REG - TempletonEmerg.Mkt. - Final Results
09/06/2023 18:00
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RNS Number : 3120C Templeton Emerging Markets IT PLC 09 June 2023
Stock Exchange Announcement
Statement of Annual Results
TEMPLETON EMERGING MARKETS INVESTMENT TRUST PLC
("TEMIT" or "the Company")
Legal Entity Identifier 5493002NMTB70RZBXO96
Templeton Emerging Markets Investment Trust plc
Annual Report and Accounts to 31 March 2023
Company Overview
Launched in June 1989, Templeton Emerging Markets Investment Trust plc
("TEMIT" or the "Company") is an investment trust that invests principally in
emerging markets companies with the aim of delivering capital growth to
shareholders over the long term. While the majority of the Company's
shareholders are based in the UK, shares are traded on both the London and
New Zealand stock exchanges.
TEMIT has a diversified portfolio of around 80 high quality companies,
actively selected for their long-term growth potential and sustainable
earnings, and with due regard to Environmental, Social and Governance ("ESG")
attributes. TEMIT's research-driven investment approach and strong long-term
performance has helped it to grow to be the largest emerging markets
investment trust in the UK, with assets of £2.0 billion as at 31 March 2023.
From its launch to 31 March 2023, TEMIT's net asset value ("NAV") total return
was +3,845.7% compared to the benchmark total return of +1,707.2%.
The Company is governed by a Board of Directors who are committed to ensuring
that shareholders' best interests, considering the wider community of
stakeholders, are at the forefront of all decisions. Under the guidance of the
Chairman, the Board of Directors is responsible for the overall strategy of
the Company and monitoring its performance.
TEMIT at a glance
For the year to 31 March 2023
Net asset value total return (cum-income)((a)) Share price total return((a)) MSCI Emerging Markets Index total return((a)(b)) Proposed total ordinary dividend((c))
0.8% 0.5% -4.5% 5.00p
(2022: -17.3%) (2022: -21.2%) (2022: -6.8%) (2022: 3.80p)
((a)) A glossary of alternative performance measures is included in the
full Annual Report.
((b)) Source: MSCI. The Company's benchmark is the MSCI Emerging Markets
Index, with net dividends reinvested.
((c)) An annual ordinary dividend of 5.00 pence per share for the year
ended 31 March 2023 has been proposed. This comprises the interim dividend of
2.00 pence per share paid by the Company on 27 January 2023 and the proposed
final dividend of 3.00 pence per share.
Strategic Report
The Directors present the Strategic Report for the year ended 31 March 2023,
which incorporates the Chairman's Statement, and has been prepared in
accordance with the Companies Act 2006.
The aim of the Strategic Report is to provide shareholders with the ability to
assess how the Directors have performed in their duty to promote the success
of the Company for shareholders' collective benefit, and having regard for the
interests of all stakeholders, by bringing together in one place key
information about the Company's strategy, the risks it faces, how it is
performing and the outlook.
Financial Summary
2022-2023
Notes Year ended Year ended Capital Total
31 March 31 March return
return
2023 2022 %
%
Total net assets (£ millions) 2,017.5 2,100.4
Net asset value (pence per share) ((a)) 174.1 178.2 (3.7) 0.8
Highest net asset value (pence per share) ( ) 185.1 223.9
Lowest net asset value (pence per share) ( ) 150.3 161.0
Share price (pence per share) ((a)) 152.2 156.4 (4.2) 0.5
Highest end of the day share price (pence per share) ( ) 164.6 208.0
Lowest end of the day share price (pence per share) ( ) 130.6 140.6
MSCI Emerging Markets Index ((a)) (7.6) (4.5)
Share price discount to net asset value at year end ((a)) 12.6% 12.2%
Average share price discount to net asset value over the year ( ) 13.0% 9.5%
Ordinary dividend (pence per share) ((b)) 5.00 3.80
Revenue earnings (pence per share) ((c)) 5.72 3.44
Capital earnings (pence per share) ((c)) (5.50) (40.90)
Total earnings (pence per share) ((c)) 0.22 (37.46)
Net gearing ((a)(d)) 0.0% 1.1%
Ongoing charges ratio ((a)) 0.98% 0.97%
Source: Franklin Templeton and FactSet.
((a)) A glossary of alternative performance measures is included in the
full Annual Report.
((b)) An annual ordinary dividend of 5.00 pence per share for the year
ended 31 March 2023 has been proposed. This comprises the interim dividend of
2.00 pence per share (2022: 1.00 pence per share) paid by the Company on 27
January 2023 and a proposed final dividend of 3.00 pence per share (2022: 2.80
pence per share).
((c)) The revenue, capital and total earnings per share figures are
shown in the Statement of Comprehensive Income in the full Annual Report and
Note 7 of the Notes to the Financial Statements.
((d)) A net gearing figure of 0% means that the cash held in the Company
is equal to or higher than the total bank loans.
Ten Year Record
2013-2023
Year ended Total net NAV((a)) Share Year-end Revenue Annual Ongoing
assets
(pence per
price((a))
discount((b))
earnings((a))
dividend((a))
charges
(£m)
share)
(pence
(%)
(pence per
(pence per
ratio((b))
per share)
share)
share)
(%)
31 March 2013 2,302.7 140.5 128.1 8.2 1.69 1.25 1.30
31 March 2014 1,913.6 118.4 105.4 10.9 1.83 1.45 1.30
31 March 2015 2,045.0 128.2 111.2 13.3 1.86 1.65 1.20
31 March 2016 1,562.3 104.8 90.8 13.4 1.41 1.65 1.22
31 March 2017 2,148.1 152.6 132.3 13.3 1.32 1.65 1.20
31 March 2018 2,300.8 169.2 148.6 12.2 3.18 3.00 1.12
31 March 2019 2,118.2 168.5 153.2 9.1 3.45 3.20 1.02
31 March 2020 1,775.7 146.5 131.4 10.3 4.88 3.80((c)) 1.02
31 March 2021 2,591.3 219.4 202.4 7.7 5.73 3.80((c)) 0.97
31 March 2022 2,100.4 178.2 156.4 12.2 3.44 3.80 0.97
31 March 2023 2,017.5 174.1 152.2 12.6 5.72 5.00((d)) 0.98
Ten year growth record((e))
2013-2023
Year ended NAV NAV total Share Share MSCI Revenue Ordinary
return((b))
price
price total
Emerging
earnings
dividend
return((b))
Market
per share-
per share
Index total
undiluted
return((b))
31 March 2013 100.0 100.0 100.0 100.0 100.0 100.0 100.0
31 March 2014 84.3 85.4 82.3 83.2 90.1 108.3 116.0
31 March 2015 91.2 93.6 86.8 88.9 102.0 110.1 132.0
31 March 2016 74.6 77.6 70.9 73.8 93.0 83.4 132.0
31 March 2017 108.6 114.7 103.3 109.5 125.8 78.1 132.0
31 March 2018 120.4 128.9 116.0 124.5 140.6 188.2 240.0
31 March 2019 119.9 131.2 119.6 131.9 140.6 204.1 256.0
31 March 2020 104.3 116.5 102.6 115.9 122.1 288.8 304.0
31 March 2021 156.2 179.8 158.0 184.9 174.4 339.1 304.0
31 March 2022 126.8 148.8 122.1 145.7 162.5 203.6 304.0
31 March 2023 123.9 150.1 118.8 146.4 155.3 338.5 400.0
Source: Franklin Templeton and FactSet.
((a)) Comparative figures for financial years 2013 to 2021 have been
retrospectively adjusted following the sub-division of each existing ordinary
share of 25 pence into five ordinary shares of 5 pence each on 26 July 2021.
((b)) A glossary of alternative performance measures is included in the
full Annual Report.
((c)) Excludes the special dividend of 0.52 pence per share for the year
ended 31 March 2020 and the special dividend of 2.00 pence per share for the
year ended 31 March 2021.
((d)) An annual ordinary dividend of 5.00 pence per share for the year
ended 31 March 2023 has been proposed. This comprises the interim dividend of
2.00 pence per share paid by the Company on 27 January 2023 and a proposed
final dividend of 3.00 pence per share.
((e)) Rebased to 100 at 31 March 2013.
Chairman's Statement
Market overview and investment performance
Our financial year started shortly after the Russian invasion of Ukraine and I
would like to repeat the sympathy of the Board and of all of those involved
with the management of TEMIT for all victims of the Russian invasion of
Ukraine. Market conditions were challenging throughout the year. The war
caused a surge in commodity prices. Rapid increases in prices generally result
in pressure from individuals to increase their pay, with a risk that inflation
then becomes entrenched. Governments and central banks around the world have
sought to contain inflation by raising interest rates but need simultaneously
to avoid choking economic growth. This is a difficult balance to achieve and
only time will tell whether their actions have been successful.
In recent years China has become an important engine for world economic growth
as well as a key element of the emerging markets investment universe. For a
large part of our financial year there were concerns over the Chinese economy
due to the government's continued pursuit of lockdowns to control the spread
of COVID-19 as well as its interventions in private companies and political
tension with the rest of the world, particularly the United States. The
approach to COVID-19 was suddenly and unexpectedly reversed and this, along
with more positive regulatory developments, helped to spur the recovery in the
country and in other emerging markets. In other countries the higher level of
inflation has caused a variety of issues, although some companies have
benefited from higher commodity prices, most notably in the energy sector.
The year under review was a volatile period for TEMIT's shares. The second
half of our financial year was better than the first; at the half year stage
we reported a decline of -8.3% whereas in the second half returns turned
around and we ended the financial year with a small positive return over 12
months of +0.8%((a)), outperforming the benchmark index which produced a total
return of -4.5%((a)).
((a)) See Glossary of Alternative Performance Measures included in the full
Annual Report.
Revenue and dividend
Net revenue earnings increased markedly to 5.72 pence per share. At the half
year stage we announced an increase in the interim dividend from 1.00 pence to
2.00 pence per share. The Board is proposing a final dividend of 3.00 pence
per share which, if approved by shareholders at the Annual General Meeting
("AGM") will result in a total dividend for the year of 5.00 pence per share.
This will be an increase in the total dividend of 32% compared with the
previous financial year. I have regularly emphasised that the primary focus of
our Investment Manager is on capital growth. Nevertheless, it is encouraging
to see such a strong increase in revenues.
Borrowing
TEMIT has fixed borrowing of £100 million, and a revolving credit facility
under which up to £120 million in flexible debt may be drawn down. The
revolving facility matured on 31 January 2023 and was extended for a further
year. The Investment Manager continues to take a cautious view on borrowing in
difficult markets. As at the financial year end, net of cash in the portfolio,
TEMIT was not geared.
Share rating
Our managers remain very active in promoting TEMIT's shares to existing and
potential investors via a variety of traditional and online channels. As I
mentioned in the half yearly report, the Board was delighted that TEMIT won
the award in the "Emerging Markets Equity - Active" category in the
prestigious AJ Bell Fund and Investment Trust Awards in September 2022 for the
third consecutive year. The award is made on the basis of voting by private
investors from a shortlist of open-ended funds, ETFs and investment trusts
drawn up by investment experts.
The challenging market conditions naturally led to pressure on the discount.
The Board remains consistent in its view that share buybacks are a key tool in
managing the balance between supply and demand for the shares. In total over
the year, £29.2 million was spent on share buybacks and, as all buybacks were
at a discount to the prevailing NAV, this resulted in an increase in the NAV
of 0.23% to the benefit of remaining shareholders.
31 March 2023 marked the end of the fourth year of the assessment period for
the Conditional Tender Offer, under which the Board undertook to arrange a
tender for up to 25% of the Company's shares if the NAV total return
underperforms that of the benchmark index over the five years to 31 March
2024. After four years, the return was ahead of the benchmark index over the
measurement period by approximately 4 percentage points, but we are aware that
returns, both absolute and relative to the benchmark, can be volatile. The
Conditional Tender Offer is described in detail in the full Annual Report.
Environmental, Social and Governance
Throughout TEMIT's history, governance of investee companies has been a key
part of the investment process and in recent years there has been a growing
focus on sustainability. A description of the Investment Manager's process is
included in the full Annual Report, along with a summary of the approach to
Environmental, Social and Governance matters. Last year the Investment Manager
published the first dedicated Stewardship Report for TEMIT and this received
favourable comments from shareholders and industry experts. The second report
was published simultaneously with this Annual Report and is available to
download at www.temit.co.uk.
The Board
As previously announced, Beatrice Hollond retired from the Board at last
year's AGM in July 2022 and Simon Jeffreys assumed the position of Senior
Independent Director.
Abigail Rotheroe was appointed as a Director with effect from 1 November 2022.
Abigail has over 20 years of investment experience, most recently as the
Investment Director at Snowball Impact Management, a sustainable and
impact-focused asset manager. Previously Abigail managed retail and
institutional Asia Pacific portfolios in Hong Kong and London for Schroders,
HSBC Asset Management and Columbia Threadneedle Investments. She is a CFA
Charterholder and has experience in manager selection, sustainability, and
impact measurement.
I will complete nine years as a director on 1 August 2024, shortly after next
year's AGM. My colleagues have started the process of identifying the next
Chairman of the Company and expect to make an announcement later this year.
Annual General Meeting
I am pleased to be able to invite all shareholders to attend our AGM on 14
July 2023 at Barber-Surgeons' Hall in London. We look forward to welcoming
shareholders at the meeting.
Whether you intend to attend the meeting in person or not, you are strongly
encouraged to submit your votes on the AGM resolutions in advance of the
meeting. Submitting votes by proxy does not preclude you attending the meeting
or changing your vote if you attend the AGM.
If you have any questions, please send these by email to
temitcosec@franklintempleton.com or via www.temit.co.uk./investor/contact-us
in advance of the meeting. You can also use these contact details should you
have a question at any other time. Any questions that we receive will be
considered and responses will be provided on our website www.temit.co.uk.
Outlook
Recent evidence suggests that the problems stemming from the pandemic and then
the Russian invasion of Ukraine have started to abate and attention has
returned to the prospects for growth. Nevertheless, difficulties remain
particularly in the developed world which is challenged by high levels of
inflation and debt. The re-opening of the Chinese economy is a positive
development but equally important are efforts to stimulate growth in several
parts of the emerging world.
Our Investment Manager expects a recovery in earnings in the second half of
2023 and this is likely to be helped by efforts by governments to stimulate
demand. The long-term case for investing in emerging markets is founded on a
higher level of economic growth supported by young populations, increasing
domestic consumption as the middle-class population expands rapidly and some
world-leading companies. Key to investment performance will be identifying the
companies best able to capitalise on these factors. Our Investment Manager
points to a wide variety of opportunities around the world and, despite the
obvious challenges, we continue to look to the long term with some optimism.
