REG-Fidelity Emerging Markets Ltd: Annual Financial Report
09/10/2024 07:15
FIDELITY EMERGING MARKETS LIMITED
Final Results for the year ended 30 June 2024
Financial Highlights:
* During the twelve-month period ended 30 June 2024, Fidelity Emerging Markets
Limited reported a Net Asset Value (NAV) return of +18.7% and ordinary share
price total return of +22.6%.
* The benchmark index, the MSCI Emerging Markets Index, produced a total
return of +13.2% over the same timeframe.
* The company’s extensive ‘toolkit’ contributed positively to
performance including mid-cap exposure and the short book.
* Long positions in the financials and information technology sectors also
stood out.
* The Board has announced a final dividend of $0.20 Participating Preference
Share.
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 35th annual report, covering a year
in which Fidelity Emerging Markets Limited (‘the Company’) performed
strongly, both in absolute terms and relative to the Company’s benchmark,
the MSCI Emerging Markets Total Return Index (‘the Index’). With the
Company’s portfolio now having been managed by Fidelity for approaching
three years, it is particularly pleasing to observe that the extended
investment toolkit available to the investment management team is having an
appreciable impact, and we are beginning to show a clean pair of heels to the
competition with this notably differentiated product.
Overview
During the 12-month period to 30 June 2024, the Company’s NAV increased by
18.7% in GBP terms, compared with a gain of 13.2% in the benchmark. The share
price advanced by 22.6%, with the discount to NAV narrowing from 14.6% at the
beginning of the period to 11.9% at year-end (all performance figures stated
on a total return basis). Having underperformed the Index somewhat in NAV
terms in the first half of the financial year (with a total return of +3.2%
versus +4.4% for the Index), the full-year NAV total return outperformance of
5.5 percentage points speaks to a particularly strong outcome in the second
half of the period.
Thus, after a difficult year in 2022, when the Company’s performance was
negatively affected by Russia’s invasion of Ukraine, and then a period of
consolidation in 2023, it is encouraging to see in 2024 that the investment
process – one which has delivered notably positive results since 2011 in the
strategy’s open-ended vehicle, the FAST Emerging Markets Fund – is now
firing again on all cylinders and driving strong NAV performance.
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 is pleased to note the positive impact of stock selection
– which drove the majority of the outperformance – as well as the
significant value delivered by the enhanced investment toolkit. Stock
selection – rather than investing by country or sector – is at the heart
of your Company’s investment strategy, facilitated by Fidelity’s large and
experienced team of portfolio managers and analysts, whose location in the
markets they cover gives them a key advantage in terms of information and
access to company managements. Their deep understanding of their investment
universe is also what drives the ability to identify successful short as well
as long positions.
At Board level, your Directors and I continue to work hard to support the
share price, both through capital management initiatives and by promoting the
Company to current and potential investors. I am pleased to note the proactive
efforts of the investment manager in raising the Company’s profile through
events, presentations, and meetings with stakeholders, combined with regular
advertising and content placement on many of the UK’s leading investment
websites and in key printed media to reach the broadest possible audience,
both professional and retail. These efforts continue apace and are helping
build investor conviction in the investment thesis, as well as contributing
towards a positive perception of the Company’s Portfolio Managers as thought
leaders in emerging markets.
A key attraction for fee-conscious investors remains our low ongoing charges
ratio of 0.81% (FY23: 0.81%), underpinned by a very competitive management fee
that your Board believes offers great value for a truly actively managed
emerging markets portfolio with a full set of investment tools at the
managers’ disposal.
Outlook
Although US financial markets have continued to suck liquidity from the rest
of the world, your Portfolio Managers are positive on the outlook for emerging
markets in the coming year and well beyond. Emerging market central banks
have been ahead of the curve in raising interest rates, inflation is generally
well controlled, and they have significant policy headroom as the US Federal
Reserve continues to ease, which should be beneficial for emerging market
equities. Moreover, while much of the US stock market performance has been
driven by multiple expansion, emerging market equities remain very
attractively valued on a relative basis.
With artificial intelligence (AI) stocks having dominated the investment
headlines from the US, it is important to remember the role that emerging
market companies, such as Taiwanese semiconductor makers and Korean memory
suppliers, play in the AI value chain. Emerging markets are also among the
largest producers of essential commodities such as copper and lithium, all of
which are fundamental to the build-out of AI and low-carbon infrastructure.
Often the best investment opportunities can be found in smaller and
medium-sized companies with a longer runway for growth. However, in far-flung
emerging markets, these can be very hard for individual investors to identify.
Your Board and I believe that one of the Company’s major advantages is
having a large team with ‘boots on the ground’, employing huge amounts of
time and effort in finding the best mid-sized and smaller companies that can
contribute to performance over many years. The permanent capital structure of
the Company provides the freedom to invest for the long term in stocks that
may not yet be widely known.
Board composition
As reported at the half-year stage, Julian Healy, Chairman of the Audit and
Risk Committee, stepped down from the Board for personal reasons following the
AGM in December. On 17 January we announced the appointment of Mark Little.
Mark – a qualified Chartered Accountant with extensive financial services
experience and a successful track record as an investment company director –
has replaced Julian both as a Director and as Chairman of the Audit and Risk
Committee, and will stand for election at the next AGM in December 2024. There
have been no further Board changes in the period under review, and with none
of the Directors yet approaching nine years’ tenure, we do not foresee any
in the immediate future. We thank Julian for his service, and with Mark’s
appointment we feel the board continues to have a strong diversity of
background, specialist knowledge and competency.
Due diligence trip
In September 2023, the Board was fortunate to have the opportunity to visit
Fidelity’s team in the Middle East. We travelled to Saudi Arabia, Abu Dhabi
and Dubai, following an investment team led schedule and observing the team at
work, which was very helpful to our understanding of the investment
opportunities in the region. The Middle East is not currently a large part of
the portfolio, but it has contributed positively to performance, notably Saudi
Arabian water utility Alkhorayef Water & Power Technologies was amongst the
top ten contributors to performance this year and the region has the potential
to play a greater role in the future.
Discount management
As noted above, during the year the discount to NAV narrowed somewhat, from
14.6% to 11.9% in what was a challenging year for the broader London listed
closed end fund sector. The Company completed a tender offer in March 2024,
which saw 13,531,881 shares (14.99% of the shares in issue) repurchased at a
2% discount to NAV, and we also bought back shares in the market, with an
additional 2.9m shares repurchased (FY23: nil). Since year-end, we have
repurchased an additional 2.8m shares (3.7% of shares in issue), and at 2
October 2024 (the latest practicable date), the discount to NAV stood at
12.2%. At the AGM in December 2024 we will seek to renew the existing annual
authority to repurchase up to 14.99% of our Participating Preference Shares.
I would also remind readers that the Company has committed to undertake a
further tender for up to 25% of its then shares in issue (excluding any shares
held in treasury) should its NAV total return fail to exceed the benchmark
over the five years ending on 30 September 2026.
While buybacks are NAV-accretive for existing shareholders, share repurchases
on their own do not narrow discounts, and as such we continue to work to
ensure that potential and existing investors fully understand the Company’s
story and the enhanced investment toolkit available to the managers, whose
performance is beginning to speak for itself.
