk at 30 June is the carrying amount of the
financial assets as set out below.
30 June 2023 Amounts due within 1 year $'000 30 June 2022 Amounts due within 1 year $'000
Derivative assets 9,468 20,515
Securities sold pending settlement 789 13,218
Amounts receivable on settlement of derivatives - 9,770
Amounts held at futures clearing houses and brokers 18,210 11,901
Cash and cash equivalents 18,057 34,418
CFD dividend receivable 827 377
Accrued income 4,834 6,189
Other receivables 30 865
52,215 97,253
None of these assets are impaired nor past due but not impaired.
For OTC and exchange traded derivative transactions, collateral is used to
reduce the risk of both parties to the contract. Collateral is managed on a
daily basis for all relevant transactions and held in segregated collateral
accounts. Collateral can be held by brokers on behalf of the Company to reduce
the credit risk exposure of the Company or held by the Company on behalf of
brokers to reduce the credit risk exposure of the brokers. All collateral
received or pledged at reporting date is in form of cash. The value of
collateral received from brokers and pledged to brokers is shown below:
30 June 2023 30 June 2022
collateral received $'000 collateral pledged $'000 collateral received $'000 collateral pledged $'000
Bank of America Merrill Lynch International - 250 - -
Goldman Sachs International Ltd - 3,430 2,730 -
J.P. Morgan Securities plc 1,180 - - 440
Morgan Stanley & Co. International Ltd 110 - 8,090 -
HSBC Bank plc - 1,800 5,180 -
UBS AG - 12,730 740 11,461
Credit Risk - Securities Lending
During the year ended 30 June 2022, the Company was engaged in securities
lending. As of 30 June 2022 and during the year ended 30 June 2023, the
Company was no longer engaged in securities lending activities.
Participation in securities lending transactions during the year ended
30 June 2022 exposed the Company to risk of default by the third party
borrower. To mitigate this risk, during the period when the Company was
engaged in securities lending, the loans were secured by collateral comprising
of governmental securities and was called in on a daily basis to a value of
102% of the fair value of securities on loan if that collateral was
denominated in the same currency as the securities on loan and 105% if it was
denominated in a different currency. The Lending Agent was responsible for
monitoring the collateralisation of 102% and 105% and ensuring that these
levels were maintained on marked to market fair values of all securities on
loan. The Company had the right under the lending agreement to recover the
securities from the borrower on demand. In case of default by the borrower,
the responsibility to `make good' the transaction was with the Lending Agent.
During the period when the Company was engaged in securities lending, Genesis
actively monitored the capital levels and credit rating of the Lending Agent
and the third party borrowers.
Derivative instrument risk
The risks and risk management processes which result from the use of
derivative instruments, are set out in the Risk Management Process document.
This document was approved by the Board and allows the use of derivative
instruments for the following purposes:
· to gain exposure to equity markets, sectors or individual investments;
· to hedge equity market risk in the Company's investments with the
intention of mitigating losses in the event markets fall;
· to enhance portfolio returns by writing call and put options; and
· to take short positions in equity markets, sectors or individual
investments which would benefit from a fall in the relevant market price,
where the Investment Manager believes the investment is overvalued. These
positions distinguish themselves from other short exposures held for hedging
purposes since they are expected to add risk to the portfolio.
The risk and investment performance of these instruments are managed by an
experienced, specialist derivative team of the Investment Manager using
portfolio risk assessment tools for portfolio construction.
Derivative instruments exposure sensitivity analysis
The Company invests in derivative instruments to gain or reduce exposure to
the equity market. An increase of 10% in the share prices of the investments
underlying the derivative instruments at the reporting date would have
increased the profit after taxation for the year and increased the net assets
of the Company by $1,392,000 (2022: decreased the loss after taxation for the
year and increased the net assets of the Company by $841,000). A decrease of
10% in share prices of the investments underlying the derivative instruments
would have had an equal but opposite effect.