Paul Manduca
Chairman
9 June 2023
The Investment Manager
TEMIT's Investment Management is delegated to Templeton Asset Management Ltd
("TAML") and Franklin Templeton Investment Management Limited ("FTIML").
Portfolio managers from TAML and FTIML form part of the wider Franklin
Templeton Emerging Markets Equity group ("FTEME"). FTEME have managed the
portfolio since TEMIT's inception and are pioneers in emerging markets equity
investing. They bring more than 30 years of experience and local knowledge
from over 70 investment professionals, based in 13 countries around the world.
The team has a collaborative investment process where all analysts and
portfolio managers work together to contribute to investment returns. They
meet regularly, both formally and informally, to debate and exchange ideas,
investment themes and enrich their understanding of the markets by drawing on
local insights to build a global perspective and context to their thinking.
They also benefit from the broader resources available throughout Franklin
Templeton.
The portfolio managers for TEMIT, Chetan Sehgal (lead) and Andrew Ness are
senior executives in FTEME.
Portfolio Managers
Chetan Sehgal, CFA
Chetan is the lead portfolio manager of TEMIT and is based in Singapore.
As part of his broader responsibilities within FTEME, Chetan is also the
director of portfolio management. In this capacity, he is responsible for the
overall Global Emerging Markets strategies, providing guidance and thought
leadership, coordinating appropriate resources and coverage, and leveraging
the group's expertise to add value across products within the strategies.
Chetan joined Franklin Templeton in 1995 from Credit Rating Information
Services of India Ltd, where he was a senior analyst.
Chetan holds a B.E. Mechanical (Hons) from the University of Bombay and a
postgraduate diploma in Management from the Indian Institute of Management in
Bangalore, where he specialised in finance and business policy and graduated
as an institute scholar. Chetan speaks English and Hindi and is a Chartered
Financial Analyst ("CFA") Charterholder.
Andrew Ness, ASIP
Andrew Ness is a portfolio manager of TEMIT and is based in Edinburgh.
Prior to joining Franklin Templeton in September 2018, Andrew was a portfolio
manager at Martin Currie. He began his career at Murray Johnstone in 1994 and
worked with Deutsche Asset Management in both London and New York before
joining Scottish Widows Investment Partnership in 2007.
Andrew holds a B.A. (Hons) in Economics and an MSc in Business Economics from
the University of Strathclyde in the UK. He is an Associate Member of the UK
Society of Investment Professionals and a member of the CFA Institute.
The Investment Manager's Report
Review of performance
Emerging markets ("EMs") as measured by our benchmark index declined over the
12 months under review. For a large part of the year, rising inflationary
pressures and resultant rate hikes, the ongoing Russian invasion of Ukraine
and supply chain challenges depressed consumer and investor sentiment.
However, several bright spots emerged towards the end of the year under
review-signs of receding inflation, policy support to spur domestic
consumption and China's pivot away from zero-COVID restored investor
confidence and helped to cap losses. The MSCI Emerging Markets Index returned
-4.5% in the 12-month period under review, whilst TEMIT delivered a net asset
value total return of +0.8% (all figures are total return in sterling). Full
details of TEMIT's performance can be found in the full Annual Report.
By region, EMs in Asia fared relatively better than their peers in Latin
America and Europe, Middle East and Africa. However, all three regions
witnessed declines in some of their underlying markets. Stocks in China
contributed to regional gains after the dismantling of the country's
zero-COVID policy and measures to spur the economy, such as support for the
property sector. Weakening global demand for consumer electronics weighed on
technology-heavy markets in South Korea and Taiwan, and the Indian market
corrected from its strong performance previously. China's gains at the end of
2022, together with tourism-reliant Thailand (which benefited from optimism
from a rebound in tourism), helped to support the emerging Asia region. Latin
America was dragged down by the emergence of political concerns which weighed
on equity prices. Emerging Europe lost ground due to the fallout from Russia's
invasion of Ukraine and the dislocations in regional energy markets. Towards
the end of the year, share prices in the Middle East-which had been through a
boom-declined as oil prices moderated and liquidity conditions tightened in
some of the markets. As at 31 March 2023 TEMIT held three Russian securities
which remained fair-valued at zero in view of restrictions around trading
these shares and a lack of any price discovery mechanism to provide
indications of residual value. We continue to monitor the developments and
will look to realise value in the best interests of shareholders, whenever
possible.
China was TEMIT's largest market exposure, although the portfolio remained
underweight relative to the benchmark. China gained almost 2% in sterling
terms over the 12-month period. Regional lockdowns related to the country's
zero-COVID policy, prolonged regulatory uncertainty and a reeling real estate
market dominated headlines for a large part of the year and capped gains.
However, Chinese equities rebounded sharply near the end of the period as the
country reopened, and the government reiterated its growth priorities. The
Chinese government has clearly defined its agenda in terms of support of
common prosperity and the curtailment of monopolies. With this, we see the
internet sector now adjusting to the new normal. China's pursuit of higher
quality growth with a focus on technology advancement and self-sufficiency
will likely shift investment and growth to newer emerging technologies. We
expect the opening up of the Chinese economy to spur local and overseas demand
as there has been a significant increase in household savings accumulated
during the pandemic.
TEMIT's second-largest market position was in South Korea, where the portfolio
was overweight versus the benchmark. South Korean equities declined by more
than 8% during the reporting period, as the technology-heavy market continued
to struggle throughout the year on weakening demand for technology products,
including consumer electronics which had seen excess demand during the
pandemic. Although a downtrend in the global technology sector weighed
heavily, expectations of a trough and hopes of a visible end in the destocking
cycle started to manifest in March 2023. South Korea has some of the most
competitive and innovative companies which span several sectors including
semiconductors, electric battery, automobile and renewable energy industries
which augur well for future growth.
The Taiwanese market ended the reporting period with a loss of more than 7%.
The technology-heavy and export-oriented market experienced a lower demand for
its technology exports and a fallout from the demand shortfall in many
consumer electronic industries. TEMIT's slight overweight allocation to Taiwan
was largely attributable to exposure to the island's semiconductor industry
and TEMIT's largest portfolio holding, which is in Taiwan Semiconductor
Manufacturing ("TSMC"), the world's leading manufacturer of advanced chips.
India was TEMIT's fourth-largest exposure at the end of March 2023. Indian
equities fell by 6% over the 12-month period as global volatility, rising
inflation and soaring energy prices diminished investor sentiment for most of
2022. India also had a weak start to 2023 over concerns of a consumption
slowdown and the impact of the decline in the share prices of different
companies in the Adani Group following a negative research report; none of
these were held in TEMIT. However, India has the ability to rely on domestic
consumption and its massive increase in infrastructure capital expenditure
bodes well for further development of the economy. It has also benefited from
the diversification of global supply chains away from China alongside a
pick-up in manufacturing investments. In the long-term, the diversification of
India's power sources into renewables should eventually ease pressure from
imported energy and inflation.
Equities in Brazil fell 13% over the reporting period. Brazilian equities were
volatile due to political and economic uncertainty after its presidential
elections in October 2022. Former president Luiz Inacio Lula da Silva won the
election by a narrow margin, beating the incumbent president Jair Bolsonaro.
In the immediate aftermath of the election, widespread protests that lasted
for more than two months plagued the country. A delay in announcing the
composition of the new cabinet also caused uncertainty. This backdrop of
domestic unrest and post-election uncertainty on future government policy hung
over positive developments such as an improvement in economic growth and
softening inflation.
Investment strategy, portfolio changes and performance attribution
The following sections show how different investment factors (stocks, sectors
and geographies) accounted for TEMIT's performance over the period. We
continue to emphasise our investment process that selects companies based on
their individual attributes and ability to generate risk-adjusted returns for
investors, rather than taking a high-level view of sectors, countries or
geographic regions to determine our investment allocations.
Our investment style is centred on finding companies with sustainable earnings
power and whose shares trade at a discount relative to their intrinsic worth
and to other investment opportunities in the market. We also pay close
attention to risks.
We continue to utilise our research-based and active approach to help us to
find companies which have high standards of corporate governance, respect
their shareholders and also allow us to understand the local intricacies that
may determine consumer trends and habits. Utilising our large team of
analysts, we aim to maintain close contact with the board and senior
management of existing and potential investments and believe in engaging
constructively with our investee companies.
All of these factors require us to conduct detailed analyses of potential
returns versus risks with a time horizon of typically five years or more.
Our well-resourced, locally-based teams remain a key competitive advantage and
it has certainly been helpful having teams on the ground particularly in the
benchmark heavyweight countries of Brazil, China and India. This local
presence allows us to understand business models, competitive dynamics and
supply chain issues. We also obtain insights into regulatory conversations and
management capabilities, which are factored into our analysis. We view our
locally-based teams, which are armed with vast knowledge of the respective
countries' macroeconomic issues and views on the ground as vital sources of
input into the investment process.
In the portfolio, we remain positioned in long-term themes including
consumption premiumisation, digitalisation, health care and technology. We
focus on companies reflecting our philosophy of owning good quality
businesses, with long-term sustainable earnings power and share prices at a
discount to intrinsic worth. We see high levels of leverage as a risk and
continue to avoid companies with weak balance sheets.
Performance attribution analysis %
Year to 31 March 2023 2022 2021 2020 2019
Net asset value total return((a)) 0.8 (17.3) 54.5 (11.2) 1.8
Expenses incurred 1.0 1.0 1.0 1.0 1.0
Gross total return((a)) 1.8 (16.3) 55.5 (10.2) 2.8
Benchmark total return((a)) (4.5) (6.8) 42.8 (13.2) 0.1
Excess return((a)) 6.3 (9.5) 12.7 3.0 2.7
Stock selection 6.9 (10.0) 6.0 (2.1) 1.8
Sector allocation (0.4) 0.3 6.8 3.1 (0.6)
Currency (0.2) 0.2 (0.3) 1.6 1.0
Share buyback impact 0.2 0.0 0.3 0.4 1.0
Residual return((a)) (0.2) (0.0) (0.1) - (0.5)
Total contribution 6.3 (9.5) 12.7 3.0 2.7
Source: FactSet and Franklin Templeton.
((a)) A glossary of alternative performance measures is included in the
full Annual Report.
Top 10 contributors to relative performance by security (%)((a))
Top contributors Country Sector Share price Contribution to
total return
portfolio relative
to MSCI Emerging
Markets Index
ICICI Bank India Financials 18.9 1.3
Prosus((b)(c)) China/Hong Kong Consumer Discretionary 55.0 1.1
Brilliance China Automotive((b)) China/Hong Kong Consumer Discretionary 78.2 0.9
Banco Santander Mexico((b)) Mexico Financials 52.2 0.7
Daqo New Energy China/Hong Kong Information Technology 20.7 0.5
Tencent Music Entertainment China/Hong Kong Communication Services 81.1 0.5
Unilever((b)(c)) United Kingdom Consumer Staples 25.9 0.4
Genpact((b)(c)) United States Information Technology 14.4 0.4
LG South Korea Industrials 11.3 0.4
Petroleo Brasileiro Brazil Energy 19.0 0.4
((a)) For the period 31 March 2022 to 31 March 2023.
((b)) Security not included in the MSCI Emerging Markets Index as at 31
March 2023.
((c)) This security, listed on a stock exchange in a developed market,
has significant exposure to operations from emerging markets.
ICICI Bank, India's second largest private sector bank, gained during the
period following several consistently strong quarters of loan growth, net
interest margins and non-interest income. The bank remains well positioned
with its healthy capital adequacy ratios and strong franchise.
Prosus is a leading global investment company and the largest shareholder of
Tencent, a Chinese technology company. Its share price tracked Tencent's,
which ended the period higher on hopes of China's reopening,
better-than-expected third quarter results for 2022 and easing of restrictions
for the Chinese internet industry.
Shares of Brilliance China Automotive, a Chinese car maker noted for its
association with German luxury car maker BMW, moved higher after trading
resumed in October 2022 following a suspension of one-and-a-half years. It
also paid out a special dividend of the proceeds from a stake sale in its
affiliate BMW Brilliance Automotive, but uncertainties over further dividends
weighed on the stock price in the later part of the period.
Top 10 detractors to relative performance by security (%)((a))
Top detractors Country Sector Share price Contribution to
total return
portfolio relative
to MSCI
Emerging
Markets Index
NAVER South Korea Communication Services (41.0) (1.1)
Americanas((b)) Brazil Consumer Discretionary (94.1) (0.7)
Banco Bradesco Brazil Financials (30.7) (0.5)
Samsung Electronics South Korea Information Technology (6.6) (0.4)
Cognizant Technology Solutions((c)(d)) United States Information Technology (26.4) (0.4)
China Merchants Bank China/Hong Kong Financials (19.4) (0.3)
Naspers((b)) South Africa Consumer Discretionary 74.0 (0.3)
PDD((b)) China/Hong Kong Consumer Discretionary 101.5 (0.3)
China Resources Cement China/Hong Kong Materials (32.3) (0.3)
TSMC Taiwan Information Technology (8.8) (0.2)
((a)) For the period 31 March 2022 to 31 March 2023.
((b)) Security not held by TEMIT as at 31 March 2023.
((c)) Security not included in the MSCI Emerging Markets Index as at 31
March 2023.
((d)) This security, listed on a stock exchange in a developed market,
has significant exposure to operations from emerging markets.
NAVER is the leading internet search and advertising company in South Korea.
The share price was negatively impacted by slower growth in a post-COVID
environment. Concerns over expansion into unprofitable new businesses in
uncertain macroeconomic conditions and weak earnings (which fell short of
consensus estimates) pressured the share price. However, we believe that NAVER
is in a good position to build a thriving ecosystem integrating search,
e-commerce, payments and digital content based on its solid foundation in
search and advertising.
Americanas is a Brazilian e-commerce company and operator of convenience
stores. Disappointing results for the third quarter of 2022, news of
accounting inconsistencies and the departure of its new leadership team
pressured its share price. High inflation and elevated interest rates also
made for a difficult environment. We divested our position in the stock in
January 2023.
Banco Bradesco is Brazil's leading private sector bank. Weak fourth quarter
results and exposure to Americanas weighed on stock prices.