Dividend
Your Board does not task the Portfolio Managers with finding yield. However,
some dividend income naturally arises, and after accounting for costs charged
to the revenue account, the majority of this is paid out to our shareholders
in the form of dividends.
A resolution to declare a final dividend of $0.20 per share (2023: $0.19) will
be proposed at the AGM of the shareholders of the Company that will be held on
10 December 2024. Subject to shareholder approval, the final dividend will be
paid on 13 December 2024 to shareholders on the Register of Members on
15 November 2024. The ex-dividend date is 14 November 2024.
AGM
This year’s AGM will be held on Tuesday, 10 December 2024 at 11.00 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 Report.
Your attention is also drawn to the Corporate Governance section of 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 11.00 a.m. on 8 December 2024. 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 Report.
Heather Manners
Chairman
8 October 2024
Portfolio Managers’ ReviewQuestion
How has Fidelity Emerging Markets Limited performed in the financial year
to 30 June 2024?
Answer
The twelve months to the end of June was a period of strong performance for
the Company. Markets were volatile as they reacted to developments in China
and signals from the Federal Reserve about the pace of interest rate cuts.
Another key driver for markets was the incredibly strong performance of
AI-related stocks, not only in the US, but across the emerging market
universe, too. Against this backdrop, emerging markets rallied over the period
but underperformed developed markets such as the US. Over the year, the
portfolio gained on an absolute basis and the Company delivered an NAV total
return of 18.7% in sterling terms, outperforming the benchmark, which returned
13.2%.
Question
What were the main contributors to the outperformance during the year and why?
Answer
The Company’s extensive ‘toolkit’ added significant value over the year.
When managing the portfolio, we draw on a broad range of ‘tools’, namely
the ability to adjust the level of gross exposure via gearing, to invest in
mid-cap companies, take out short positions, and use options. It is pleasing
to see that many of these tools, including the mid-cap exposure and the short
book, added substantial value over the past year. While yield enhancement (or
the options book) detracted, this is a function of it being a hedging tool,
which means it detracts when performance is strong.
The short book in particular generated very positive performance. We take out
short positions in businesses that are in structural or cyclical decline, and
that have a number of red flags around aspects like their balance sheet
structure, cash conversion, or related party/management conflicts of
interest. Over the year there were two short positions in the top ten
contributors to relative returns, a notable achievement given that we limit
the size of short positions to c.100bps. The top performer in the short book
was a declining Asian utility that is unsuccessfully pivoting into unrelated
business areas, and which saw its share price halve during June, following
poor earnings and after the major shareholder faced margin calls.
Looking to the rest of the portfolio, several holdings in the financials
sector stand out. These included high-conviction positions like Brazilian
digital challenger bank Nu Holdings, and Kazakhstan’s e-commerce and
payments platform Kaspi. Another contributor was Russia’s TCS Group1, a
provider of online financial services, which we disposed of after identifying
a liquidity opportunity. The Company’s holdings in Russian securities have
been fair valued at nil since the first quarter of 2022. Within information
technology, Taiwanese semiconductor foundry business TSMC performed well given
the growing tailwind from AI-related demand.
The Chinese consumer names held in the portfolio were the main headwind to
performance. The portfolio had a marginal underweight exposure to China and
Hong Kong combined at the end of June, but the Hong Kong listed names held
such as sportwear company Li Ning and insurance company AIA lagged the
domestic A-share market. A feature of 2023 was the significant
underperformance of Hong Kong listed H-shares as foreign investors exited the
market, although this started to reverse over the first half of 2024 as
sentiment began to improve.
Overall, it was a strong period for the Company, which benefited from
broad-based performance drivers and where the extensive toolkit added notable
value.
Question
The Company is unique in its peer group given its ability to use both long and
short positions. How did you exploit that flexibility over the past year?
Answer
One of the additional tools the Company has at its 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.
An example of a now-closed short position that worked well for us is
Microvast, a battery maker using antiquated, obsolete technology. We thought
that Microvast also had a questionable order book and a stretched balance
sheet. The company’s share price fell significantly, and we exited the
position at a profit earlier this year.
Other high-conviction short positions include several current holdings in
Chinese EV makers (disclosure rules mean we are unable to name open short
positions). These companies operate in an industry that suffers from high
competitive intensity and overcapacity, while at a fundamental level these
businesses also have undifferentiated products, high cash burn, and
significant debt on their balance sheets.
Top 5 Positions
As at 30 June 2024 Country Sector Portfolio (%) Index Weight (%) Relative (%)
Taiwan Semiconductor Manufacturing Taiwan Information Technology 11.6 9.7 1.8
Naspers South Africa Consumer Discretionary 5.4 0.5 5.0
Kaspi.KZ Kazakhstan Financials 5.4 0.0 5.4
Samsung Electronics South Korea Information Technology 5.1 4.2 0.8
Nu Holdings Brazil Financials 4.6 0.0 4.6
1 Fidelity investment, trading and operational teams actively monitor
developments, which can result in the identification of liquidity
opportunities. Importantly, any pre-trade assessment ensures that activities
do not contravene international sanctions. Prudent assessment of
counterparties and all aspects of trade settlement arrangements are
scrutinised and carefully managed in the best interests of clients. The
decision to trade TCS was based on our assessment that a fair exit multiple
was achievable.
Question
What were some of the major changes you made to the portfolio during the year
and what drove those?
Answer
Over the twelve months to the end of June we focused on adjusting the
portfolio’s China/Hong Kong exposure. Something we pay very close attention
to is the extent of negative sentiment towards China and the potential for a
rebound, which we did indeed see following the end of the review period, when
China announced meaningful stimulus measures in September. While the Chinese
market faces structural issues, we think it is important to hedge the
portfolio’s underweight exposure. We also saw a number of very high-quality
businesses that had disproportionately derated, offering attractive entry
points.
One of the ways we looked to add exposure towards the end of the period was
through the options book, initiating a long position in an out-of-the-money
Hang Seng China Enterprises Index call option, which we funded by selling
out-of-the-money put options. Given that implied volatility is at decade lows
for emerging markets, utilising the options book is a cost-effective way to
take out insurance against a rally in Chinese equities (which we saw during
April and May and subsequent to the end of the review period in September). We
also added a number of long positions in Chinese stocks during the review
period, including high-quality consumer and internet businesses that now trade
on very attractive valuations, including premium sportwear company Anta Sports
and leading online travel agent Trip.com.
We also made changes within the portfolio’s information technology holdings.
The semiconductor industry has performed extremely well and index heavyweight
TSMC, the Taiwanese foundry business, now makes up about a tenth of the
emerging market index. We have a very constructive outlook for TSMC, which is
a vital part of the AI supply chain, and the company remains a core position
in the portfolio. However, we have looked to diversify exposure to other AI
supply chain beneficiaries, with recent additions including Elite Material,
a Taiwanese manufacturer of copper clad laminate, a vital input for printed
circuit boards, and another beneficiary of AI-driven demand.
Question
What opportunities are you particularly excited about – are there any
stand-out markets, sectors or themes you’d highlight?