Offsetting
To mitigate counterparty risk for OTC derivative transactions, the ISDA legal
documentation is in the form of a master agreement between the Company and the
brokers. This allows enforceable netting arrangements in the event of a
default or termination event. Derivative instrument assets and liabilities
that are subject to netting arrangements have not been offset in preparing the
Statement of Financial Position.
The Company's derivative instrument financial assets and liabilities
recognised in the Statement of Financial Position and amounts that could be
subject to netting in the event of a default or termination are shown below:
Financial assets Gross amount $'000 Gross amount of recognised financial liabilities set off on the statement of financial position $'000 Net amount of financial assets presented on the statement of financial position $'000 Related amounts not set 2023
off on statement of
financial position
Financial instruments $'000 Margin account received as collateral $'000 Net amount $'000
CFDs 8,365 - 8,365 (6,055) (1,290) 1,020
Options 254 - 254 (254) - -
Futures 849 - 849 - - 849
9,468 - 9,468 (6,309) (1,290) 1,869
Financial liabilities Gross amount $'000 Gross amount of recognised financial assets set off on the statement of financial position $'000 Net amount of financial liabilities presented on the statement of financial position $'000 Related amounts not set 2023
off on statement of
financial position
Financial instruments $'000 Margin account pledged as collateral $'000 Net amount $'000
CFDs (10,906) - (10,906) 6,055 4,235 (616)
Options (1,941) - (1,941) 254 1,687 -
(12,847) - (12,847) 6,309 5,922 (616)
Financial liabilities Gross amount $'000 Gross amount of recognised financial assets set off on the statement of financial position $'000 Net amount of financial liabilities presented on the statement of financial position $'000 Related amounts not set 2022
off on statement of
financial position
Financial instruments $'000 Margin account pledged as collateral $'000 Net amount $'000
CFDs 19,542 - 19,542 (10,444) (6,635) 2,463
Options 973 - 973 (973) - -
20,515 - 20,515 (11,417) (6,635) 2,463
Financial assets Gross amount $'000 Gross amount of recognised financial liabilities set off on the statement of financial position $'000 Net amount of financial assets presented on the statement of financial position $'000 Related amounts not set 2022
off on statement of
financial position
Financial instruments $'000 Margin account received as collateral $'000 Net amount $'000
CFDs (10,891) - (10,891) 10,444 - (447)
Options (3,240) - (3,240) 973 2,267 -
Futures (277) - (277) - 277 -
(14,408) - (14,408) 11,417 2,544 (447)
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Note 2(b). The table below sets out the Company's fair value hierarchy:
Financial assets at fair value through profit or loss Level 1 $'000 Level 2 $'000 Level 3 $'000 30 June 2023 Total $'000
Investments in equity securities 751,117 - 1,009 752,126
Equity linked notes - 17,433 - 17,433
Investee funds - 3,943 5,106 9,049
Derivative instrument assets - Futures contracts 849 - - 849
Derivative instrument assets - Options 13 241 - 254
Derivative instrument assets - CFDs - 8,365 - 8,365
751,979 29,982 6,115 788,076
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities - Options 1,516 425 - 1,941
Derivative instrument liabilities - CFDs - 10,906 - 10,906
1,516 11,331 - 12,847
Financial instruments classified under Level 2 are valued by reference to
inputs other than quoted prices included in level 1 that are observable (i.e.
developed using market data) for the asset or liability, either directly or
indirectly. The Level 2 instruments include underlying investment funds,
equity linked notes, over the counter option contracts and contracts for
difference.