Top contributors and detractors to relative performance by sector (%)((a))
Top contributors MSCI Contribution Top detractors MSCI Contribution
Emerging to portfolio Emerging to portfolio
Markets Index relative Markets Index relative
sector total to MSCI sector total to MSCI
return Emerging return Emerging
Markets Index Markets Index
Financials (7.4) 2.3 Information Technology (7.8) (0.0)
Materials (9.5) 1.0
Consumer Discretionary 2.2 0.8
Industrials 0.4 0.5
Consumer Staples 6.6 0.5
((a)) For the period 31 March 2022 to 31 March 2023.
Favourable stock selection in the financials sector added to TEMIT's
performance relative to the benchmark index in the period of review. ICICI
Bank (described above) and Banco Santander Mexico were both examples of
financial companies which aided relative returns. In addition, Banco Santander
Mexico is an off-benchmark holding, which is testament to the investment
team's knowledge of local companies stemming from our experience and
on-the-ground presence. Stock selection in the materials sector also aided
relative performance. Contribution within this sector was led by South
Korea-based steel product manufacturer POSCO. Stock selection in the consumer
discretionary sector was also another contributor to relative returns.
In contrast, only one sector, information technology detracted (marginally)
primarily due to an overweight allocation. Semiconductor firms TSMC and
Samsung Electronics were key detractors, as they suffered from a cyclical
downturn in demand for semiconductors.
Top contributors and detractors to relative performance by country (%)((a))
Top contributors MSCI Contribution Top detractors MSCI Contribution
Emerging to portfolio Emerging to portfolio
Markets Index relative Markets Index relative
sector total to MSCI sector total to MSCI
return Emerging return Emerging
Markets Index Markets Index
China/Hong Kong 1.5 2.2 Brazil (13.1) (0.4)
India (6.0) 2.1 Thailand 5.8 (0.3)
South Africa (15.0) 0.6 Turkey 63.2 (0.2)
United Arab Emirates (23.8) 0.6 Indonesia 7.5 (0.2)
United Kingdom 2.5 0.4 Pakistan((b)) - (0.1)
((a)) For the period 31 March 2022 to 31 March 2023.
((b)) No companies included in the MSCI Emerging Markets Index in this
country as at 31 March 2023.
By markets, stock selection in China, India and South Africa were key
contributors. Several holdings in China such as Brilliance China Automotive
and polysilicon manufacturer Daqo New Energy helped relative returns. In
India, ICICI Bank was a key contributor to TEMIT's returns relative to the
index. South Africa's contribution was led by general merchandise retailer
Massmart.
Brazil was the top detractor from relative performance. The detraction was
caused by stock selection with Americanas and Banco Bradesco leading the
declines. An overweight position in Thailand was a positive contributor to
performance but this was negated by poor stock performance. A lack of exposure
to Turkey also detracted as Turkish equities rallied in 2022. Investors
increased their equity allocation within the country to hedge against
inflation and a low-yield environment. Turkey has since given up some of its
gains in the first quarter of 2023.
Largest holdings
The largest portfolio holding is in computer chip maker TSMC. After rising in
2021 on the basis of a positive outlook for the semiconductor industry, TSMC
suffered with a weakness in demand at some of its end customers. Although its
profits for 2022 were ahead of initial estimates, the slowdown in demand meant
that estimates for 2023 profit growth are much more muted. However, we are
confident on the resilience of the business model of TSMC as it continues to
lead on its business model of being "everyone's foundry".
The second largest portfolio holding is in Alibaba, a Chinese e-commerce
company. Most recently, Alibaba announced an organisational revamp, resulting
in a split into six units. Alibaba has seen a slowdown in growth in the past
couple of years due to increased regulations, competition and prolonged
COVID-19 lockdowns. With China's economic reopening and the industry's
adjustment to the new regulatory environment, we expect growth to resume,
albeit at a slower pace. Whilst the e-commerce businesses of Alibaba should
deliver steady growth, its other businesses such as cloud, fintech, local
commerce and content have significant potential. This could either offer
growth opportunities or the possibility of an improvement in profitability. We
remain positive on the strength of the e-commerce ecosystem of Alibaba and its
ability to generate strong cash flows. In addition, Alibaba's strong buyback
policy is another driver of earnings growth.
Global semiconductor manufacturer Samsung Electronics was the third-largest
holding in the portfolio. Although TEMIT has reduced its holdings in the
company due to a cyclical fall in earnings, we continue to believe that
Samsung Electronics will be at the forefront of the industry and will benefit
from any subsequent revival in demand.
Portfolio changes by sector
Total return in sterling
Sector 31 March 2022 Purchases Sales Market 31 March 2023 TEMIT MSCI
market value
£m
£m
movement
market value
%
Emerging
£m
£m
£m
Markets Index
%
Information Technology 737 57 (168) (61) 565 (5.8) (7.8)
Financials 473 141 (139) (4) 471 2.3 (7.4)
Consumer Discretionary 266 52 (43) 14 289 6.7 2.2
Communication Services 212 46 (58) (2) 198 (1.8) (1.2)
Materials 208 25 (56) (8) 169 1.3 (9.5)
Industrials 62 51 (16) 4 101 8.6 0.4
Consumer Staples 82 14 (42) 19 73 28.8 6.6
Health Care 33 33 (2) (4) 60 (7.2) (9.5)
Energy 36 29 (1) (15) 49 18.4 2.1
Utilities - 18 (12) 3 9 45.7 (8.6)
Real Estate 16 - (6) (1) 9 (13.2) (13.2)
Total investments 2,125 466 (543) (55) 1,993
Portfolio changes by country
Total return in sterling
Country 31 March 2022 Purchases Sales Market 31 March 2023 TEMIT MSCI
market value
£m
£m
movement
market value
%
Emerging
£m
£m
£m
Markets Index
%
China/Hong Kong 605 191 (219) 39 616 9.1 1.5
South Korea 487 60 (107) (42) 398 (5.8) (8.4)
Taiwan 363 22 (32) (37) 316 (6.5) (7.1)
India 188 73 (65) 30 226 14.5 (6.0)
Brazil 210 33 (29) (59) 155 (16.6) (13.1)
Other 272 87 (91) 14 282 - -
Total investments 2,125 466 (543) (55) 1,993
Portfolio investments by fair value
As at 31 March 2023
Holding Country Sector Trading((a)) Fair value % of net
£'000
assets
TSMC Taiwan Information Technology NT 231,444 11.5
Alibaba((b)) China/Hong Kong Consumer Discretionary PS 114,084 5.6
Samsung Electronics South Korea Information Technology PS 113,781 5.6
ICICI Bank India Financials PS 112,103 5.6
Tencent China/Hong Kong Communication Services PS 74,008 3.7
MediaTek Taiwan Information Technology IH 69,319 3.5
NAVER South Korea Communication Services IH 61,205 3.0
Prosus((c)) China/Hong Kong Consumer Discretionary IH 56,774 2.8
LG South Korea Industrials PS 52,065 2.6
China Merchants Bank China/Hong Kong Financials IH 45,150 2.2
TOP 10 LARGEST INVESTMENTS 929,933 46.1
Guangzhou Tinci Materials Technology China/Hong Kong Materials PS 43,448 2.2
Samsung Life Insurance South Korea Financials IH 42,935 2.1
Petroleo Brasileiro((d)) Brazil Energy IH 41,238 2.0
Itaú Unibanco((d)(e)) Brazil Financials IH 40,867 2.0
HDFC Bank India Financials NH 38,345 1.9
Genpact((f)) United States Information Technology PS 35,216 1.8
Banco Bradesco((d)(e)) Brazil Financials IH 34,687 1.7
Vale Brazil Materials PS 34,589 1.7
Baidu China/Hong Kong Communication Services IH 32,193 1.6
Unilever((f)) United Kingdom Consumer Staples PS 31,968 1.6
TOP 20 LARGEST INVESTMENTS 1,305,419 64.7
Cognizant Technology Solutions((f)) United States Information Technology IH 31,915 1.6
POSCO South Korea Materials PS 31,627 1.6
Brilliance China Automotive China/Hong Kong Consumer Discretionary NT 29,606 1.5
Soulbrain South Korea Materials IH 28,414 1.4
Banco Santander Mexico((e)) Mexico Financials PS 25,627 1.3
Ping An Insurance China/Hong Kong Financials IH 24,963 1.2
Techtronic Industries China/Hong Kong Industrials IH 24,812 1.2
Kasikornbank Thailand Financials NT 23,425 1.2
Uni-President China China/Hong Kong Consumer Staples IH 21,144 1.0
NetEase China/Hong Kong Communication Services IH 20,515 1.0
TOP 30 LARGEST INVESTMENTS 1,567,467 77.7
Daqo New Energy((e)) China/Hong Kong Information Technology PS 20,392 1.0
Gedeon Richter Hungary Health Care IH 19,603 1.0
Meituan China/Hong Kong Consumer Discretionary NH 18,962 0.9
Doosan Bobcat South Korea Industrials NH 17,977 0.9
Bajaj Holdings & Investments India Financials PS 17,872 0.9
Astra International Indonesia Consumer Discretionary PS 17,313 0.9
WuXi Biologics China/Hong Kong Health Care IH 17,250 0.9
Banco Santander Chile((e)) Chile Financials NH 16,659 0.8
Fila South Korea Consumer Discretionary PS 15,867 0.8
Zomato India Consumer Discretionary NH 14,093 0.7
TOP 40 LARGEST INVESTMENTS 1,743,455 86.5
Infosys Technologies India Information Technology IH 14,015 0.7
Netcare South Africa Health Care IH 12,735 0.6
One 97 Communications India Information Technology NH 12,481 0.6
China Resources Cement China/Hong Kong Materials PS 11,887 0.6
Hon Hai Precision Industry Taiwan Information Technology PS 11,824 0.6
Ping An Bank China/Hong Kong Financials PS 10,588 0.5
Beijing Oriental Yuhong Waterproof Technology China/Hong Kong Materials NH 10,262 0.5
Tata Consultancy Services India Information Technology PS 10,201 0.5
H&H Group China/Hong Kong Consumer Staples IH 10,150 0.5
LegoChem Biosciences South Korea Health Care IH 9,885 0.5
TOP 50 LARGEST INVESTMENTS 1,857,483 92.1
Samsung SDI South Korea Information Technology NH 9,627 0.5
Intercorp Financial Services Peru Financials IH 9,501 0.5
Emirates Central Cooling Systems United Arab Emirates Utilities NH 9,416 0.5
LG Chem South Korea Materials PS 9,012 0.5
Thai Beverage Thailand Consumer Staples IH 8,680 0.4
Kiatnakin Phatra Bank Thailand Financials NT 8,279 0.4
Star Petroleum Refining Thailand Energy NH 8,251 0.4
Tencent Music Entertainment((e)) China/Hong Kong Communication Services PS 8,107 0.4
BDO Unibank Philippines Financials NT 7,931 0.4
PB Fintech India Financials NH 6,930 0.3
TOP 60 LARGEST INVESTMENTS 1,943,217 96.4
NagaCorp Cambodia Consumer Discretionary PS 6,819 0.3
COSCO SHIPPING Ports China/Hong Kong Industrials IH 5,961 0.3
China Resources Land China/Hong Kong Real Estate PS 5,033 0.2
Nemak Mexico Consumer Discretionary PS 4,689 0.2
Greentown Service Group China/Hong Kong Real Estate PS 4,070 0.2
Yageo Taiwan Information Technology NH 3,730 0.2
Hankook Tire South Korea Consumer Discretionary NT 3,292 0.2
MCB Bank Pakistan Financials PS 2,807 0.1
XP Inc Brazil Financials NT 2,473 0.1
Weifu High-Technology China/Hong Kong Consumer Discretionary NT 2,410 0.1
TOP 70 LARGEST INVESTMENTS 1,984,501 98.3
BAIC Motor China/Hong Kong Consumer Discretionary NT 2,152 0.1
KT Skylife South Korea Communication Services NT 2,114 0.1
JD.com China/Hong Kong Consumer Discretionary NT 2,042 0.1
TOTVS Brazil Information Technology PS 817 0.1
East African Breweries Kenya Consumer Staples PS 801 0.1
Chervon Holdings China/Hong Kong Consumer Discretionary PS 348 -
Yandex((g)) Russia Communication Services NT - -
LUKOIL((g)) Russia Energy NT - -
Sberbank of Russia((g)) Russia Financials NT - -
TOTAL INVESTMENTS 1,992,775 98.8
NET ASSETS 24,728 1.2
TOTAL NET ASSETS 2,017,503 100.0
((a)) Trading activity during the year: (NH) New Holdings, (IH)
Increased Holdings, (PS) Partial Sale and (NT) No Trading.
((b)) TEMIT holds in this company shares listed on the Hong Kong stock
exchange and American Depository Receipts listed on the New York stock
exchange.
((c)) This company is listed in the Netherlands. The classification of
China/Hong Kong is due to most of its revenue coming from its holding in
Tencent.
((d)) Preferred shareholders are entitled to dividends before ordinary
shareholders.
((e)) US listed American Depository Receipt.
((f)) This company, listed on a stock exchange in a developed market,
has significant exposure to operations from emerging markets.
((g)) This company is fair valued at zero as a result of its trading
being suspended on international stock exchanges.
Portfolio summary
As at 31 March 2023
All figures are a % of the net assets
Communication Consumer Consumer Energy Financials Health Care Industrials Information Materials Real Estate Utilities Total Equities Net assets/ 31 March 2023 31 March 2022
Services
Discretionary
Staples
Technology
(liabilities)((a))
Total
Total
Brazil - - - 2.0 3.8 - - 0.1 1.7 - - 7.6 - 7.6 10.0
Cambodia - 0.3 - - - - - - - - - 0.3 - 0.3 0.4
Chile - - - - 0.8 - - - - - - 0.8 - 0.8 -
China/Hong Kong 6.7 11.1 1.5 - 3.9 0.9 1.5 1.0 3.3 0.4 - 30.3 - 30.3 28.8
Egypt - - - - - - - - - - - - - - 0.1
Germany - - - - - - - - - - - - - - 0.1
Hungary - - - - - 1.0 - - - - - 1.0 - 1.0 0.7
India - 0.7 - - 8.7 - - 1.8 - - - 11.2 - 11.2 9.1
Indonesia - 0.9 - - - - - - - - - 0.9 - 0.9 0.9
Kenya - - 0.1 - - - - - - - - 0.1 - 0.1 0.2
Mexico - 0.2 - - 1.3 - - - - - - 1.5 - 1.5 1.6
Pakistan - - - - 0.1 - - - - - - 0.1 - 0.1 0.4
Peru - - - - 0.5 - - - - - - 0.5 - 0.5 0.5
Philippines - - - - 0.4 - - - - - - 0.4 - 0.4 0.3
Russia((b)) 0.0 - - 0.0 0.0 - - - - - - 0.0 - 0.0 0.0
South Africa - - - - - 0.6 - - - - - 0.6 - 0.6 0.6
South Korea 3.1 1.0 - - 2.1 0.5 3.5 6.1 3.5 - - 19.8 - 19.8 23.2
Taiwan - - - - - - - 15.8 - - - 15.8 - 15.8 17.3
Thailand - - 0.4 0.4 1.6 - - - - - - 2.4 - 2.4 2.1
United Arab Emirates - - - - - - - - - - 0.5 0.5 - 0.5 -
United Kingdom - - 1.6 - - - - - - - - 1.6 - 1.6 1.4
United States - - - - - - - 3.4 - - - 3.4 - 3.4 3.4
Net assets/(liabilities)((a)) - - - - - - - - - - - - 1.2 1.2 (1.1)
31 March 2023 Total 9.8 14.2 3.6 2.4 23.2 3.0 5.0 28.2 8.5 0.4 0.5 98.8 1.2 100.0 -
31 March 2022 Total 10.2 12.7 3.8 1.7 22.6 1.5 2.9 35.1 9.9 0.7 - 101.1 (1.1) - 100.0
((a)) The Company's net assets/(liabilities) are the total of net
current assets plus non-current liabilities per the Statement of Financial
Position in the full Annual Report.