Answer
We have a particularly constructive outlook for copper miners. Electrification
and datacentres alone could add an incremental 4% per annum to demand over the
rest of the decade, while the backdrop for supply is very muted, with few
copper mines currently in operation, and little supply expected to come online
given it takes around 10 years to bring a greenfield copper discovery into
production. This creates a buoyant environment for copper prices.
The largest position we have is in Grupo Mexico, which is the holding company
for Southern Copper, one of the lowest cost copper producers in the world.
Given the Company’s closed-ended nature we also have positions in mid-cap
copper miners, for example Minsur, a Peruvian miner of copper and tin which
has good assets, and a healthy cash balance that it has signalled it intends
to pay out to investors.
We continue to see opportunities in the financials sector. While interest
rates have likely peaked, the Company’s financials exposure is not rate
sensitive. Examples of companies we own are Indian private sector banks,
companies in the fintech space and banks in Eastern Europe that are
beneficiaries of falling rates.
Indian private sector banks HDFC Bank, ICICI Bank, and Axis Bank remain core
holdings. These companies all stand to benefit from the underpenetration of
financial services in India, and growing demand for credit cards and mortgage
products. Unlike the Indian market in aggregate, these stocks trade at
reasonable valuations. We have seen in recent years a significant shift in
business towards these private banks at the expense of the state-owned banks
and think that going forward they stand to benefit from strong GDP and credit
growth in the Indian market.
High conviction holdings in fintech include Brazil’s digital challenger bank
Nu Holdings, which is rapidly taking market share from incumbents. Five years
ago, the incumbent banks in Brazil were levying very high fees and rates on
consumers, using that revenue to finance a bloated bricks-and-mortar cost
base. This created a fantastic backdrop for a challenger bank like Nu to offer
a great value proposition with no fees and lower interest rates, all at much
better unit economics. As a result, it has been able to rapidly grow its
customer base to 100m customers and start to expand into other markets like
Mexico.
We also have exposure to beneficiaries of falling rates, for example, banks in
countries such as Hungary, which are liability sensitive. This means that
their liabilities reprice more quickly than their assets, so when rates come
down, margins expand rather than contract. One of the stocks we hold is
Hungary’s OTP Bank, which has a dominant position in Eastern Europe and is
set to benefit from net interest margin expansion as rates continue to come
down.
Question
Another aspect of the company’s broad toolkit is the ability to invest in
smaller companies and in “off-the-beaten-track” markets like Vietnam.
Can you outline some of the most exciting opportunities you are seeing
in those areas?
Answer
One of the key benefits of the investment company structure is that we can
take a longer investment horizon and move further down the market cap
spectrum. This might be into smaller companies that are less well known by
investors and are often poorly covered by the sell side, or companies in
frontier markets such as Vietnam.
One mid-cap company we are particularly excited about is Brazil’s
Direcional, a developer of large-scale, low-income housing projects in Brazil.
Affordable housing is a key priority for Brazil’s President Lula, and recent
changes to the “Minha Casa, Minha Vida” social housing programme make the
low-income housing market much larger and more profitable than it has been
historically. Despite these structural tailwinds and a benign competitive
environment, the company is trading on a very cheap valuation, and is, we
think, an underappreciated beneficiary of the growth in social housing in
Brazil.
We also see opportunities in frontier markets such as Vietnam. One Vietnamese
company we hold is FPT, an IT services business that benefits from Vietnam’s
highly skilled low-cost labour and is a beneficiary of the diversification of
supply chains away from China. FPT owns its own university, providing access
to the country’s talent base, and offers unparalleled value to its
customers, putting it in a good position to continue gaining market share.
Question
Given the scale of the emerging market opportunity set, one of Fidelity’s
strengths is the depth of resources and local presence around the world
combined with your frequent research trips to the countries in which the
Company invests. How do you leverage that resource to the benefit of the
Company’s shareholders and what were some of the key takeaways from recent
country visits?
Answer
Travel is a huge part of our process and the investment team go on a number of
research trips every year. These overseas trips form a crucial part of our due
diligence process, and we’ve visited Poland, Greece, and the Middle East,
among other places, over the past year. Speaking to local experts on their
home turf is a vital input that allows us to assess all manner of
opportunities and, of course, risks.
One of the more recent trips we went on was to Poland, where we wanted to
assess the backdrop for companies following last year’s election, when the
right-wing PiS party was replaced by Donald Tusk’s pro-EU coalition. This
has resulted in management team changes at state-owned companies, leading to
many companies having a much more shareholder friendly mandate than
previously. We wanted to visit the country to assess this for ourselves and
were heartened to see what appears to be a significant corporate change story
underway, with a huge improvement in the treatment of minority shareholders.
We think it is vital to meet these management teams in person in order to
really understand who the winners and losers of this corporate change story
are.
Question
How do you actively and efficiently manage the portfolio, given the extensive
universe of companies to choose from in emerging markets?
Answer
Fidelity’s extensive emerging market research team is one of the key
mechanisms that lets us effectively manage the portfolio. We have about 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 among mid-cap companies. 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
analyse what is going on in emerging markets alongside changes in developed
markets.
Our research team really allows us to have ‘boots on the ground’ across
emerging markets. This year we travelled to countries like Greece and Poland
and spent time meeting with companies, their competitors, and their suppliers,
seeing the assets and operations of companies first hand. There is no
substitute for this sort of on the ground presence, and Fidelity research
analysts carry out around 20,000 company meetings a year.
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, encompassing Latin America, emerging EMEA, and emerging
Asia, which all feed ideas into our global emerging markets portfolio, and
within this the Company’s portfolio. 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.
Question
Finally, how do you view the prospects for the broad asset class and China in
particular given overall valuation levels, macroeconomic conditions and the
political backdrop across the emerging world?
Answer
Emerging market equities have structurally derated over the past 15 years.
Weakness in China and a muted backdrop for commodity prices partly explains
this, as well as the environment of higher interest rates and concerns about
geopolitics.
We are cautiously optimistic about the year ahead. As the Fed has now started
to ease policy, this should give the green light to emerging economies to
continue cutting interest rates, which will be supportive of consumers and
corporates, and will help drive flows to equity markets. During the current
rate-hiking cycle, many emerging economies were far ahead of developed
economies in acting decisively to raise rates and bring inflation under
control. This means that real interest rates in many emerging markets are
still incredibly high, and there is huge scope for rates to come down further.
Emerging economies also benefit from an improved fiscal backdrop, which stands
in stark contrast to developed economies like the UK or the US, where the
fiscal environment is the worst it’s been for many years. While much of the
boom in developed markets has been underpinned by QE and stimulus, we have not
seen the same level of support extended in emerging economies, which makes the
asset class better equipped for an environment of structurally higher interest
rates.
Part of the reason the fiscal backdrop is better for emerging markets is the
more buoyant backdrop for commodity prices. For emerging economies, the past
decade has been marked by a bursting of the commodity bubble as demand from
the China property market slowed down. Looking ahead to the next decade we see
a much tighter environment for prices, given there has been a decade of
underinvestment in the commodity complex, and the fact that there are strong
demand drivers from electrification and AI. We expect this will be a huge
tailwind for commodity exporting emerging market economies such as Brazil,
South Africa, Indonesia, and Peru.