Financial assets at fair value through profit or loss Level 1 $'000 Level 2 $'000 Level 3 $'000 30 June 2022 Total $'000
Investments in equity securities 642,794 - - 642,794
Equity linked notes - 78,739 - 78,739
Investee funds - - 5,809 5,809
Derivative instrument assets - Options 973 - - 973
Derivative instrument assets - CFDs - 19,542 - 19,542
643,767 98,281 5,809 747,857
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities - Futures contracts (277) - - (277)
Derivative instrument liabilities - Options (2,155) (1,085) - (3,240)
Derivative instrument liabilities - CFDs - (10,891) - (10,891)
(2,432) (11,976) - (14,408)
Valuation basis for Level 3 Investment 30 June 2023 $'000 30 June 2022 $'000
Net asset value 5,106 5,809
Most recently available published price 1,009 -
6,115 5,809
As at 30 June 2023 there were twelve holdings (2022: twelve holdings)
classified as Level 3 investments. Two holdings (2022: two holdings) in
Investee Funds were valued using the most recently available valuation
statements as received from the respective general
partner/manager/administrator, updated to include subsequent cash flows. One
holding (China Renaissance) was valued using the most recently available
published price. Nine holdings (2022: ten holdings) had a nil value.
As at the reporting date seven Russian securities (2022: seven) as well as one
investment exposed to Ukrainian securities (2022: one) have been fair valued
at nil as at 30 June 2023 as a result of trading being suspended on
international stock exchanges. These investments have been transferred from
Level 1 to Level 3 with a value of nil during the year ended 30 June 2022.
As the key input into the valuation of Level 3 investments is official
valuation statements from the investee funds and the adjusted most recently
available published price, we do not consider it appropriate to put forward a
sensitivity analysis on the basis that insufficient value is likely to be
derived by the end users.
The following table summarises the change in value associated with Level 3
financial instruments carried at fair value during the year:
Movements in level 3 investments during the year 30 June 2023 Level 3 $'000 30 June 2022 Level 3 $'000
Opening balance 5,809 8,770
Sales (4,045) (1,473)
Transfers into level 3 1,009 -
Realised gains 3,112 889
Net change in unrealised gains/(losses) 230 (2,377)
Closing balance 6,115 5,809
Unrealised losses as at year end amounting to $6,956,000 (2022: unrealised
losses of $7,186,000) related to Level 3 securities. Gains and losses
(realised and unrealised) included in the Statement of Comprehensive Income
for the year are reported in `Net (losses)/gains on financial assets at fair
value through profit or loss'.
The Company holds seven securities issued by Russian entities (2022: seven).
These securities continue to be impacted by a range of actions taken by
governments, stock exchanges and counterparties, including sanctions regimes,
leading to significant valuation and liquidity issues. Due to these issues,
and the Company's inability to transact or transfer these assets, the value of
the seven Russian securities (2022: seven) held by the Company was written
down to nil (2022: nil), reflecting the significant uncertainty in the
resolution of geopolitical events. These securities, classified as Level 1
immediately prior to the suspension of Russian markets, were transferred to
Level 3 during the year ended 30 June 2022. The Company's investments in the
seven Russian securities (2022: seven) amounted to $17,283,661 immediately
prior to suspension of markets on 28 February 2022 with a cost of $99,959,944
(2022: $99,959,944).
During the year ended 30 June 2023, one security (China Renaissance)
transferred from Level 1 into Level 3 as its shares were suspended from
trading on the Hong Kong Stock Exchange in April 2023. The fair value of
shares held in China Renaissance amounts to USD 1,008,686 and was determined
based on the last available published price for the shares before suspension,
with a cost of USD 1,466,334.
The Company's policy is to recognise transfers in and transfers out at the end
of each accounting period.
Securities Lending
During the year ended 30 June 2023, the Company was not engaged in securities
lending activities. As of 30 June 2022, the Company was no longer engaged in
securities lending activities.
Capital Risk Management
The capital of the Company is represented by the equity attributable to
holders of Participating Preference Shares. The amount of equity attributable
to holders of Participating Preference Shares is subject to change, at most,
twice monthly as the Company is a closed-ended fund with the ability to issue
additional shares only if certain conditions are met as set out in the
Company's scheme particulars. The Company's objective when managing capital is
to safeguard the Company's ability to continue as a going concern in order to
provide returns for shareholders and to maintain a strong capital base to
support the development of the investment activities of the Company.
18. Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital, reserves and
gearing, which are disclosed on the Statement of Financial Position. The
Company is managed in accordance with its investment policy and in pursuit of
its investment objective, both of which are detailed in the Strategic Report.
The principal risks and their management are disclosed in the Strategic Report
and in Note 17 above.
The Company's gearing at the year end is set out below:
30 June 2023
Gross gearing Net gearing
Exposure $'000 % 1 Exposure $'000 % 1
Investments 778,608 97.7 778,608 97.7
Long CFDs 312,737 39.2 312,737 39.2
Short put options 10,789 1.4 10,789 1.4
Long call options 2,879 0.4 2,879 0.4
Total long exposures before hedges 1,105,013 138.7 1,105,013 138.7
Less: short derivative instruments hedging the above (130,176) (16.3) (130,176) (16.3)
Total long exposures after the netting of hedges 974,837 122.4 974,837 122.4
Short CFDs 203,746 25.5 (203,746) (25.5)
Short call options 6,406 0.8 (6,406) (0.8)
Gross Asset Exposure/net exposure 1,184,989 148.7 764,685 96.1
Net Assets 796,734 796,734
Gearing 2 48.7% (3.90)%
30 June 2022
Gross gearing Net gearing
Exposure $'000 % 1 Exposure $'000 % 1
Investments 727,342 91.3 727,342 91.3
Long CFDs 249,053 31.3 249,053 31.3
Short put options 16,092 2.0 16,092 2.0
Long call options 3,675 0.5 3,675 0.5
Total long exposures before hedges 996,162 125.1 996,162 125.1
Less: short derivative instruments hedging the above (68,250) (8.6) (68,250) (8.6)
Total long exposures after the netting of hedges 927,912 116.5 927,912 116.5
Short CFDs 188,830 23.7 (188,830) (23.7)
Short call options 3,334 0.4 (3,334) (0.4)
Gross Asset Exposure/net exposure 1,120,076 140.6 735,748 92.4
Net Assets 796,761 796,761
Gearing 2 40.6% (7.6)%
1 Exposure to the market expressed as a percentage of Net Assets.
2 Gearing is the amount by which Gross Asset Exposure/net exposure exceeds
Net Assets expressed as a percentage of Net Assets.
19. Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International. Both companies are Fidelity group companies.
Details of the current fee arrangements are given in Note 4 above. During the
year, management fees of $4,613,000 (2022: $4,636,000) were payable to the
Manager. During the year, marketing fees of $176,000 (2022: $148,000) were
payable to the Manager. Amounts payable at the reporting date are included in
other payables.
At the date of this report, the Board consisted of five non-executive
Directors (as shown in the Annual Financial Report) all of whom are considered
to be independent by the Board. None of the Directors has a service contract
with the Company.
The Directors received for the financial year fees totalling £221,115, the
breakdown of the fees is shown in the Directors' Remuneration Report in the
Annual Financial Report. From 1 July 2023, the Chairman receives an annual
fee of £50,000, the Chairman of the Audit Committee and Senior Independent
Director receive £38,000 and the other Directors receive an annual fee of
£36,000. The following members of the Board hold ordinary shares in the
Company at the date of this report: Dr Simon Colson 4,416 shares, Katherine
Tsang nil shares, Torsten Koster 15,000 shares, Julian Healy* nil shares and
Heather Manners 10,000 shares.
Directors' expenses for the year include travelling, hotel and other expenses
which the Directors are entitled to when properly incurred by them in
travelling to, attending and returning from meetings and while on other
business of the Company.
Directors' related party interests are stated on in the Annual Financial
Report as part of the Directors' Remuneration Report.
* Appointed on 12 December 2022.
20. Ultimate Controlling Party
In the opinion of the Directors on the basis of the shareholdings advised to
them, the Company has no immediate or ultimate controlling party.
21. Segment Information
The Directors, after having considered the way in which internal reporting is
provided to them, are of the opinion that the Company continues to be engaged
in a single segment of business, being the provision of a diversified
portfolio of investments in emerging markets.