((b)) All companies held by TEMIT in this country are valued at zero.
Market capitalisation breakdown (%) Less than £1.5bn to £5bn to Greater than Net assets/
£1.5bn
£5bn
£25bn
£25bn
(liabilities)((a))
31 March 2023 5.1 11.2 22.9 59.6 1.2
31 March 2022 7.7 8.0 16.5 68.9 (1.1)
Split between markets((b)) (%) 31 March 31 March
2023
2022
Emerging markets 93.3 95.6
Developed markets((c)) 5.0 4.9
Frontier markets 0.5 0.6
Net assets/(liabilities)((a)) 1.2 (1.1)
Source: FactSet Research System, Inc.
((a)) The Company's net assets/(liabilities) are the total of net
current assets plus non-current liabilities per the Statement of Financial
Position in the full Annual Report.
((b)) Geographic split between "Emerging markets", "Frontier markets",
"Developed markets" are as per MSCI index classifications.
((c)) Developed market exposure represented by companies listed in
United Kingdom and United States which have significant exposure to operations
in emerging markets.
Outlook for emerging markets
Heading into 2023, while we remain watchful for developments that could change
our overall outlook, including China's relationship with Taiwan and the United
States, we find many reasons to be positive about EMs. Many countries are
towards the end of the rate tightening cycle. Most markets in Latin America
have traditionally had a significant real interest rate and their economic
potential has been curtailed because of the need for macroeconomic stability.
We expect any policy pivot in EMs to revive consumption and spur economic
growth as inflation slows. In addition, after a slowdown in earnings in 2022,
there is the prospect of a recovery in earnings growth in 2023, with China
being the last major country to emerge from the pandemic. However, in the
short-term, earnings are likely to remain weak with subdued consumption and
inventory digestion and a recovery is expected more towards the second half of
2023. A pickup in earnings revisions in EMs would signify better times ahead
for equity markets.
Although the current global outlook remains weak, economies with a greater
focus on domestic demand are better placed to weather this in the near term.
Many emerging markets such as China, India, Indonesia and Brazil have huge
domestic consumption bases and are well-positioned to remain resilient from
external demand shortfalls. In addition, policy makers in several markets are
providing incentives to manufacturing companies to expand operations in order
to remain self-sufficient and competitive. For example, India is driving
investments through its Production Linked Incentive program. South Korea plans
to offer tax breaks to semiconductor and other technology companies investing
within the country whilst reforming stock market regulations. Thailand has
also approved a budget to boost tourism in the country, one of its biggest
growth drivers.
The long-term structural tailwind of consumption growth in EMs via expansion
of the middle class and premiumisation of buying patterns is now more
significant than ever. Some US$2.6 trillion in Chinese bank deposits were
amassed in 2022((a)) and middle-class households are looking to spend on
experiences, products and services. In our view, China's reopening could
benefit many markets as the country has strong trade links with many EMs.
Chinese tourism has also been a vital source of revenue for many countries.
((a)) Source: People's Bank of China
After the removal of most COVID-related constraints, we have seen economic
activity in China starting to recover in the first quarter of 2023, where
retail sales, industrial production and investment in fixed assets increased.
More importantly, companies are now able to operate their businesses without
COVID protocols which removes the pressure of unplanned outages and improves
overall efficiency.
Markets in Eastern Europe will benefit from the normalisation of energy
dislocations, although the conflict in Ukraine will continue to be an
overhang. Markets in the Middle East continue to see a boom in initial public
offering activity which bodes well for future capital market developments in
the region.
These uncorrelated drivers of returns in EM economies present an investment
opportunity which our team's deep experience, local expertise and a bottom-up
investment approach can uncover.
EMs also continue to make strides towards climate goals and with the cost of
renewable energy expected to fall in 2023, we might well see EMs make further
climate commitments.
It is an interesting time to be looking at the emerging world today. We
believe that the breadth of opportunity, growth, innovation, sustainability of
business models and the much stronger institutional resilience compared to
decades past when considered together create an attractive future for EMs.
Chetan Sehgal
Lead Portfolio Manager
9 June 2023
The Investment Manager's Process
Investment philosophy and approach
FTEME's long-term approach is driven by the 3 S's, seeking Structural growth
opportunities in emerging markets, investing in businesses with Sustainable
earnings power at a discount to intrinsic worth, and believing in responsible
Stewardship of client capital. FTEME seeks to capture the growth potential of
emerging market companies and believes that this is best achieved by employing
a bottom-up and fundamental security selection process. FTEME conducts
in-depth proprietary company research with a long-term and independent
perspective. FTEME believes in the responsible stewardship of clients' capital
and that governance and sustainability factors create risks and opportunities
for companies. ESG analysis is therefore integrated alongside fundamental
bottom-up analysis.
TEMIT's performance in different market environments
FTEME's approach aims for outperformance over the long term. The investment
strategy tends to produce stronger performance when company fundamentals are
the primary driver for stock returns, where a focus on stock selection should
produce superior results. Performance may be less strong in highly
sentiment-driven market environments, when investors focus more on the overall
economic picture rather than company fundamentals. This can also be the case
when the market is overly short-term oriented, and rewards companies driven by
what FTEME views as unsustainable factors such as short-term demand/supply
imbalances or inorganic growth.
Investment process
The three broad stages of FTEME's investment process comprise: idea
generation, stock research, and portfolio construction and management; with
governance and sustainability considerations and risk management fully
integrated at all stages.
1. Idea generation
The key source of idea generation is FTEME's team of over 70 analysts and
portfolio managers located around the globe. Their experience and expertise
allow them to identify trends which they may want to explore further through
company research. In addition, FTEME's local presence, network and
understanding of local dynamics may help to identify trends and opportunities
that other market participants may filter out through standard quantitative
screens. FTEME analysts speak the local language and are part of the local
culture and fabric of the countries where they conduct research.
2. Stock research
FTEME analysts conduct rigorous analysis to assess whether a company has
sustainable earnings power, and to establish a proprietary estimate of its
intrinsic worth. By integrating ESG analysis with traditional business and
financial analysis, FTEME seeks to gain insights into the quality and risks of
companies. FTEME's research platform currently has coverage of over 700
companies across emerging markets using a proprietary and rigorous bottom-up
research approach, along with extensive knowledge of the wider investment
universe.
FTEME's research analysts form detailed views of companies by collecting and
analysing a variety of information. The team conducts detailed quantitative
financial analysis by building in-depth company models to evaluate financial
strength and profitability, and to project future earnings and cash flow.
Industry demand and supply models are incorporated in the analysis, as well as
country and currency macro considerations. FTEME has a strong emphasis on
qualitative assessment.
The assessment of ability to sustain stable or growing economic profits over
time is typically driven by a combination of factors, including (i) sound
business models; (ii) sustainable competitive advantages; (iii) management
foresight; and (iv) low debt levels. Earnings power is the demonstrable
ability to generate sustainable economic profit into the future in areas which
could be beyond the current scope of operations. The analysts look for real
earnings growth by focusing on economic earnings and cash flows rather than
reported earnings, and differentiating between operational earnings and
financial earnings. They evaluate internal versus external drivers to earnings
and prefer companies with earnings which can be affected through management
action. A key element of earnings power is therefore quality, as signified by
(i) products and services with low regulatory and macro risk; (ii) financial
strength; and (iii) management strength.
Each research recommendation may incorporate several valuation methods
extending typically over a three to five-year horizon. FTEME aims to clarify
the risk/reward balance of a company by conducting sensitivity analysis,
stress-testing, and scenario analysis. It seeks to identify what the market
consensus expectations are for a stock and how the team's fundamental views
may differ.
3. Portfolio construction
FTEME seeks to build a high-conviction stock-centric portfolio that is
primarily driven by company-specific factors and focused on the long term. A
bottom-up approach to stock selection is used, with country and sector
allocations a residual of this process.
Portfolio Style and Characteristics
The strategy typically displays the following characteristics:
• Core style: The strategy aims to deliver outperformance
irrespective of market direction. The portfolio construction process leads to
the majority of active risk being focused.
• Quality and growth but not at excessive valuation levels: The
philosophy typically leads to a portfolio with higher quality and growth than
the aggregate of the benchmark index.
• High conviction portfolio: The top-10 holdings typically account
for over 40% of the portfolio which overall is well-diversified across the
market cap spectrum.
• Low turnover: FTEME's high conviction and long-term approach means
that the typical annual portfolio turnover is less than 20%.
Buy and Sell Discipline
FTEME's buy discipline is primarily designed to ensure that the portfolio
managers buy when they have both conviction in a business and it is trading
below its intrinsic value; FTEME's sell discipline is designed to capture the
opposite. All holdings are regularly reviewed to ensure that analyst
recommendations are up to date and accurately reflect any changes in company
fundamentals. In this way, ongoing fundamental research drives all buy and
sell decisions.
Investment risk management
Investment in emerging markets equities inevitably involves risk in a volatile
asset class. Franklin Templeton uses a comprehensive approach to managing
risks within its managed portfolios and this approach is inherent in all
aspects of the investment process. Investment risks are to be identified and
intentional, not minimised. Risk management is embedded through all stages of
the investment process, in collaboration with dedicated resources from
Franklin Templeton's Investment Risk Management Group of over 80 risk
management professionals, which is independent from the portfolio management
team. Various risk management tools are used to predict and decompose the
portfolio's active risk in order to understand and manage the portfolio's
active risk profile.
For additional information with respect to the AIFM risk management framework,
please read the Investor Disclosure Document on our website (www.temit.co.uk).
FTEME's approach to stewardship
FTEME's focus is on a total sustainability approach including business,
economic, environmental and social sustainability. How FTEME monitors and
manages client assets is not just about focusing on governance and
sustainability factors. It demands a holistic approach incorporating proactive
long-term engagement with the managers of the companies which FTEME invests
in, on behalf of TEMIT and its other clients.
Part of being a responsible steward of clients' assets is acknowledging that
governance and sustainability factors create risks and opportunities for
companies. It therefore makes sense to integrate these factors alongside
fundamental bottom-up analysis and engage with companies as active owners on
behalf of clients. Responsible stewardship is not a single act but a
continuous process that includes engagement and voting. Being responsible
stewards of our clients' capital is reflected in:
How we act as investors How we treat our clients How we behave as a business
- ESG integration - Putting clients first - Building relationships
- Company engagement - Being responsible fiduciaries of our clients᾿ capital - Achieving quality results
- Policy advocacy - Working with integrity
Integrating ESG factors
Analyses of governance and sustainability factors are embedded components of
our rigorous fundamental bottom-up research. The driving factors of the
decision to purchase or sell a stock centre on the following:
• Its sustainable earnings power and whether its price is at a
discount to intrinsic worth; and
• The sustainability of its business model, which is critical to
maintaining its competitive positioning.
Our proprietary three-pillar ESG framework is a key component of how we aim to We have summarised one of our case studies from the full Stewardship Report to
achieve our goal of being an emerging market leader in
give TEMIT shareholders a snapshot of the typical analysis undertaken.
sustainable investing.
Soulbrain - a prominent South Korean player in the electronic materials and
chemicals industry.
Intentionality
ESG Topic: Environmental Footprint
Assessing companies' intentionality toward managing material ESG factors with
our proprietary scoring system and linking ESG factors into our valuation
models. Materiality and Risk: Companies operating in the materials processing sector
have the potential to cause significant environmental damage if they are not
managed properly. The reliability of service and safe operation of company
assets is key.
Alignment
Analysis:
Mapping the alignment of companies' products and services to positive social
and environmental outcomes and UN Sustainable Development Goals (SDGs). To minimise leaks of hazardous materials in the event of disasters such as
fires, earthquakes, or floods, measures such as explosion-proofing equipment,
negative pressure equipment, and ventilation have been implemented to
standards exceeding those required by South Korea's Ministry of Environment.
Transition
Wastewater and sewage from plants are pooled in collecting wells and processed
at an on-site treatment facility operated by the government. Soulbrain not
only complies with legal water quality standards, but also treats water
Identifying companies' transition potential linked to their incremental pollutants as much as possible and sends the remaining wastewater for further
progress, using our on-the-ground capabilities and experience as active owners treatment at an industrial complex that is operated by the government.
to foster positive change.
ESG Thesis: As a chemical product manufacturer, Soulbrain focuses on the
management of environmental issues, whilst also contributing to nearby
communities. The company has expressed active commitment to the protection of
the environment through the establishment of its own Environmental Health,
Safety and Energy Management Policy. We note that the company has been exposed
to fires in the past. Post these incidents the company has implemented an
Emergency Response System and other prevention measures such as regular
monthly prevention exercises. The CEO has since been replaced with one who is
specialised in health and safety of factory operations. With some history of
disruption and environmental impact in the past, we have applied a discount to
our valuation but are confident in the new management's ability to manage
future fire risk in its operations.
Climate change
Within emerging markets, the landscape varies considerably, ranging from
countries that have announced meaningful carbon targets to those that have yet
to declare any significant policies. FTEME's objective is to understand the
climate commitments of investee companies incorporating both local and global
perspectives, recognising that the pace of decarbonisation and the associated
strategies will differ across countries and cultures.