China remains key to the outlook. We are emerging from a period of
significantly negative sentiment towards China and while structural problems
persist, any signs that we are past the worst could lead international
investors to start reallocating capital to the market. Following the end of
the review period there was a significant rally in the Chinese market, as the
government announced meaningful stimulus measures. The big challenge for China
is consumer confidence as the post-Covid spending boom seen in developed
markets failed to materialise, given weakness in the property market, which
has historically made up around half of household wealth. This year the
government has shifted from deleveraging the property market to looking to
reflate it, with the most significant measures announced post the end of the
review period in late September. While the recovery will likely be slow and
protracted, any positive momentum in prices will support consumer confidence.
However, we expect excess capacity in industries like steel, cement, and solar
to persist, while the potential for higher tariffs is also a tail risk. For
that reason, it is vital to be incredibly selective when investing in China.
Another driver for emerging markets is the exposure it offers to the AI supply
chain. While US companies are typically thought of as AI beneficiaries, what
is often overlooked is the fact that the bulk of the AI supply chain sits in
emerging markets like Taiwan. Indeed, Jensen Huang, Nvidia’s CEO, has said
that Nvidia wouldn’t be the company it is today without Taiwan’s TSMC,
which manufactures Nvidia’s AI chips. Given the discount that emerging
markets are trading on relative to the US, the emerging market universe offers
exposure to the AI supply chain at much more attractive valuations.
The emerging market universe is trading at multi-decade lows relative to
developed markets. Part of this is down to concerns about geopolitics. 2024 is
a busy election year, with developments in both emerging economies and the US
requiring close scrutiny. These are the types of events we continue to monitor
incredibly carefully, drawing on the inputs of external experts to help make
sense of elevated unpredictability in markets, and we continue to focus on
staying fully engaged and speaking to geopolitical experts with a range of
different perspectives.
With an improving fundamental backdrop, we think today represents an
attractive entry point for emerging market equities. Using our bottom-up,
highly differentiated approach, we are focused on using the Company’s
extensive toolkit to carefully manage country-level exposures, and the short
book to benefit from the universe’s structural losers, as well as
identifying the winners for the long book. Against a backdrop that will likely
remain highly uncertain, we will continue to use this flexibility to closely
manage risk, all the while exploiting the most exciting opportunities
throughout the emerging market universe.
Nick Price
Chris Tennant
Portfolio Managers
8 October 2024
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 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 feasible 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 and escalation of Middle
East tensions or tensions between China and Taiwan into the wider region or an
increase in tensions in the South China Sea; continuous ”high levels of
so-called cost of living crisis impacting demand for UK-listed shares;
Artificial Intelligence hype. AI as a differentiator capability and as a
multiplier of existing risks 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. 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. Stable
extremely volatile. * Russian securities already held at nil value.
* Further risks on emerging markets from high inflation, and challenging financial conditions exacerbated by the war in Ukraine * The exposure to any one company is unlikely to exceed 5% of the Company’s net assets at the time the investment is made.
and Middle East. * 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 amplified by uncertainty of * China’s integration into the global financial system and into global supply chains.
the foreign policy changes following US elections. * Companies that were solely listed in the US are listing on the HK or mainland markets.
* US imposed Executive Orders prohibiting US investments in certain Chinese companies and the passing of the Holding Foreign * Robust risk governance in place supports risk profile assessment.
Companies Accountable Act (HFCAA).
* Rising geopolitical tensions, including contagion of the Ukraine and Middle East crisis or tensions between China and Taiwan
into the wider region.
* Regulatory measures impacting sectors such as IT sector or biotech sector and a lingering weakness in the real estate sector.
Investment Performance Risk * The Portfolio Manager may fail to outperform the Benchmark Index over the longer-term. * An investment strategy overseen by the Board to optimise returns. Stable
* 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. Increased
from the Russia/Ukraine war, Middle East crisis and geopolitical events. * 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, ransomware, DDoS (Distributed Denial of Service) attacks, financial theft
and reputational risk arising from accidental data leakage. Ransomware continues to increase globally and is also becoming a
supply chain risk.
Level of 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. Increased
* The Board may fail to implement its discount management policy. * If the NAV total return for the five years ending 30 September 2026 does not exceed the Benchmark Index, the Company will make a tender offer for up to 25% of the shares in issues (excluding shares held in treasury) at that time.
* Elevated energy costs and cost of living crisis impact on retail demand for shares. * The Board and manager proactively try to raise the Company’s profile through events, presentations, and meetings with stakeholders, combined with regular advertising and content placement on many of the UK’s leading investment websites and in key printed media to reach the broadest
possible audience.
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 wars in Ukraine and Middle East conflict has increased the risk for working from home or in offices, specifically * Business Continuity and Crisis Management Frameworks in place. Business Continuity Oversight Group (BCOG) is established which provides support to drive business continuity through the organisation that ranges from strategic input to operational processes. Stable
concerning the potential loss of network outages. * Digital teams continue to maintain solutions to allow business continuity and operational.
* Business process disruption risk globally considers Cyber, Geopolitical, and Earthquake as the top risks, which if were to * Annual requirement to perform recovery site test, remote working test, work transfer test and notification test.
materialise to a business disruption event, the impact could be reputational in the near term and broader over time (financial,
client, industry) depending on the duration/severity of the events.
Gearing Risk * The Portfolio Manager may fail to use gearing adequately, 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 may fail 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. * The Company is not labeled as an ESG product.
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.
Professional negligence liability risks
The requirement to cover potential liability risks arising from professional
negligence is covered by the Manager’s own funds. Sufficient capital above
the regulatory limit is held which is monitored by the board of the Manager.
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 its 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
2024 lagged the Benchmark Index, with a NAV total return of +3.1%, and a share
price total return of +2.3% compared to the Benchmark Index total return of
+18.2%.
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 on in the Annual 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 Report .
Promoting the Success of the Company
The Company is not required to comply with the provisions of the UK Companies
Act 2006, but it is a requirement of the AIC Code of Corporate Governance to
report upon Section 172 of this statute irrespective of domicile. Section 172
recognises that 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 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.
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
The Board has been proactive in its efforts to promote the success of the
Company. It has worked closely with the Manager, utilising the Manager’s
extensive marketing capabilities, in combination with the Company’s
appointed stockbrokers, and public relations firm to execute a comprehensive
promotional programme for the Company.
* Discount Control – Share Buybacks
In November 2023 the Company announced a share buyback programme to address
the discount to NAV at which the Company’s shares trade with the ambition
that it may ultimately be maintained in single digits in normal market
conditions on a sustainable basis.
* Discount Control – Tender Offer
In recognition of the imbalance between demand and supply of its shares the
Company undertook a tender offer for 14.99% of its issued share capital in
March 2024. The tender was priced at a 2% discount to the Net Asset Value per
Share as at 6.00 p.m. on 22 March 2024 and resulted in 13,531,881
participating preference shares being repurchased by the Company
and cancelled.