All of the Company's activities are interrelated, and each activity is
dependant on the others. Accordingly, all significant operating decisions are
based upon analysis of the Company operating in one segment.
The financial positions and results from this segment are equivalent to those
per the financial statements of the Company as a whole, as internal reports
are prepared on a consistent basis in accordance with the measurement and
recognition principles of IFRS.
A breakdown of the Company's financial assets at fair value through profit and
loss is shown in the Country exposure of the Company's portfolio in the Annual
Financial Report.
The Company is domiciled in Guernsey. All of the Company's income from
investment is from entities in countries or jurisdictions other than Guernsey.
22. Subsequent events
No significant events have occurred since the end of the reporting date which
would impact on the financial position of the Company disclosed in the
Statement of Financial Position as at 30 June 2023 or on the financial
performance and cash flows of the Company for the year ended on that date.
Alternative Performance Measures
Active Share
Active Share is a measure of the percentage which stock holdings in the
Company differ from the constituents of the benchmark, the MSCI Emerging
Markets Index. Active share is calculated by taking the sum of the absolute
difference between the weights of the holdings in the Company and those in the
MSCI Emerging Markets Index and dividing the result by two. See The Year at a
Glance inside the front cover of the Annual Report for further details.
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure.
It is the difference between the NAV of the Company and the share price and is
expressed as a percentage of the NAV. Details of the Company's discount are on
the Financial Highlights page of the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18 in
the Annual Report for details of the Company's gearing.
Net Asset Value ("NAV") per Participating Preference Share
The NAV per Participating Preference Share is considered to be an Alternative
Performance Measure. See the Statement of Financial Position in the Annual
Report and Note 16 in the Annual Report for further details.
Ongoing charges ratio
Ongoing charges ratio is considered to be an Alternative Performance Measure.
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC as the total of management fees and other expenses expressed
as a percentage of the average net assets throughout the year.
30 June 2023 30 June 2022
Management fees ($'000) 4,613 4,636
Other expenses ($'000) 1 1,619 3,769
Less legal fees - not recurring ($'000) - (1,318)
Ongoing charges ($'000) 6,232 7,087
Average net assets ($'000) 768,785 1,179,409
Ongoing charges ratio 0.81% 0.60%
1 Transaction costs directly associated with purchases and sales of
non-derivative securities changed presentation to be included under the `Net
gains/(losses) on financial assets at fair value through profit or loss' line
in the capital column of the Statement of Comprehensive Income. In the prior
periods the transaction costs were included under `Other expenses'. The change
in presentation is consistently applied for both for the current year and
comparative reporting period.
Total Return Performance
Total return performance is considered to be an Alternative Performance
Measure (as defined in the Glossary to the Annual Report). NAV per share total
return includes reinvestment of the dividend in the NAV of the Company on the
ex-dividend date. Share price total return includes the reinvestment of the
net dividend in the month that the share price goes ex-dividend.
The tables below provide information relating to the NAV per share and share
prices of the Company, the impact of the dividend reinvestments and the total
returns for the years ended 30 June 2023 and 30 June 2022.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 30 June 2023 are an abridged
version of the Company's full Annual Report and Financial Statements, which
have been approved and audited with an unqualified report. The 2022 and 2023
statutory accounts received unqualified reports from the Company's Auditor and
did not include any reference to matters to which the Auditor drew attention
by way of emphasis without qualifying the reports and did not contain a
statement under s.498 of the Companies Act 2006. The financial information for
2021 is derived from the statutory accounts for 2022 which have been delivered
to the Guernsey Financial Services Commission. The 2023 Financial Statements
will be filed with the Guernsey Financial Services Commission in due course.
A copy of the above results announcement will be available on the Company's
website at www.fidelity.co.uk/emergingmarkets within two working days.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at:
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and
additional copies will be available from the registered office of the Company
and on the Company's website: www.fidelity.co.uk/emergingmarkets where up to
date information on the Company, including daily NAV and share prices,
factsheets and other information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
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