Where material, FTEME integrates climate change/carbon analysis into its
bottom-up research process, focusing on assessing the impact on long-term
business values. This is part of the holistic approach of integrating ESG
analysis with traditional financial analysis so that FTEME can gain valuable
insights into the quality and risks of businesses which FTEME invests in.
FTEME's analysts and portfolio managers look at climate risks and
opportunities closely for relevant sectors and geographies where climate
change plays an important role. FTEME closely tracks climate related factors
into estimates, models and valuations for those businesses materially exposed
to the issue.
Our portfolio managers also seek to understand the carbon risk profile at a
portfolio level to understand its carbon risk exposures. The data helps with
the engagement agenda.
TEMIT's portfolio carbon risk is concentrated amongst a small number of
companies, with the top 5 companies in terms of carbon intensity representing
7.2% of the portfolio and accounting for 69.0% of the portfolio WACI. From a
sector perspective, 48.2% of the portfolio WACI contributions come from the
materials sector. On a relative basis, portfolio selection in materials
contributes positively, whilst the utilities sector also contributes
positively to WACI, as TEMIT is underweight in this sector. China Resources
Cement and LG, exhibit the largest carbon intensities in TEMIT's portfolio,
representing 3.2% of the portfolio and accounting for 48.8% of the portfolio
WACI. TSMC's carbon intensity is low, however due to it representing 11.6% of
the portfolio, it is third in terms of contribution to the portfolio WACI.
We emphasise that the data does not always fully represent the actual carbon
risk of the portfolio.
We remain willing to invest in companies in carbon-intensive sectors, such as
cement, steel and extractive industries. This is because we are pragmatic
investors who understand that not every company can have a perfect
sustainability profile today.
In the full Stewardship Report, available on our website (www.temit.co.uk), we
spotlight and focus this year on the steel industry. The transition to a
low-carbon economy will require a change in the way we manufacture steel.
Accounting for nearly 8% of global emissions from the energy sector, the steel
industry will play an important role in mitigating climate change by reducing
the CO2 emissions in the production process.
As investors in the steel industry in TEMIT, we profile our observations with
POSCO, one of the largest steel producers in the world, headquartered in South
Korea.
POSCO
ESG observations and analysis:
• POSCO is one of the most efficient and cost competitive steel
makers globally, but it has recognised that the "survival" of steel companies
depends on net-zero carbon.
• In order to achieve their net-zero by 2050 target, the company
plans to optimise low-carbon solutions that are already in use such as
hydrogen reduction steelmaking, expansion of renewable energy and carbon
capture and storage.
• POSCO has a clear timeline in place for the commercialisation of
their hydrogen reduction steelmaking technology. Clear progress has been made
over recent years, but the technology in its current state is not sufficient
to enable fast enough progress for low-carbon steelmaking.
Our thesis:
POSCO is a market leader in terms of ESG disclosures and efforts to move
towards net-zero steel production. We acknowledge the significant steps that
POSCO's management has undertaken to improve the company's environmental
initiatives with the implementation of clear disclosures, documentation, and
establishment of timelines.
There are several steps that the company will have to take to fully utilise
its hydrogen-reduction technology. POSCO is supported by a strong financial
position and has committed a substantial capital investment, which has been
factored into our valuation.
Active ownership
As investors with a significant presence in emerging markets, FTEME's active
ownership efforts are a key part of the overall approach to stewardship. FTEME
analysts conduct almost 2,000 company meetings a year across the investment
platform using its industry-leading research footprint across emerging
markets, where FTEME seek to gain a number of fundamental and sustainability
insights. We believe that our engagement efforts are key to developing a
detailed understanding of companies and improving outcomes for shareholders as
well as stakeholders more broadly.
Engagement statistics
FTEME's analysts are in a continual dialogue with companies on a range of
topics including sustainability and governance. There are also companies that
FTEME identify where dedicated discussion on ESG topics are necessary. Active
engagements with companies in the TEMIT portfolio for the year ended 31 March
2023 are summarised below:
ESG discussion by engagement type Number of % of
interactions
interactions
Environmental 12 34
Carbon risk and climate change 6 17
Environmental consideration 6 17
Social 4 11
Human and social capital 4 11
Governance 20 55
Corporate governance 14 39
Strategic risk and communication 6 16
Total 36 100
ESG discussion outcome Number of % of
interactions
interactions
No progress 1 3
Feedback noted by company 17 47
Company plans to make changes 7 19
Company has made changes 11 31
Total 36 100
Below is an ESG engagement example with an investee company headquartered in
South Korea.
KT Skylife
ESG engagement topic: Governance - to recommend a more transparent and
attractive payout policy. Objectives:
• Pay-tv is a mature market in South Korea and the business
generates significant cash. Thus, we continue to engage with the company on
their shareholder return policy, encouraging management to align its policy
with minority shareholder interests.
Outcome: Company plans to make changes
• We engaged with the management to highlight that, despite previous
engagements, KT Skylife's dividend distribution remained low despite cash
levels matching the company's market capitalisation at one point in time.
• We also noted that in 2021, the company acquired a cable TV
operator, a low growth business, at a valuation that was at a significant
premium to its own valuation. However, we believed that a share buyback would
have added more value than the acquisition.
• The company responded with confirmation that they would actively
consider a new dividend policy, and that while share buybacks may be
considered, they preferred to prioritise strengthening their dividend payout.
• Management confirmed that, once finalised, they would share the
company's strategy and vision for the year ahead with us.
Proxy voting
In the year ended 31 March 2023, FTEME voted on over 900 management proposals
at annual and special general meetings for TEMIT.
Most of the proposals which FTEME voted on related to companies' director
appointments, routine business proposals and capital structures. Of the
voteable management proposals, FTEME voted "For" proposals 84% of the time.
FTEME voted "Against" management proposals in 13% of cases. By proposal
category, as a percentage of votes within each category, votes against were
largely concentrated on capital structure, non-salary compensation and
management-related proposals.
FTEME views votes against proposals as a formal way to communicate our views
to management, and FTEME undertakes them based on the investment team's
assessment of each motion in line with clients' best interests.
"Other" votes were cast in 3% of cases. These were mainly related to director
votes in Brazil, where FTEME abstained from voting when they did not support
the candidates put forward for election, or where the company bundled several
proposals into one, preventing voting on individual items.
The number of resolutions proposed by shareholders is increasing around the
world, particularly on environmental and social issues, although they remain
relatively uncommon in emerging markets. FTEME will continue to closely
examine the merits of views raised by fellow shareholders.
We encourage you to download the full TEMIT Stewardship Report from
www.temit.co.uk for further, detailed information.
Business Review
Strategy and Business Model
Company purpose and objective
TEMIT's purpose is to provide both private and institutional investors with
the opportunity for capital appreciation via a professionally managed vehicle
focused on listed equity investments in emerging markets.
The objective of TEMIT is to provide long-term capital appreciation via
exposure to global emerging markets, supported by a culture of both strong
customer service and corporate governance.
Investment policy
The Company seeks long-term capital appreciation through investment in
companies listed in emerging markets or companies which earn a significant
amount of their revenues in emerging markets but are domiciled in, or listed
on, stock exchanges in developed countries ("Emerging Markets Companies").
It is expected that the majority of investments will be in listed equities.
However, up to 10% of the Company's assets may be invested in unlisted
securities. In addition, while it is intended that the Company will normally
invest in equity instruments, the Investment Manager may invest in
equity-related investments (such as convertibles or derivatives) where it
believes that it is advantageous to do so.
The portfolio may frequently be overweight or underweight in certain
investments compared with the MSCI Emerging Markets Index (the "Benchmark")
and may be concentrated in a more limited number of sectors or geographical
areas than the Benchmark. Investments may be made in Emerging Markets
Companies outside the Benchmark that meet the investment criteria.
Whilst there are no specific restrictions on investment in any one sector or
geographic area, the portfolio will be managed in a way which aims to spread
investment risk. The portfolio will typically contain between 50 and 100
individual stocks but may, at times, contain fewer or more than this range. No
more than 12% of the Company's assets will be invested in the securities of
any one issuer at the time of investment, save that any investment in unlisted
securities of any one issuer will be limited to no more than 2% of the
Company's assets, measured at the time of investment.
The maximum borrowing will be limited to 20% of the Company's net assets,
measured at the time of borrowing.
No more than 10%, in aggregate, of the value of the Company's assets will be
invested in other listed closed-ended investment funds.
In accordance with the Listing Rules, the Company will not make any material
change to its published investment policy without the prior approval of the
UK's Financial Conduct Authority ("FCA") and the approval of its shareholders
by ordinary resolution.
Distribution policy
The Company will ensure that its total annual dividends will be paid out of
the profits available for distribution under the provisions of the relevant
laws and regulations and will be at least sufficient to enable it to qualify
as an investment trust under the UK Income and Corporation Taxes Act. If the
Company has received an exceptional level of income in any accounting year,
the Board may elect to pay a special dividend. The primary focus of the
investment policy is on generating capital returns, the Company does not
target a particular level of income and there is no guarantee that dividend
levels will be maintained from one year to the next.
The Company will normally pay two dividends per year, an interim dividend
declared at the time when the half yearly results are announced, and a final
dividend declared at the time when the annual results are announced. The final
dividend will be subject to shareholder approval at the AGM each year.
The Company may also distribute capital by means of share buybacks when the
Board believes that it is in the best interests of shareholders to do so. The
share buyback programme will be subject to shareholder approval at each AGM.
Business model
The Company has no employees and all of its Directors are non-executive. The
Company delegates its day-to-day activities to third parties.
Since 1 October 2021, Franklin Templeton Investment Trust Management Limited
("FTITML", "AIFM" or the "Manager") has been the Company's AIFM and Company
Secretary.
The Board is responsible for all aspects of the Company's affairs, including
the setting of parameters for the monitoring of the investment strategy and
the review of investment performance and policy. It also has responsibility
for overseeing all strategic policy issues, namely dividend, gearing, share
issuance and buybacks, share price and discount/premium monitoring, corporate
governance matters and engagement with all the Company's stakeholders.
Strategy
The Company seeks to achieve its objective by following a strategy focused on
the following:
Performance
At the heart of the strategy is the appointment and retention of capable
investment management professionals, whose aim is to identify value and
achieve superior long-term growth for shareholders. The Investment Manager,
under the leadership of Chetan Sehgal, continues to apply the same core
investment philosophy that has driven TEMIT's performance since the Company's
launch. The investment team aims to achieve long-term capital appreciation for
shareholders seeking exposure to global emerging markets by investing in
companies that they believe offer long-term sustainable growth and good value,
combined with strong management and sound governance.
Environmental, Social and Governance ("ESG") matters
As TEMIT is an investment trust, the key ESG consideration is the stewardship
of its portfolio of investments. The Board has reviewed and fully supports the
Investment Manager's approach to stewardship, which is described under
"FTEME's approach to stewardship" in the full Annual Report. It receives
regular reports on Franklin Templeton's policies and controls.
TEMIT has no greenhouse gas emissions to report from the operations of the
Company, as all of its activities are outsourced to third parties. While as an
investment trust TEMIT is exempt from disclosures recommended by the Task
Force on Climate-related Financial Disclosures ("TCFD"), Franklin Templeton
continues to develop metrics for our carbon footprint. Further information on
our approach to climate change can be found under "FTEME's approach to
stewardship" above and in more detail in the full Stewardship Report,
available on our website (www.temit.co.uk).
TEMIT has no employees and is not an organisation that provides goods or
services as defined in the Modern Slavery Act 2015 and thus the Company
considers that the Act does not apply. The Company's own supply chain consists
predominantly of professional services advisers.
Culture and values
The Board believes in a culture of openness and constructive challenge in its
interactions with the Manager and other service providers. The Board aims to
maintain open and regular communication with shareholders, as set out under
Communication in the full Annual Report.
The Company is committed to acting professionally, fairly and with integrity
in all of its business dealings and relationships. The Board has a
zero-tolerance policy towards bribery and looks to ensure that its service
providers and associated persons have effective policies and procedures
designed to actively prevent bribery which are proportionate, and risk based.
In relation to the corporate offence of failing to prevent tax evasion, it is
the Company's policy to conduct all business in an honest and ethical manner.
The Company takes a zero-tolerance approach to any facilitation of tax evasion
whether under UK law or under the law of any foreign country. The Board notes
that the Manager has a robust whistleblowing policy in place.
Information on the Company's approach to Diversity is set out in the
Directors' Report in the full Annual Report.
Liquidity
The shares issued by the Company are traded on the London and New Zealand
stock exchanges. The Company has engaged Winterflood Securities as financial
adviser and stockbroker, and to act as a market maker in the shares of the
Company.
Gearing
Fixed term loan
On 31 January 2020, the Company entered into a five-year £100 million loan at
a fixed rate of 2.089% with Scotiabank Europe plc. The fixed term loan is
denominated in pounds sterling and will remain in place until 31 January 2025.
Full details of the loan are set out in Note 11 of the Notes to the Financial
Statements.
Revolving credit facility
On 31 January 2020, the Company entered into a three-year £120 million
unsecured multi-currency revolving loan facility with The Bank of Nova Scotia,
London Branch. Drawings may be in sterling, US dollars or Chinese renminbi
("CNH"). The total amount which may be drawn down in CNH is 45% of the
combined limit of the fixed rate loan and of the revolving loan facility. On
31 January 2023 the agreement was amended to extend the maturity date to 30
January 2024. Further details of the facility are set out in Note 10 of the
Notes to the Financial Statements.
The Investment Manager has been granted discretion by the Board to draw down
the revolving loan facility as investment opportunities arise, subject to
overall supervision by the Board, and subject to the overall gearing limit in
TEMIT's investment policy.
The Company has no other debt. The net gearing position was 0.0% (net of cash
in the portfolio) at the year-end (2022: 1.1%) which means that the cash held
by the Company is equal to or higher than the total bank loans.
The Board continues to monitor the level of gearing and currently considers
gearing of up to 20% to be appropriate, measured at the time of borrowing.
Affirmation of shareholder mandate
In accordance with the Company's Articles of Association, the Board must seek
shareholders' approval every five years for TEMIT to continue as an investment
trust. This allows shareholders the opportunity to decide on the long-term
future of the Company. The last continuation vote took place at the 2019 AGM,
when 99.95% of the votes cast were registered as votes in favour. The next
continuation vote will take place at the 2024 AGM.
Stability - Share buybacks and Conditional Tender Offer
The Company has powers to buy back its shares as a discount control mechanism
and when this is in the best interests of the Company's shareholders and in
2019 introduced a Conditional Tender Offer. The share price discount to net
asset value is discussed under Key Performance Indicators in the full Annual
Report.