* Dividend
The decision to recommend a dividend of $0.19 per Participating Preference
Share in respect of the year ended 30 June 2023 (2022: $0.16). Shareholders
approved the dividend at the 2023 AGM.
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 UK Listing Rule 6.6.1 during the financial period under review.
For and on behalf of the Board
Heather Manners
Chairman
8 October 2024
Statement of Comprehensive Income
for the year ended 30 June 2024
Year ended 30 June 2024 Year ended 30 June 2023
Note Revenue $’000 Capital $’000 Total $’000 Revenue $’000 Capital $’000 Total $’000
Revenue
Investment income 3 19,284 – 19,284 22,272 – 22,272
Derivative income 3 19,711 – 19,711 17,709 – 17,709
Other income 3 1,252 – 1,252 620 – 620
Total Income 40,247 – 40,247 40,601 – 40,601
Net gains on investments at fair value through profit or loss 10 – 81,553 81,553 – 36,553 36,553
Net gains/(loss) on derivative instruments 11 – 35,890 35,890 – (37,809) (37,809)
Net foreign exchange losses – (1,569) (1,569) – (933) (933)
Total income and gains/(losses) 40,247 115,874 156,121 40,601 (2,189) 38,412
Expenses
Management fees 4 (935) (3,741) (4,676) (923) (3,690) (4,613)
Other expenses 5 (1,631) – (1,631) (1,619) – (1,619)
Profit/(loss) before finance costs and taxation 37,681 112,133 149,814 38,059 (5,879) 32,180
Finance costs 6 (21,566) – (21,566) (15,653) – (15,653)
Profit/(loss) before taxation 16,115 112,133 128,248 22,406 (5,879) 16,527
Taxation 7 (2,060) (123) (2,183) (2,622) 644 (1,978)
Profit/(loss) after taxation for the year attributable to Participating Preference Shares 14,055 112,010 126,065 19,784 (5,235) 14,549
Earnings/(loss) per Participating Preference Share (basic and diluted) 8 $0.16 $1.29 $1.45 $0.22 $(0.06) $0.16
The Company does not have any income or expenses that are not included in the
profit/(loss) after taxation for the year. Accordingly the profit/(loss) after
taxation for the year is also the total comprehensive income for the year and
no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Company’s Statement of
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 2024
Note Share premium account $’000 Capital reserve $’000 Revenue reserve $’000 Total equity $’000
Total equity at 30 June 2023 6,291 735,860 54,583 796,734
Profit after taxation for the year – 112,010 14,055 126,065
Repurchase and cancellation of the Company’s own shares 14 – (127,125) – (127,125)
Participating Preference Shares repurchased into Treasury 14 – (24,923) – (24,923)
Dividend paid to shareholders 9 – – (17,305) (17,305)
Total equity at 30 June 2024 6,291 695,822 51,333 753,446
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
The notes below form an integral part of these financial statements
Statement of Financial Position
as at 30 June 2024
Note 30 June 2024 $’000 30 June 2023 $’000
Non-current assets
Investments at fair value through profit or loss 10 696,753 778,608
Current assets
Derivative assets 11 25,399 9,468
Amounts held at futures clearing houses and brokers 44,952 18,210
Other receivables 12 8,083 6,480
Cash at bank 8,794 18,057
87,228 52,215
Current liabilities
Derivative liabilities 11 11,857 12,847
Other payables 13 18,678 21,242
30,535 34,089
Net current assets 56,693 18,126
Net assets 753,446 796,734
Equity
Share premium account 15 6,291 6,291
Capital reserve 15 695,822 735,860
Revenue reserve 15 51,333 54,583
Total Equity Shareholders’ Funds 753,446 796,734
Net asset value per Participating Preference Share 16 $10.09 $8.75
The Financial Statements above were approved by the Board of Directors of the
Company on 8 October 2024 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 2024
30 June 2024 $’000 30 June 2023 $’000
Operating activities
Cash inflow from investment income 24,168 24,214
Cash inflow from derivative income 9,769 6,184
Cash inflow from other income 20 33
Cash outflow from taxation paid (2,060) (1,063)
Cash outflow from the purchase of investments (695,450) (928,894)
Cash inflow from the sale of investments 854,047 930,627
Cash inflow/(outflow) from net proceeds from settlement of derivatives 23,436 (4,819)
Cash outflow from amounts held at futures clearing houses and brokers (26,742) (6,309)
Cash outflow from operating expenses (6,217) (5,150)
Net cash inflow from operating activities 180,971 14,823
Financing activities
Cash outflow from CFD interest paid (18,527) (10,111)
Cash outflow from short CFD dividends paid (2,726) (5,564)
Cash outflow from dividends paid to shareholders (17,305) (14,576)
Cash outflow from repurchase of participating preference shares into treasury (22,982) –
Cash outflow from repurchase and cancellation of Participating Preference Shares (127,125) –
Net cash outflow from financing activities (188,665) (30,251)
Net decrease in cash at bank (7,694) (15,428)
Cash at bank at the start of the year 18,057 34,418
Effect of foreign exchange movements (1,569) (933)
Cash at bank at the end of the year 8,794 18,057
The notes below form an integral part of these financial statements
Notes to the Financial Statements
for the year ended 30 June 2024
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 8 October 2024.
2. Summary of Material 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 as amended to reflect the adoption of new standards, amendments
and interpretations which became effective in the year as shown below.
At the date of authorisation of these financial statements, the following
revised International Accounting Standards (IAS) were in issue but not yet
effective:
* Amendments to the Classification and Measurement of Financial Instruments
– Amendments to IFRS 9 and IFRS 7
* Lack of Exchangeability – Amendments to IAS 21
* Presentation and Disclosure in Financial Statements – IFRS 18
* Supplier Finance Arrangements – Amendments to IAS 7 and IFRS 7
* Subsidiaries without Public Accountability – IFRS 19
The adoption of these new and amended standards, together with any other IFRSs
or IFRIC interpretations that are not yet effective, are not expected to have
a material impact on the financial statements of the Company other than
IFRS 18 (Presentation and Disclosure in Financial Statements) that the
Company is in the process of assessing.
(b) Financial InstrumentsClassification(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
allowable 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 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;
* Forward currency contracts – valued at the appropriate quoted forward
foreign exchange rate ruling at the Statement of Financial Position date;
* 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 TranslationFunctional 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 year, 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 year. 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/due to 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 year. 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) 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.
(r) Capital reserve
The following are attributable 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.
The Company holds 2,921,898 participating preference shares in treasury which
have been excluded from the net asset value and earnings per participating
preference share calculations from the date of repurchase into treasury.
3. Income
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Investment income
UK dividends 362 798
Overseas dividends 18,900 21,474
UK and overseas scrip dividends 15 –
Interest on bonds 7 –
19,284 22,272
Derivative income
Dividends earned on long CFDs 8,489 5,220
Interest earned on CFDs 2,114 1,414
Option income 9,108 11,075
19,711 17,709
Other income
Interest income from cash and collateral 1,232 587
Fee rebate 20 33
1,252 620
Total income 40,247 40,601
4. Management Fees
Year ended 30 June 2024 Year ended 30 June 2023
Revenue $’000 Capital $’000 Total $’000 Revenue $’000 Capital $’000 Total $’000
Management fees 935 3,741 4,676 923 3,690 4,613
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 are 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.