Under the Conditional Tender Offer, if over the five-year period from 31 March
2019 to 31 March 2024 the Company's net asset value total return fails to
exceed the benchmark total return, the Board will put forward proposals to
shareholders to undertake a tender offer for up to 25 per cent of the issued
share capital of the Company, at the discretion of the Board. Any such tender
offer will be at a price equal to the then prevailing net asset value less two
per cent (and less the costs of the tender offer). There will be no tender
offer if the Company's net asset value total return exceeds the benchmark
total return (MSCI Emerging Markets Index) over the five-year period. Any
tender offer would take place following the Company's 2024 AGM and will also
be conditional on shareholders approving the continuation vote in 2024 which
is described under "Affirmation of shareholder mandate" above.
A key point in the Investment Manager's mandate is to take a long-term view of
investments and one of the advantages of a closed-end fund is that the
portfolio structure is not disrupted by large inflows or outflows of cash.
However, the Board and the Investment Manager recognise that the returns
experienced by shareholders are in the form of movements in the share price,
which are not directly linked to NAV movements, and the shares may trade at
varying discounts or premiums to NAV. Many shareholders, both professional and
private investors, have expressed a view that a high level of volatility in
the discount is undesirable and that the Company should continue its active
share buyback programme. A less volatile discount, and hence share price, is
seen as important to investors. For this reason, TEMIT uses share buybacks
selectively with the intention of limiting volatility in the share price and
where buybacks are in the best interests of shareholders. Details of the share
buybacks are included in the following table. All shares bought back in the
year were cancelled, with none being placed in treasury. As at 31 March 2023,
the Company held 103,825,895 shares in treasury (2022: 103,825,895 shares in
treasury).
2023 2022
Shares bought back and cancelled during the year 19,758,613 2,331,670
Proportion of share capital bought back and cancelled 1.7% 0.2%
Total cost of share buybacks £29.2m £3.6m
The benefit to NAV £4.6m £0.5m
The percentage benefit to NAV 0.23% 0.03%
Discount management is reviewed regularly by the Board to ensure that it
remains effective in the light of prevailing market conditions. The
Conditional Tender Offer will not affect the Board's current approach to
discount management. The Board will continue to exercise the Company's right
to buy back shares when it believes this to be in shareholders' interests and
with the aim of reducing volatility in the discount.
Communication
The Board works to ensure that investors are informed regularly about the
performance of TEMIT and of emerging markets through clear communication and
updates. The Board is fully committed to TEMIT's marketing programme. There is
a substantial annual marketing and communication budget, and expenditure by
TEMIT is matched by a contribution to costs from the Manager.
TEMIT won the prestigious Best Campaign Award at the AIC Shareholder Awards
2022 in recognition of the quality of the "Your future is emerging" campaign
undertaken to attract new shareholders. The innovative use of broadcast media
has helped to increase TEMIT's profile, advertise the benefits of the Company
and communicate the growth story of emerging markets to a wider audience.
A new corporate identity was launched in January 2022 providing TEMIT with a
unique brand for the first time.
TEMIT seeks to keep shareholders updated on performance and investment
strategy through its regular annual and half yearly reports, along with
monthly factsheets and commentaries. These are available on the TEMIT website
(www.temit.co.uk) which also contains portfolio holdings information, updates
from the Investment Manager and other important documents that will help
shareholders to understand how their investment is managed. We also
communicate via @TEMIT on Twitter and continue to develop the Company's
presence across social media platforms. The Board encourages registration to
our monthly email that keeps subscribers appraised of the latest performance,
insights and announcements.
TEMIT has an active public relations programme. Our Investment Manager
provides comments to journalists, hosts media briefings and publishes articles
on issues relevant to investing in emerging markets.
The Investment Manager meets regularly with professional investors and
analysts and hosts interactive webinars. At each AGM the Investment Manager
makes a presentation with the opportunity for all shareholders to ask
questions.
The Chairman regularly meets major shareholders to discuss investment
performance and developments in corporate governance. We try to engage with a
wide spectrum of our shareholders and aim to address their concerns as far as
practically possible. Shareholders are welcome to contact the Chairman or the
Senior Independent Director at any time via temitcosec@franklintempleton.com.
Section 172 Report - Promoting the success of the Company
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to
explain how they have discharged their duties under Section 172(1) of the
Companies Act 2006 in promoting the success of their companies for the benefit
of "members as a whole" and having regard for all stakeholders.
Section 172 Matter Board's Statement
The likely consequences of any decision in the long term. The Board is focused on promoting the long-term success of the Company and
regularly reviews the Company's long-term strategic objectives, including
consideration of the impact of the Investment Manager's actions on the
marketability and reputation of the Company and the likely impact on the
Company's stakeholders of the Company's strategy.
The interests of the Company's employees. The Company has no direct employees.
The need to foster the Company's business relationships with suppliers, The Board's approach to its key stakeholders is set out below.
customers and others.
The impact of the Company's operations on the community and the environment. The Board's approach is set out in the section on ESG under Strategy and
Business Model in the full Annual Report.
The desirability of the Company maintaining a reputation for high standards of The Board's approach is set out in "Culture and values" in the full Annual
business conduct. Report.
The need to act fairly between members of the Company. The Board's approach to its key stakeholders is set out below.
In addition to the primary focus of the Board, and with due regard to its
obligations under Section 172 of the Companies Act 2006, the following
important and non-routine matters were considered at Board meetings during the
year:
• Recruitment of Abigail Rotheroe as a non-executive Director;
• Changes to the risk matrix, monitoring such changes carefully
and introducing alternative mitigating controls where necessary and
practicable to support the operation of an effective control environment;
• Pandemic risks affecting the Company's investments and business
operations;
• Risks resulting from the Russian invasion of Ukraine and the
valuation of Russian assets;
• Rebalancing dividend payments by increasing the interim
dividend;
• Review of the marketing plan with the Manager;
• Review of the share buyback programme; and
• Review of the gearing facility.
The Board considers the main stakeholders in the Company to be its
shareholders and its service providers, the principal one of which is its
Manager, along with its investee companies. A summary of the key areas of
engagement undertaken by the Board with its main stakeholders in the year
under review and how Directors have acted upon this to promote the long-term
success of the Company are set out in the following table.
Stakeholders Area of Engagement Consideration Engagement Outcome
Shareholders and potential investors Company objective Delivering on the Company's objective to shareholders over the long term. The Company's objective and investment policy are set out in the full Annual The Investment Manager's commentary in the full Annual Report gives a full
Report. commentary on the Company's portfolio as well as on the approach and
considerations undertaken by the Investment Manager for stock selection within
the portfolio.
The Company's performance against its objective is regularly reviewed by the
Board, taking account of views expressed by shareholders.
A continuation vote took place at the 2019 AGM, with 99.95% of votes cast in
favour. The next continuation vote is scheduled to take place at the AGM in
2024.
The Company holds a continuation vote every five years to allow shareholders
to decide on the long-term future of the Company.
Shareholders and potential investors Dividend The objective of the Company is to provide long term capital appreciation, The Board reviews regularly the level of dividends, taking account of the Dividend payments are discussed in the Chairman's Statement in the full Annual
however the Board recognises the importance of regular dividend income to many income generated by the Company's portfolio and the availability of reserves. Report.
shareholders.
In considering the sustainability of the dividend and of the Company, the
Board reviews the models supporting the going concern assessment and viability
statement.
Shareholders and potential investors Communication with shareholders The Board understands the importance of communication with its shareholders Working closely with the Manager, the Board ensures that there is a variety of Full details of all Board and Manager communication are included in the full
and maintains open channels of communication with shareholders. regular communication with shareholders. Annual Report.
Shareholders are invited to submit questions for the Board to address at the
Company's Annual General Meeting.
Shareholders and potential investors Discount management To smooth the volatility in the discount. The Board monitors the discount closely and discusses discount strategy with TEMIT continues to adopt an active buy back policy and has a Conditional
the Investment Manager and the Company's stockbroker at every regular Board Tender Offer. Details of these can be found under "Stability - Share buybacks
meeting. The stockbroker provides a summary of the discount and market and Conditional Tender Offer" in the full Annual Report.
conditions to the Board and Investment Manager at the close of each trading
day in London.
The Board also meets with the Investment Manager to discuss the Company's Further details of the current discount and discount management are detailed
marketing strategy to ensure effective communication with existing in the Chairman's Statement under "Share rating" in the full Annual Report.
shareholders and to consider strategies to create additional demand for the
Company's shares.
Manager Communication between the Board and the Manager The relationship of the Board with the Manager is very important. The Manager attends all Board meetings where it reviews and discusses The Board operates in a supportive and open manner, challenging the activity
performance reports, changes in the portfolio composition and risk matrix. The of the Manager and its results. The Board believes that the Company is well
Board receives timely and accurate information from the Manager and engages managed and the Board places great value on the experience of the Investment
with the Investment Manager and the Company Secretary between meetings as well Manager to deliver superior long-term returns from investments and on the
with other representatives of the Manager as and when it is deemed necessary. other functions of the Manager to fulfil their roles effectively.
Third-party service providers Engagement with service providers The Board acknowledges the importance of ensuring that the Company's service As an investment company all services are outsourced to third-party providers. The Manager maintains the overall day-to-day relationship with the service
providers are delivering a suitable level of service, that the service level The Board considers the support delivered by service providers including the providers and the Board undertakes an annual review of the performance of the
is sustainable and that they are fairly remunerated for their service. quality of the service, succession planning and any potential interruption of Company's service providers. This review also includes the level of fees paid.
service or other potential risks. The Board meets with service providers as and when considered necessary.
Investee companies Engagement with investee companies The relationship between the Company and the investee companies is very On behalf of the Company the Investment Manager engages with investee The Investment Manager has a dedicated research team that is employed in
important. companies implementing corporate governance principles and discusses the making investment decisions and when voting at shareholder meetings of
portfolio with the Board on a quarterly basis. investee companies.
Key Performance Indicators
The Board considers the following to be the key performance indicators
("KPIs") for the Company:
• Net asset value and share price total return over various periods,
compared to its benchmark;
• Share price discount to net asset value;
• Dividend and revenue earnings; and
• Ongoing charges ratio.
The Ten Year Record of the KPIs is shown in the full Annual Report.
Net asset value and share price total return((a))
Net asset value and share price total return data is presented within the
Company Overview along with the Ten Year Record in the full Annual Report.
The Chairman's Statement and the Investment Manager's Report in the full
Annual Report include further commentary on the Company's performance.
Share price discount to net asset value((a))
Details of the Company's share price discount to net asset value are presented
within the Financial Summary in the full Annual Report. On 24 May 2023, the
latest practicable date for which information was available, the discount was
14.8%.
((a)) A glossary of alternative performance measures is included in the full
Annual Report.
The Company has powers to buy back its shares as a discount control mechanism
when it is in the best interests of the Company's shareholders and has a
Conditional Tender Offer mechanism. These are described under "Stability -
Share buybacks and Conditional Tender Offer" in the full Annual Report.
Dividend and revenue earnings
Total income earned in the year was £80.6 million (2022: £54.3 million)
which translates into net revenue earnings of 5.72 pence per share (2022: 3.44
pence per share), an increase of 66.3% over the prior year. The increase in
revenue earnings per share was attributable to the increase in underlying
revenues, mainly dividends earned from Petroleo Brasileiro.
The Company paid an interim dividend of 2.00 pence per share on 27 January
2023. The Board is proposing a final dividend of 3.00 pence per share, making
total ordinary dividends for the year of 5.00 pence per share.
Ongoing charges ratio((a)) ("OCR")
The OCR rose to 0.98% for the year ended 31 March 2023, compared to 0.97% in
the prior year. This was driven by the reduction in average net assets during
the year, offsetting the AIFM fee reduction effective from 1 July 2022. The
OCR has been calculated in line with the Association of Investment Companies
("AIC") recommended methodology.
Costs associated with the purchase and sale of investments are taken to
capital and are not included in the OCR. Transaction costs are disclosed in
Note 8 of the Notes to the Financial Statements in the full Annual Report.
((a)) A glossary of alternative performance measures is included in the full
Annual Report.
Principal and emerging risks
At least quarterly, the Board reviews with the AIFM and the Investment Manager
a wide range of risk factors that may impact the Company. A full review of
risks and internal controls is held every September by the Audit and Risk
Committee. These reviews include a robust assessment of the principal and
emerging risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. These are
summarised in the table below.
Further explanation of the monitoring of risk and uncertainties is covered
within the Report of the Audit and Risk Committee in the full Annual Report.
Information on the risks that TEMIT is subject to, including additional
financial and valuation risks, are also detailed in Note 15 of the Notes to
the Financial Statements.
Due to the nature of the Company's business, investment risk is a key focus
and is reviewed on an ongoing basis by the Investment Manager as part of every
investment decision. Further information on this process is detailed in the
full Annual Report.
Principal risk Mitigation
Market and geopolitical
Market risk arises from volatility in the prices of the Company's investments, The Board reviews regularly and discusses with the Investment Manager the
from the risk of volatility in global markets arising from macroeconomic and portfolio, the Company's investment performance and the execution of the
geopolitical circumstances and conditions. Many of the companies in which investment policy against the long-term objectives of the Company. The
TEMIT invests are, by reason of the locations in which they operate, exposed Manager's independent risk team performs systematic risk analysis, including
to the risk of political or economic change. In addition, sanctions, exchange country and industry specific risk monitoring, as well as stress testing of
controls, tax or other regulations introduced in any country in which TEMIT the portfolio's resilience to geopolitical shocks. The Manager's legal and
invests may affect its income and the value and the marketability of its compliance team monitors sanctions. Where TEMIT is affected, adherence to all
investments. Emerging markets can be subject to greater price volatility than sanctions and restrictions is ensured by this team. The Board also regularly
developed markets. reviews reports from the Manager's risk, legal and compliance teams.
Geopolitical risk was highlighted by the Russian invasion of Ukraine in
February 2022 and the escalating trade war between the United States and China
and military tensions over the Taiwan Strait. All these factors have depressed
investor sentiment and the Russian invasion of Ukraine has impacted global
trade posed by supply shocks, sanctions, higher levels of inflation and
volatility in asset prices.
Pandemic
The spread of infectious illnesses or other public health issues and their The Board has regularly reviewed and discussed the situation with the
aftermaths, such as the outbreak of COVID-19, first detected in China in Investment Manager, including a review of the portfolio, risk management and
December 2019 and later spreading globally, could have a significant adverse business continuity.
impact on the Company's operations (including the ability to find and execute
suitable investments) and therefore, the Company's potential returns.