Please see information on ongoing charges ratio as presented in the Annual
Report.
5. Other expenses
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Allocated to revenue:
Custodian fees 415 362
Directors’ fees 263 279
Directors’ expenses 24 74
Administration fees 193 192
Audit fees 106 73
Legal and professional fees 120 117
Sundry expenses 510 522
Other expenses 1,631 1,619
Administration fees
The Administrator is entitled to receive a fee, payable monthly, based on the
Net Asset Value of the Company and time incurred.
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 0.06% (2023: 0.05%) per annum of the average Net Assets of the
Company.
6. Finance costs
Year ended 30 June 2024 Year ended 30 June 2023
Revenue $’000 Capital $’000 Total $’000 Revenue $’000 Capital $’000 Total $’000
Dividends expenses on short CFDs 3,081 – 3,081 5,270 – 5,270
Interest expenses on CFDs 18,485 – 18,485 10,383 – 10,383
21,566 – 21,566 15,653 – 15,653
7. Taxation
Year ended 30 June 2024 Year ended 30 June 2023
Revenue $’000 Capital $’000 Total $’000 Revenue $’000 Capital $’000 Total $’000
Capital gains tax – 123 123 – (644) (644)
Withholding taxes 2,060 – 2,060 2,622 – 2,622
2,060 123 2,183 2,622 (644) 1,978
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 (2023: £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 2024, $1,038,000 capital gains tax provision was recognised in
the Statement of Financial Position (2023: $915,000).
8. Earnings/(loss) per Participating Preference Share
Year ended 30 June 2024 Year ended 30 June 2023
Revenue earnings per Participating Preference Share $0.16 $0.22
Capital earnings/(loss) per Participating Preference Share $1.29 $(0.06)
Total earnings per Participating Preference Share – basic and diluted $1.45 $0.16
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 14,055 19,784
Capital profit/(loss) after taxation for the year 112,010 (5,235)
Total profit after taxation for the year attributable to Participating Preference Shares 126,065 14,549
Number Number
Weighted average number of Participating Preference Shares in issue 86,936,701 91,100,066
9. Dividends Paid to Shareholders
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Dividend paid
2023 final dividend of 19.0¢ (2022: 16.0¢) per Participating Preference Share 17,305 14,576
Total dividend paid 17,305 14,576
Dividend proposed
2024 final dividend of 20.0¢ (2023: 19.0¢) per Participating Preference Share 14,929 17,309
Total dividend proposed 14,929 17,309
The Directors have proposed the payment of a dividend for the year ended
30 June 2024 of 20.0¢ per Participating Preference Share which is subject to
approval by shareholders at the Annual General Meeting on 10 December 2024
and has not been included as a liability in these financial statements. The
dividend will be paid on 13 December 2024 to shareholders on the register at
the close of business on 15 November 2024 (ex-dividend date 14 November
2024).
10. Investments at Fair Value through Profit or Loss
30 June 2024 $’000 30 June 2023 $’000
Financial Assets:
Equity securities 687,025 752,126
Equity linked notes 4,555 17,433
Debt instruments 316 –
Investee funds 4,857 9,049
Total Investments at fair value through profit or loss 696,753 778,608
Opening book cost 884,753 907,801
Opening unrealised losses on Investments at fair value through profit or loss (106,145) (180,459)
Opening fair value of Investments at fair value through profit or loss 778,608 727,342
Movements in the year
Purchases at cost 692,013 932,911
Sales – proceeds (855,428) (918,198)
Gains on Investments at fair value through profit or loss 81,553 36,553
Amortisation adjustment 7 –
Closing fair value 696,753 778,608
Closing book cost 695,828 884,753
Closing unrealised gains/(losses) on Investments at fair value through profit or loss 925 (106,145)
Closing fair value of Investments at fair value through profit or loss 696,753 778,608
Gains/(losses) on Investments at fair value through profit or loss
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Realised gains/(losses) on Investments at fair value through profit or loss
Realised gains 81,933 75,936
Realised losses (107,443) (113,697)
Net realised losses on Investments at fair value through profit or loss (25,510) (37,761)
Change in unrealised gains/(losses) on Investments at fair value through profit or loss
Change in unrealised gains on Investments at fair value through profit or loss 39,223 20,750
Change in unrealised losses on Investments at fair value through profit or loss 67,840 53,564
Net change in unrealised gains on Investments at fair value through profit or loss 107,063 74,314
Net gains on Investments at fair value through profit or loss 81,553 36,553
The Company received $855,428,000 (2023: $918,198,000) from financial
investments at fair value through profit or loss sold in the year. The book
cost of these Investments at fair value through profit or loss when they were
purchased was $880,938,000 (2023: $955,959,000). These financial investments
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 investments at fair value through profit or loss.
Transaction costs incurred during the year in the acquisition and disposal of
Investments at fair value through profit or loss, which are included in the
Net gains/(losses) on financial investments at fair value through profit or
loss were as follows:
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Purchases transaction costs 1,012 1,403
Sales transaction costs 1,116 1,123
2,128 2,526
11. Derivative Instruments
Year ended 30 June 2024 $’000 Year ended 30 June 2023 $’000
Realised gains/(losses) on derivative instruments
Gains on CFDs 177,604 163,817
Gains on future contracts 16,178 19,508
Gains on option contracts 18,681 10,947
Losses on CFDs (141,402) (187,154)
Losses on future contracts (23,062) (21,287)
Losses on option contracts (23,903) (13,600)
Net realised gains/(losses) on derivative instruments 24,096 (27,769)
Change in unrealised gains/(losses) on derivative instruments
Change in unrealised gains on CFDs 9,979 (11,177)
Change in unrealised gains on future contracts (581) 849
Change in unrealised gains on option contracts 4,746 138
Change in unrealised gains on forward currency contracts 364 –
Change in unrealised losses on CFDs 4,143 (15)
Change in unrealised losses on future contracts (1,889) 277
Change in unrealised losses on option contracts (4,968) (112)
Net change in unrealised gains/(losses) on derivative instruments 11,794 (10,040)
Net gains/(losses) on derivative instruments 35,890 (37,809)
30 June 2024 Fair value $’000 30 June 2023 Fair value $’000
Fair value of derivative instruments recognised on the Statement of Financial Position
Derivative instrument assets 25,399 9,468
Derivative instrument liabilities (11,857) (12,847)
13,542 (3,379)
30 June 2024 30 June 2023
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 4,751 366,358 (4,598) 312,737
Short CFDs 6,830 170,814 2,057 203,746
Long future contracts (399) 22,348 – –
Short future contracts (26) 22,831 – –
Short futures (hedging exposure) (1,196) (148,757) 849 (130,176)
Long call option contracts 5,508 49,080 254 2,879
Short put option contracts 915 2,269 (1,557) 10,789
Short call option contracts (1) 37 (384) 6,406
Short call option contracts (hedging exposure) (2,418) (15,110) – –
Long put option contracts (786) 10,698 – –
Forward currency contracts 364 – – –
13,542 480,568 (3,379) 406,381
12. Other Receivables
30 June 2024 $’000 30 June 2023 $’000
CFD dividend receivable 1,661 827
Securities sold pending settlement 2,170 789
Amounts receivable on settlement of derivatives 3,054 –
Accrued income 1,182 4,834
Other receivables 16 30
8,083 6,480
13. Other Payables
30 June 2024 $’000 30 June 2023 $’000
CFD interest payable 431 473
CFD dividend payable 616 261
Securities purchased pending settlement 12,613 16,050
Amounts payable on settlement of derivatives 1,182 2,762
Management fees 335 391
Custodian fees 102 89
Directors’ fees 65 45
Repurchases of the Company’s own shares awaiting settlement 1,941 –
Capital gains tax payable 1,038 915
Accrued expenses 355 256
18,678 21,242
14. Share Capital
2024 Number of shares 2023 Number of shares
Authorised
Founder shares of no par value 1,000 1,000
Issued
Participating Preference Shares held outside Treasury
Beginning of the year 91,100,066 91,100,066
Repurchase and cancellation of the Company’s own Participating Preference Shares (13,531,881)
Participating Preference Shares repurchased into Treasury (2,921,898) –
End of the year 74,646,287 91,100,066
Participating Preference Shares held in Treasury*
Beginning of the year – –
Participating Preference Shares repurchased into Treasury 2,921,898 –
End of the year 2,921,898 –
Total Participating Preference Shares including held in Treasury 77,568,185 91,100,066
* The ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
The Board of Directors is mindful that the Company’s shares have traded at a
discount to NAV for some time, and frequently deliberates appropriate discount
control mechanisms to address the imbalance between the demand and supply of
the Company’s shares. In recognition of this, on 13 November 2023, the
Company implemented a share buyback programme to repurchase up to 14.99% of
issued share capital, which was renewed at the Annual General Meeting on
7 December 2023. The Board intends to continue using its buyback programme to
address the discount to NAV with the ambition that it may ultimately be
maintained in single digits in normal market conditions on a sustainable
basis.
The costs associated with the repurchase and cancellation of shares as well as
repurchase of shares held in treasury of $127,125,000 and $24,923,000
respectively were charged to the capital reserve for the year ended 30 June
2024.
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 Genesis
Investment Management LLP to FIL Investment Services (UK) Limited.
Treasury Shares
As at year ending 30 June 2024, the Company holds 2,921,898 shares in
treasury (2023: nil).
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 2023 6,291 735,860 54,583 796,734
Net gains on investments at fair value through profit or loss (see Note 10) – 81,553 – 81,553
Net gains on derivative instruments (see Note 11) – 35,890 – 35,890
Net foreign exchange losses – (1,569) – (1,569)
Management fees (see Note 4) – (3,741) – (3,741)
Tax charged to capital (see Note 7) – (123) – (123)
Repurchase and cancellation of the Company’s own shares (see Note 14) – (127,125) – (127,125)
Participating Preference Shares repurchased into Treasury (see Note 14) – (24,923) – (24,923)
Revenue profit after taxation for the year – – 14,055 14,055
Dividends paid to shareholders (see Note 9) – – (17,305) (17,305)
At 30 June 2024 6,291 695,822 51,333 753,446
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
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 2024 includes investment holding gains
of $925,000 (2023: losses of $106,145,000) as detailed in Note 10.
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 2024 30 June 2023
Net assets $753,446,000 $796,734,000
Participating Preference Shares in issue 74,646,287 91,100,066
Net Asset Value per Participating Preference Share $10.09 $8.75
17. Financial InstrumentsManagement 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 2024 $’000 30 June 2023 $’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 361,607 317,335
361,607 317,335
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value 177,644 205,804
Debt Instrument 316 –
Amounts held at futures clearing houses and brokers 44,952 18,210
Cash and cash equivalents 8,794 18,057
231,706 242,071
Net exposure to financial instruments that bear interest (129,901) (75,264)
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
$1,299,000 (2023: increased the loss after taxation for the year and decreased
the net assets of the Company by $753,000). 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 2024 Total foreign currency risk $’000
Australian dollar 3,594 (4,012) (35) (453)
Brazilian real 44,315 – (275) 44,040
Canadian dollar 25,805 9,545 (17) 35,333
Euro 16,125 21,793 (28) 37,890
Hong Kong dollar 40,623 108,530 (1,395) 147,758
Hungarian Forint 10,536 – – 10,536
Indian rupee 77,447 (17,942) 25,903 85,408
Indonesian rupiah 28,009 – – 28,009
Japanese Yen – (25,855) (97) (25,952)
Korean won 20,102 (7,027) 1,325 14,400
Mexican peso 33,824 23,248 (49) 57,023
Other currencies 38,148 (374) (36) 37,738
Poland złoty 13,899 (16,346) (351) (2,798)
Saudi riyal 36,888 – 385 37,273
South African Rand 85,394 2,518 (9) 87,903
Sterling 4,465 16,082 (985) 19,562
Swedish Krona – 8,450 (12) 8,438
Taiwan dollar 115,039 – 395 115,434
United Arab Emirates Dirham 16,671 – – 16,671
United States dollar 65,389 (29,581) 18,432 54,240
Vietnamese dong 20,480 – – 20,480
696,753 89,029 43,151 828,933
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 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.
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 2024, had the
average exchange rate of the US dollar weakened by a reasonable possible
movement of 5% (2023: 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 $38,735,000 (2023: increased the profit after taxation
for the year and increased the net assets of the Company by $38,340,000).
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 year 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.
There were no purchases of Investee Funds during the year ended 30 June 2024
(2023: $3,846,000). Total sales amounted to $1,310,000 (2023: $4,045,000). As
at 30 June 2024 and 2023 there were no capital commitment obligations and no
amounts due to Investee Funds for unsettled purchases.