The risks associated with a pandemic affect all areas of the Company's
investments as well as operations. Mitigation strategies apply as detailed
Restrictive measures implemented to control such outbreaks could adversely within the specific areas of risk.
affect the economies of individual nations or the entire global economy, the
financial condition of individual issuers or companies (including those that
are held by, or are counterparties or service providers to, the Company) and
capital markets in ways that cannot necessarily be foreseen, and such impact A global network of analysts and operations and a flexible technology setup
could be significant and long term. (including the ability to "work from home") at the Investment Manager ensure
operational business continuity and continuous analyst coverage. The Board has
also received updates on its key service providers' business continuity plans.
Technology
Failure or breach of the security of information technology systems of the The Company benefits from Franklin Templeton's technology framework designed
Company's service providers may entail risk of financial loss, disruption to to mitigate the risk of a cyber security breach.
operations or damage to the reputation of the Company.
For key third-party providers, the Audit and Risk Committee receives regular
independent certifications of their technology control environment.
Concentration
Concentration risk arises from investing in relatively few holdings, few The Board reviews regularly the portfolio composition/ asset allocation and
sectors or a restricted geographic area. Performance may be more volatile than discusses related developments with the Investment Manager and the independent
with a greater number of securities. risk management team. The Investment Compliance team of the Investment Manager
monitors concentration limits and highlights any concerns to portfolio
management for remedial action.
Sustainability and climate change
The Company's portfolio, and also the Company's service providers and the The Investment Manager considers that sustainability risks are relevant to the
Investment Manager, are exposed to risks arising from governance and returns of the Company. The Manager has implemented a policy in respect of the
sustainability factors, including climate change. To the extent that such a integration of sustainability and climate change risks in its investment
risk occurs, or occurs in a manner that is not anticipated by the Investment decision making process. The Board receives regular reports on the policies
Manager, there may be a sudden, material negative impact on the value of an and controls in place on ESG matters. The Board has reviewed and fully
investment, and the operations or reputation of the Investment Manager. supports the Franklin Templeton Stewardship Statement and its Sustainable
Investing Principles and Policies.
Foreign currency
Currency exchange rate movements may affect TEMIT's performance. In general, The Board monitors currency risk as part of the regular portfolio and risk
if the value of sterling increases compared with a foreign currency, an management oversight. TEMIT does not hedge currency risk.
investment traded in that foreign currency will be worth less in sterling
terms. This can have a negative effect on the Company's performance.
Discount Risk
The discount/premium at which the Company's shares trade relative to its net The Board monitors the level of discount/premium at which the shares trade and
asset value can change. The risk of a widening discount, and/or related has an active investor relations programme. The Company has authority to buy
volatility, could reduce shareholder returns and confidence in the Company. back its existing shares when deemed by the Board to be in the best interests
of the Company and its shareholders.
Operational and custody
Like many other investment trust companies, TEMIT has no employees. The The Manager's systems are regularly tested and monitored and an internal
Company therefore relies upon the services provided by third parties and is controls report, which includes an assessment of risks together with an
dependent upon the control systems of the Investment Manager and of the overview of procedures to mitigate such risks, is prepared by the Manager and
Company's other service providers. The security, for example, of the Company's reviewed by the Audit and Risk Committee.
assets, dealing procedures, accounting records and maintenance of regulatory
and legal requirements depends on the effective operation of these systems.
J.P. Morgan Europe Limited is the Company's depositary. Its responsibilities
include cash monitoring, safe keeping of the Company's financial instruments,
verifying ownership and maintaining a record of other assets and monitoring
the Company's compliance with investment limits and borrowing requirements.
The depositary is liable for any loss of financial instruments held in custody
and will ensure that the custodian and any sub-custodians segregate the assets
of the Company. The depositary oversees the custody function performed by
JPMorgan Chase Bank. The custodian provides a report on its key controls and
safeguards (SOC 1/ SSAE 16/ISAE 3402) that is independently reported on by its
auditor, PwC.
The Board reviews regular operational risk management reporting provided by
the Investment Manager.
Key personnel
The ability of the Company to achieve its objective is significantly dependent The Manager endeavours to ensure that the principal members of its management
upon the expertise of the Investment Manager and its ability to attract and teams are suitably incentivised, participate in strategic leader programmes
retain suitable staff. and monitor key succession planning metrics. The Board discusses this risk
regularly with the Manager.
Regulatory
The Company is an Alternative Investment Fund ("AIF") and is listed on both The Board, with the assistance of the Manager, ensures that the Company
the London and New Zealand stock exchanges. The Company operates in an complies with all applicable laws and regulation and its internal risk and
increasingly complex regulatory environment and faces numerous regulatory control framework reduces the likelihood of breaches happening.
risks. Breaches of regulations could lead to a number of detrimental outcomes
and reputational damage.
Emerging risks
The key emerging risk faced by the Company during the year under review was
the continuing ramifications of the Russian invasion of Ukraine, discussed
under market and geopolitical risk above. The extent of this risk will depend
on the length of the conflict, impacts on commodity prices and associated
inflationary pressure. In addition, the Board and Investment Manager discussed
the growing tensions between the United States and China. The Board is also
monitoring the potential risks on the portfolio and investee companies posed
by the dramatic progress of Artificial Intelligence (AI).
Viability Statement
The Board considers viability as part of its continuing programme of
monitoring risk. In preparing the Viability Statement, in accordance with the
UK Corporate Governance Code and the AIC Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the 12 months required by the 'Going Concern' provision.
The Board has considered the Company's business and investment cycles and is
of the view that five years is a suitable time horizon to consider the
continuing viability of the Company, balancing the uncertainties of investing
in emerging markets securities against having due regard to viability over the
longer term.
In assessing the Company's viability, the Board has performed a robust
assessment of controls over the principal risks. The Board considers, on an
ongoing basis, each of the principal and emerging risks as noted above and set
out in Note 15 of the Notes to the Financial Statements. The Board evaluated
various scenarios of possible future circumstances including a material
increase in expenses and a continued significant and prolonged fall in
emerging equity markets. The Board also considered the latest assessment of
the portfolio's liquidity. The Board monitors income and expense projections
for the Company, with the majority of the expenses being predictable and
modest in comparison with the assets of the Company. The Company foresees no
issues with meeting interest payments and other principal obligations of the
borrowing facilities. A significant proportion of the Company's expenses is
the ad valorem AIFM fee, which would naturally reduce if the market value of
the Company's assets were to fall.
Considering the above, and with careful consideration given to the current
market situation, the continuing ramifications of the Russian invasion of
Ukraine, growing tensions between the United States and China over trade and
the Taiwan Strait and the challenges posed by climate change, the Board has
concluded that there is a reasonable expectation that, assuming that there
will be a successful continuation vote at the 2024 AGM, the Company will be
able to continue to operate and meet its liabilities as they fall due over the
next five years.
Future Strategy
The Company was founded, and continues to be managed, based on a long-term
investment strategy that seeks to generate superior returns from investments,
principally in the shares of carefully selected companies in emerging markets.
The Company's results will be affected by many factors including political
decisions, economic factors, the performance of investee companies and the
ability of the Investment Manager to choose investments successfully as well
as the current challenges.
The Board and the Investment Manager continue to believe in investment with a
long-term horizon in companies that are undervalued by stock markets, but
which are fundamentally strong and growing. It is recognised that, at times,
extraneous political, economic and company-specific and other factors will
affect the performance of investments, but the Company will continue to take a
long-term view in the belief that patience will be rewarded.
By order of the Board
Paul Manduca
9 June 2023
Statement of Directors' Responsibilities
In respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulations.
Details of the Directors and members of the committees are reported in the
full Annual Report.
Company law requires the Directors to prepare Financial Statements for each
financial year. Under that law the Directors are required to prepare the
Financial Statements in accordance with UK adopted International Accounting
Standards.
Under company law the Directors must be satisfied that the Financial
Statements give a true and fair view of the state of affairs of the Company
and of the profit or loss of the Company for the period. In preparing these
Financial Statements, International Accounting Standard 1 requires that
Directors:
• Properly select and apply accounting policies;
• Present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
• Provide additional disclosures when compliance with the specific
requirements of UK adopted International Accounting Standards are insufficient
to enable users to understand the impact of particular transactions, other
events and conditions on the entity's financial position and financial
performance; and
• Assess the Company's ability to continue as a going concern.
The Directors are responsible for keeping adequate 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 the Financial Statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
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
(www.temit.co.uk). Legislation in the United Kingdom governing the preparation
and dissemination of Financial Statements may differ from legislation in other
jurisdictions.
Responsibility Statement
Each of the Directors, who are listed in the full Annual Report, confirms that
to the best of their knowledge:
• The Financial Statements, which have been prepared in accordance
with UK adopted International Accounting Standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company for the year ended 31 March 2023; and
• The Chairman's Statement, Strategic Report and the Report of the
Directors include a fair review of the information required by 4.1.8R to
4.1.11R of the FCA's Disclosure Guidance and Transparency Rules; and
• The Annual Report and Audited Financial Statements, taken as a
whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and performance,
business model and strategy, and include a description of the principal risks
and uncertainties.
By order of the Board
Paul Manduca
9 June 2023
Financial Statements
Statement of Comprehensive Income
For the Year Ended 31 March 2023
Year ended Year ended
31 March 2023 31 March 2022
Note Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net losses on investments and foreign exchange
Net losses on investments at fair value 8 - (54,645) (54,645) - (460,585) (460,585)
Net losses on foreign exchange - (442) (442) - (168) (168)
Income
Dividends 2 77,463 8,431 85,894 54,020 - 54,020
Other income 2 3,088 - 3,088 250 - 250
80,551 (46,656) 33,895 54,270 (460,753) (406,483)
Expenses
AIFM fee 3 (5,232) (12,209) (17,441) (6,316) (14,738) (21,054)
Other expenses 4 (1,979) - (1,979) (2,338) - (2,338)
(7,211) (12,209) (19,420) (8,654) (14,738) (23,392)
Profit/(loss) before finance costs and taxation 73,340 (58,865) 14,475 45,616 (475,491) (429,875)
Finance costs 5 (962) (2,239) (3,201) (858) (1,998) (2,856)
Profit/(loss) before taxation 72,378 (61,104) 11,274 44,758 (477,489) (432,731)
Tax expense 6 (5,520) (3,232) (8,752) (4,081) (5,596) (9,677)
Profit/(loss) for the year 66,858 (64,336) 2,522 40,677 (483,085) (442,408)
Profit/(loss) attributable to equity holders of the Company 66,858 (64,336) 2,522 40,677 (483,085) (442,408)
Earnings per share 7 5.72p (5.50)p 0.22p 3.44p (40.90)p (37.46)p
Under the Company's Articles of Association the capital element of return is
not distributable.
The total column of this statement represents the profit and loss account of
the Company.
The accompanying notes are an integral part of the Financial Statements.
Statement of Financial Position
As at 31 March 2023
Note As at As at
31 March 2023 31 March 2022
£'000 £'000
Non-current assets
Investments at fair value through profit or loss 8 1,992,775 2,124,530
Current assets
Trade and other receivables 9 7,886 16,928
Cash and cash equivalents 132,988 125,855
Total current assets 140,874 142,783
Current liabilities
Other payables 10 (6,402) (57,718)
Total current liabilities (6,402) (57,718)
Net current assets 134,472 85,065
Non-current liabilities
Capital gains tax provision 6 (9,744) (9,205)
Other payables falling due after more than one year 11 (100,000) (100,000)
Total assets less liabilities 2,017,503 2,100,390
Share capital and reserves
Equity Share Capital 12 63,148 64,136
Capital Redemption Reserve 1(j) 19,521 18,533
Capital Reserve 1(j) 1,372,654 1,466,197
Special Distributable Reserve 1(j) 433,546 433,546
Revenue Reserve 1(j) 128,634 117,978
Equity Shareholders' Funds 2,017,503 2,100,390
Net asset value pence per share((a)) 174.1 178.2
((a)) Based on shares in issue excluding shares held in treasury.
The Financial Statements of Templeton Emerging Markets Investment Trust plc
(company registration number SC118022) were approved for issue by the Board
and signed on 9 June 2023.
Paul Manduca Simon Jeffreys
Chairman Director
Statement of Changes in Equity
For the Year Ended 31 March 2023
Note Equity Share Capital Capital Special Revenue Total
Capital Redemption Reserve Distributable Reserve £'000
£'000 Reserve £'000 Reserve £'000
£'000 £'000
Balance at 31 March 2021 64,253 18,416 1,952,886 433,546 122,186 2,591,287
(Loss)/profit for the year - - (483,085) - 40,677 (442,408)
Equity dividends 13 - - - - (44,885) (44,885)
Purchase and cancellation of own shares 12 (117) 117 (3,604) - - (3,604)
Balance at 31 March 2022 64,136 18,533 1,466,197 433,546 117,978 2,100,390
(Loss)/profit for the year - - (64,336) - 66,858 2,522
Equity dividends 13 - - - - (56,202) (56,202)
Purchase and cancellation of own shares 12 (988) 988 (29,207) - - (29,207)
Balance at 31 March 2023 63,148 19,521 1,372,654 433,546 128,634 2,017,503
The accompanying notes are an integral part of the Financial Statements.
Statement of Cash Flows
For the Year Ended 31 March 2023
Note For the year to For the year to
31 March 2023 31 March 2022
£'000 £'000
Cash flows from operating activities
Profit/(Loss) before taxation 11,274 (432,731)
Adjustments to reconcile Profit/(Loss) before taxation to cash used in
operations:
Bank and deposit interest income recognised (3,082) (130)
Dividend income recognised (85,894) (54,020)
Finance costs 3,201 2,856
Net losses on investments at fair value 8 54,645 460,585
Net losses on foreign exchange 442 168
Decrease in debtors 12 16
Decrease in creditors (310) (614)
Cash used in operations (19,712) (23,870)
Bank and deposit interest received 3,082 130
Dividends received 86,727 57,522
Bank overdraft interest paid (2) (2)
Tax paid (5,971) (6,250)
Realised gains on foreign currency cash and cash equivalents((a)) 179 377
Net cash inflow from operating activities((a)) 64,303 27,907
Cash flows from investing activities
Purchases of non-current financial assets (465,539) (600,482)
Sales of non-current financial assets((a)) 548,504 612,872
Net cash inflow from investing activities((a)) 82,965 12,390
Cash flows from financing activities
Equity dividends paid 13 (56,202) (44,885)
Purchase and cancellation of own shares (30,453) (2,041)
(Repayment)/draw down from revolving credit facility (50,000) 50,000
Interest and fees paid on bank loans (3,457) (2,728)
Net cash (outflow)/inflow from financing activities (140,112) 346
Net increase in cash((a)) 7,156 40,643
Cash at the start of the year 125,855 85,212
Unrealised losses on foreign currency cash and cash equivalents((a)) (23) 0
Cash at the end of the year 132,988 125,855
((a)) Net unrealised losses on cash and cash equivalents have been shown
separately as part of the reconciliation of cash and cash equivalents. Net
realised gains arising from cash and cash equivalents have been allocated to
the corresponding cash flow activities to which they relate. Comparative
figures have been updated for the consistency of the presentation in line with
IAS 8 requirements.