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
2023: 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:
2024 2023
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 69,644 (69,644) 77,861 (77,861)
Net assets 69,644 (69,644) 77,861 (77,861)
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 2024 $’000 30 June 2023 $’000
Amounts due within one month
Securities purchased pending settlement 12,613 16,050
Repurchases of the Company’s own shares awaiting settlement 1,941 –
Amounts payable on settlement of derivatives 1,182 2,762
Derivative liabilities 8,377 12,847
CFD interest payable 431 473
CFD dividend payable 616 261
Custodian fees 102 89
Management fees 335 391
Directors’ fees 65 45
Accrued expenses 355 256
Amounts due within one year
Derivative liabilities 3,480 –
Capital gains tax payable 1,038 915
Total liabilities 30,535 34,089
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 2024 (2023:
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 2024 (2023:
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 2024 Amounts due within 1 year $’000 30 June 2023 Amounts due within 1 year $’000
Derivative assets 25,399 9,468
Debt instruments 316 –
Securities sold pending settlement 2,170 789
Amounts receivable on settlement of derivatives 3,054 –
Amounts held at futures clearing houses and brokers 44,952 18,210
Cash and cash equivalents 8,794 18,057
CFD dividend receivable 1,661 827
Accrued income 1,182 4,834
Other receivables 16 30
87,544 52,215
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 2024 30 June 2023
collateral received $’000 collateral pledged $’000 collateral received $’000 collateral pledged $’000
Bank of America Merrill Lynch International – – – 250
Goldman Sachs International Ltd 6,440 – – 3,430
J.P. Morgan Securities plc 5,290 – 1,180 –
Morgan Stanley & Co. International Ltd – 530 110 –
HSBC Bank plc 790 – – 1,800
UBS AG 2,300 44,422 – 12,730
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 events market falls;
* 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 $8,903,000 (2023: increased the profit after taxation for
the year and increased the net assets of the Company by $1,392,000). 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:
Related amounts not set 2024
off on statement of
financial position
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 Financial instruments $’000 Margin account received as collateral $’000 Net amount $’000
CFDs 18,344 – 18,344 (6,763) (9,169) 2,412
Options 6,423 – 6,423 (1,209) – 5,214
Futures 268 – 268 (268) – –
Forward currency contracts 11,801 (11,437) 364 – – 364
36,836 (11,437) 25,399 (8,240) (9,169) 7,990
Related amounts not set 2024
off on statement of
financial position
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 Financial instruments $’000 Margin account pledged as collateral $’000 Net amount $’000
CFDs (6,763) – (6,763) 6,763 – –
Options (3,205) – (3,205) 1,209 – (1,996)
Futures (1,889) – (1,889) 268 1,621 –
Forward currency contracts (11,437) 11,437 – – – –
(23,294) 11,437 (11,857) 8,240 1,621 (1,996)
Related amounts not set 2023
off on statement of
financial position
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 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
Related amounts not set 2023
off on statement of
financial position
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 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)
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 2024 Total $’000
Investments in equity securities 686,519 – 506 687,025
Equity linked notes – 4,555 – 4,555
Debt instruments – 316 – 316
Investee funds – – 4,857 4,857
Derivative instrument assets – futures contracts 268 – – 268
Derivative instrument assets – options 6,412 11 – 6,423
Derivative instrument assets – CFDs – 18,344 – 18,344
Derivative instrument assets – forward currency contracts – 364 – 364
693,199 23,590 5,363 722,152
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – futures contracts 1,889 – – 1,889
Derivative instrument liabilities – options 1,198 2,007 – 3,205
Derivative instrument liabilities – CFDs – 6,763 – 6,763
3,087 8,770 – 11,857
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 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
Valuation basis for Level 3 investments 30 June 2024 $’000 30 June 2023 $’000
Net asset value 4,857 5,106
Most recently available published price adjusted 506 1,009
5,363 6,115
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 2024 Level 3 $’000 30 June 2023 Level 3 $’000
Opening balance 6,115 5,809
Sales (8,384) (4,045)
Transfers into level 3 – 1,009
Realised (losses)/gains (19,431) 3,112
Net change in unrealised gains/(losses) 27,063 230
Closing balance 5,363 6,115
During the year the Company participated in a tender offer which was being
undertaken in Detsky Mir’s restructuring from being a public listed company
to a private company. The Company’s application was successful and it
received proceeds of RUB 300.5 million, (approx. $3.1 million based on
exchange rates at that time).
During the year, the Company sold its position in TCS Group Holding Plc by
means of a secondary market transaction. The Manager granted the attestations
required to ensure the proceeds from the sale where available to the Company
and it received proceeds of $4 million.
The Company’s holdings in Russian securities have been fair valued at nil as
at 30 June 2024 (2023 : nil) as a result of trading being suspended on
international stock exchanges. These Russian securities have a carrying cost
of $90,932,976 as at 30 June 2024. (2023: $99,959,944).
The Company’s policy is to recognise transfers in and transfers out at the
end of each accounting year.
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.
The Company’s gearing at the year end is set out below:
30 June 2024
Gross gearing Net gearing
Exposure $’000 % 1 Exposure $’000 % 1
Investments 696,753 92.5 696,753 92.5
Long CFDs 366,358 48.6 366,358 48.6
Long futures 22,348 3.0 22,348 3.0
Long put options 10,698 1.4 10,698 1.4
Long call options 49,080 6.5 49,080 6.5
Total long exposures before hedges 1,145,237 152.0 1,145,237 152.0
Less: short derivative instruments hedging the above (148,757) (19.7) (148,757) (19.7)
Less: short call covered options for hedging purposes (15,110) (2.0) (15,110) (2.0)
Total long exposures after the netting of hedges 981,370 130.3 981,370 130.3
Short CFDs 170,814 22.7 (170,814) (22.7)
Short futures 22,831 3.0 (22,831) (3.0)
Short put options 2,269 0.3 (2,269) (0.3)
Short call options 37 – (37) –
Gross Asset Exposure/net exposure 1,177,321 156.3 785,419 104.3
Net Assets 753,446 753,446
Gearing 2 56.3% 4.3%
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)%
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 Managers 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. During the year,
management fees of $4,676,000 (2023: $4,613,000) were payable to the Manager.
During the year, marketing fees of $269,000 (2023: $176,000) were payable to
the Manager. At the year-end date the Company had a balance of management fees
outstanding, full details are disclosed in Note 13. Additionally, the Company
had a balance of marketing fees outstanding of $57,000 (2023: $39,000). This
balance forms part of the other payables figure in Note 13.
At the date of this report, the Board consisted of five non-executive
Directors (as shown in the Annual 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 £205,829, (2023:
£156,604), the breakdown of the fees is shown in the Directors’
Remuneration Report in the Annual Report. From 1 July 2024, the Chairman
receives an annual fee of £52,000 (2023: £50,000), the Chairman of the Audit
Committee and Senior Independent Director receive £39,500 (2023: £38,000)
and the other Directors receive an annual fee of £37,500 (2023: £36,000).
The following members of the Board hold Participating Preference Shares in the
Company at the date of this report: Heather Manners 10,000 shares, Torsten
Koster 15,000 shares, Dr Simon Colson 4,416 shares, Katherine Tsang nil shares
and Mark Little* nil 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 in the Annual Report as part
of the Directors’ Remuneration Report.
*Appointed 17 January 2024
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 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 2024 or on the financial
performance and cash flows of the Company for the year ended on that date.
Alternative Performance MeasuresActive 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 this 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 in 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 2024 30 June 2023
Management fees ($’000) 4,676 4,613
Other expenses ($’000)1 1,631 1,619
Ongoing charges ($’000) 6,307 6,232
Average net assets ($’000) 782,365 768,785
Ongoing charges ratio 0.81% 0.81%
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 2024 and 30 June 2023.
2024 Net asset value per share Share price
30 June 2023 687.91p 587.50p
30 June 2024 798.47p 703.00p
Change in the year +16.1% +19.7%
Impact of dividend reinvestment +2.6% +2.9%
Total return for the year +18.7% +22.6%
2023 Net asset value per share Share price
30 June 2022 720.13p 633.70p
30 June 2023 687.91p 587.50p
Change in the year -4.5% -7.3%
Impact of dividend reinvestment +1.9% +2.1%
Total return for the year -2.6% -5.2%
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 30 June 2024 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 2023 and 2024
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
2022 is derived from the statutory accounts for 2023 which have been delivered
to the Guernsey Financial Services Commission. The 2024 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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