The accompanying notes are an integral part of the Financial Statements.
Reconciliation of liabilities arising from bank loans
Liabilities Cash flows Profit & Loss Liabilities
as at £'000 £'000 as at
31 March 2022 31 March 2023
£'000 £'000
Revolving credit facility 50,000 (50,000) - -
Interest and fees payable 249 (1,351) 1,102 -
Fixed term loan 100,000 - - 100,000
Interest and fees payable 352 (2,106) 2,097 343
Total liabilities from bank loans 150,601 (53,457) 3,199 100,343
Liabilities Cash flows Profit & Loss Liabilities
as at £'000 £'000 as at
31 March 2021 31 March 2022
£'000 £'000
Revolving credit facility - 50,000 - 50,000
Interest and fees payable 120 (628) 757 249
Fixed term loan 100,000 - - 100,000
Interest and fees payable 355 (2,100) 2,097 352
Total liabilities from bank loans 100,475 47,272 2,854 150,601
Notes to the Financial Statements
As at 31 March 2023
1 Accounting Policies
(a) Basis of preparation
The Financial Statements of the Company have been prepared in accordance with
UK adopted International Accounting Standards. The Financial Statements have
also been prepared in accordance with the Statement of Recommended Practice
("SORP") for investment trusts issued by the Association of Investment
Companies ("AIC") in July 2022 insofar as the SORP is compatible with
International Accounting Standards.
The Financial Statements have been prepared on the historical cost basis,
except for the measurement at fair value of certain financial instruments. All
financial assets and financial liabilities are recognised (or derecognised) on
the date of the transaction by the use of "trade date accounting". The
principal accounting policies adopted are set out below.
Adoption of new and revised Accounting Standards
At the date of authorisation of these Financial Statements, the following
standard was assessed to be relevant and is effective for annual periods
beginning on or after 1 January 2022:
• Annual Improvements to IFRS Standards 2018 - 2020: IFRS 9
Amendment. This amendment relates to situations where there is a substantial
change in the terms of a financial liability.
The amendment listed above did not have any impact on the amounts recognised
in the current reporting period.
At the date of authorisation of these Financial Statements, the following
standards and interpretations which have not been applied in these Financial
Statements were in issue but not yet applicable:
Accounting Standards Effective date for annual
periods beginning on or after
IAS 1 Amendments: Disclosure of Accounting Policies 1 January 2023
IAS 8 Amendments: Definition of Accounting Estimates 1 January 2023
IAS 1 Amendments: Non-current Liabilities with Covenants 1 January 2024
The Directors expect that the amendments listed above will have either no
impact or that any impact will not be material to the Financial Statements of
the Company in the next reporting periods.
Going concern
The Directors have a reasonable expectation that the Company has sufficient
resources to continue in operational existence for the period to 31 March
2025, which is at least 12 months from the date of the approval of the
Financial Statements. The Directors reviewed income forecasts covering the
next two financial years, including interest and fees arising from the debt
facility. The Directors considered the principal and emerging risks and
uncertainties disclosed in the full Annual Report in particular those relating
to the continuing ramifications of the Russian invasion of Ukraine.
At 31 March 2023, the Company had net current assets of £134,472,000 (31
March 2022: net current assets of £85,065,000). In addition, the Company
holds a portfolio of largely liquid assets that, if required, can be sold to
maintain adequate cash balances to meet its expected cash flows, including
debt servicing. The repayment of the principal balance of the Company's
£100 million fixed term loan does not fall due until 31 January 2025. The
Directors also reviewed scenarios of a significant drop in value of the assets
and noted that in those scenarios they would still be significantly higher
than the Company's liabilities. They have also confirmed the resiliency of the
Company's key service providers and are satisfied that their contingency plans
and working arrangements are sustainable.
The Board has established a framework of prudent and effective controls
performed periodically by the Audit and Risk Committee, which enable risks to
be assessed and managed. Therefore, the going concern basis has been adopted
in preparing the Company's Financial Statements. The Going Concern statement
is set out in the full Annual Report.
Functional currency
As the Company is a UK investment trust, whose share capital is issued in the
UK and denominated in sterling, the Directors consider that the functional
currency of the Company is sterling.
Estimates, assumptions and judgements
Significant estimates and assumptions have been used to fair value the Level 3
Russian investments held by the Company. Further details are given in the fair
value section of Note 15 and in the Report of the Audit and Risk Committee.
There have been no other significant judgements, estimates or assumptions for
the year.
In preparing these Financial Statements, the Directors have considered the
impact of climate change as a principal risk as set out in the full Annual
Report and have concluded that there was no further impact of climate change
to be considered as the investments are valued based on market pricing. In
line with UK adopted International Accounting Standards the investments are
valued at fair value, which for the Company are the bid prices quoted on the
relevant stock exchange at the date of the Statement of Financial Position and
therefore reflect market participants' views of climate change risk on the
investments held.
(b) Presentation of Statement of Comprehensive Income
In order to reflect better the activities of an investment trust company and
in accordance with guidance issued by the AIC, supplementary information which
analyses the Statement of Comprehensive Income between items of a revenue and
capital nature has been presented within the Statement of Comprehensive
Income. In accordance with the Company's Articles of Association, net capital
profits may not be distributed by way of dividend. Additionally, the net
revenue is the measure that the Directors believe appropriate in assessing the
Company's compliance with certain requirements set out in Section 1158 of the
Corporation Tax Act 2010.
(c) Income
Dividends receivable on equity shares are treated as revenue for the year on
an ex-dividend basis. Where no ex-dividend date is available, dividends are
recognised on their due date. Provision is made for any dividends not expected
to be received.
Where the Company has elected to receive its dividends in the form of
additional shares rather than in cash, the amount of the cash dividend is
recognised in the revenue column of the Statement of Comprehensive Income. Any
excess in the value of the shares received over the amount of the cash
dividend forgone is recognised in the capital column of the Statement of
Comprehensive Income.
Special dividends receivable are treated as repayment of capital or as revenue
depending on the facts of each particular case. Interest on bank deposits is
recognised on an accrual basis.
Stock lending income is shown gross of associated costs and recognised in
revenue as earned.
(d) Expenses
All expenses are accounted for on an accrual basis and are charged through the
revenue and capital sections of the Statement of Comprehensive Income
according to the Directors' expectation of future returns except as follows:
• Expenses relating to the purchase or disposal of an investment are
treated as capital. Details of transaction costs on purchases and sales of
investments are disclosed in Note 8; and
• Expenses are treated as capital where a connection with the
maintenance or enhancement of the value of the investments can be
demonstrated. 70% of the annual AIFM fee has been allocated to the capital
account.
(e) Finance costs
Finance costs relating to bank loans are accounted for on an accrual basis
using the effective interest method in the Statement of Comprehensive Income
according to the Directors' expectations of future returns. Finance costs
relate to interest and fees on bank loans and overdrafts. 70% of the finance
costs, except for interest and fees on overdrafts, have been allocated to the
capital account.
(f) Taxation
The tax expense represents the sum of current and deferred tax. Tax
receivables will be recognised when it is probable that the benefit will flow
to the entity and the benefit can be reliably measured. In line with the
recommendations of the SORP, the allocation method used to calculate tax
relief on expenses presented against capital returns in the supplementary
information in the Statement of Comprehensive Income is the "marginal basis".
Under this basis, if taxable income is capable of being offset entirely by
expenses presented in the revenue return column of the Statement of
Comprehensive Income, then no tax relief is transferred to the capital return
column.
Deferred taxation is recognised in respect of all taxable temporary
differences that have originated but not reversed at the year-end date, where
transactions or events that result in an obligation to pay more tax in the
future or rights to pay less tax in the future have occurred at the year-end
date. This is subject to deferred tax assets only being recognised to the
extent that it is probable that taxable profit will be available against which
the deductible temporary difference can be utilised. Deferred tax assets and
liabilities are measured at the rates applicable to the legal jurisdictions in
which they arise.
Due to the Company's status as an investment trust company, and its intention
to continue to meet the eligibility conditions of Section 1158 of the
Corporation Tax Act 2010 and the ongoing requirements of The Investment Trust
(Approved Company) (Tax) Regulations 2011, the Company has not provided
deferred tax in respect of UK corporation tax on any capital gains and losses
arising on the revaluation or disposal of investments. Where appropriate, the
Company provides for deferred tax in respect of overseas taxes on any capital
gains arising on the revaluation of investments.
The carrying amount of deferred tax assets is reviewed at each year-end date
and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
(g) Investments held at fair value through profit or loss
The Company classifies its equity investments based on their contractual cash
flow characteristics and the Company's business model for managing the assets.
The Company's business is investing in financial assets with a view to
profiting from their total return in the form of revenue and capital growth.
This portfolio of financial assets is managed, and its performance evaluated
on a fair value basis, in accordance with a documented investment strategy,
and information about the portfolio is provided internally on that basis to
the Company's Directors and other key management personnel. Equity investments
do not meet the contractual cash flows test so are measured at fair value.
Accordingly, upon initial recognition, all of the Company's non-current asset
investments are held at "fair value through profit or loss". They are included
initially at fair value, which is taken to be their cost excluding expenses
incidental to the acquisition.
Subsequently, the investments are valued at "fair value", which is measured as
follows:
The fair value of financial instruments at the year-end date is, ordinarily,
based on the latest quoted bid price at, or before, the US market close
(without deduction for any of the estimated future selling costs), if the
instrument is held in active markets. This represents a Level 1 classification
under IFRS 13. For all financial instruments not traded in an active market or
where market price is not deemed representative of fair value, valuation
techniques are employed to determine fair value. Valuation techniques include
the market approach (i.e. using recent arm's length market transactions
adjusted as necessary and reference to the market value of another instrument
that is substantially the same) and the income approach (i.e. discounted cash
flow analysis making use of available and supportable market data as
possible).
Gains and losses arising from changes in fair value are included in the net
profit or loss for the period as a capital item in the Statement of
Comprehensive Income.
(h) Foreign currencies
Transactions involving foreign currencies are translated to sterling (the
Company's functional currency) at the spot exchange rates ruling on the date
of the transactions. Assets and liabilities in foreign currencies are
translated at the rates of exchange at the year-end date. Foreign currency
gains and losses are included in the Statement of Comprehensive Income and
allocated as capital or income depending on the nature of the transaction
giving rise to the gain or loss.
(i) Financial instruments
Cash comprises cash in hand and demand deposits. Cash equivalents are
short-term, highly liquid investments that are readily convertible to known
amounts of cash that are subject to an insignificant risk of changes in value.
Bank loans are classified as financial liabilities at amortised cost. They are
initially measured as the proceeds net of direct issue costs and subsequently
measured at amortised cost. Interest payable on the bank loan is accounted for
on an accrual basis in the Statement of Comprehensive Income. The amortisation
of direct issue costs is accounted for on an accrual basis in the Statement of
Comprehensive Income using the effective interest method.
(j) Share capital and reserves
Equity Share Capital - represents the nominal value of the issued share
capital. This reserve is undistributable.
Capital Redemption Reserve - represents the nominal value of shares
repurchased and cancelled. This reserve is undistributable.
Capital Reserve - gains and losses on realisation of investments; changes in
fair value of investments which are readily convertible to cash, without
accepting adverse terms; realised exchange differences of a capital nature;
changes in the fair value of investments that are not readily convertible to
cash, without accepting adverse terms; and the amounts by which other assets
and liabilities valued at fair value differ from their book value are within
this reserve. Additionally, 70% of the annual AIFM fee and finance costs are
charged to this reserve in accordance with accounting policies 1(d) and 1(e).
Purchases of the Company's own shares are funded from the realised component
of the Capital Reserve. The Company's Articles of Association preclude it from
making any distribution of capital profits by way of dividend.
If treasury shares are subsequently cancelled, the nominal value is
transferred out of Equity Share Capital and into the Capital Redemption
Reserve.
Special Distributable Reserve - reserve created upon the cancellation of the
Share Premium Account and Capital Redemption Reserve. This reserve is fully
distributable.
Revenue Reserve - represents net income earned that has not been distributed
to shareholders. This reserve is fully distributable.
Income recognised in the Statement of Comprehensive Income is allocated to
applicable reserves in the Statement of Changes in Equity.
2 Income
2023 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Dividends((a))
International dividends 76,287 8,431 84,718 52,714 - 52,714
UK dividends 1,176 - 1,176 1,306 - 1,306
77,463 8,431 85,894 54,020 - 54,020
Other income
Bank and deposit interest 3,082 - 3,082 130 - 130
Stock lending income 6 - 6 120 - 120
3,088 - 3,088 250 - 250
Total 80,551 8,431 88,982 54,270 - 54,270
((a)) The Company received special dividends amounting to £14.0
million (2022: £3.9 million) of which £8.4 million (2022: £nil) was
classified as capital and £5.6 million (2022: £3.9 million) was classified
as revenue.
3 AIFM fee
2023 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
AIFM fee 5,232 12,209 17,441 6,316 14,738 21,054
On 1 October 2021, FTITML replaced Franklin Templeton International Services
S.à r.l as the Company's AIFM and Company Secretary. The contract with FTITML
may be terminated at any date by either party giving one year's notice of
termination.
The AIFM fee is paid monthly and based on the month end total net assets of
the Company. From 1 July 2022, the AIFM fee was reduced to 1% of the first £1
billion of net assets, 0.75% of net assets between £1 billion and £2
billion, and 0.50% of net assets over £2 billion. The previous fee structure
was 1% of net assets up to £1 billion and 0.80% of net assets above £1
billion.
70% of the annual AIFM fee has been allocated to the capital account.
4 Other expenses
2023 2022
£'000
£'000
Custody fees 526 775
Marketing fees 321 362
Directors' remuneration 303 304
Membership fees 180 176
Depository fees 148 207
Registrar fees 86 132
Auditor's remuneration
Audit of the annual financial statements 52 34
Review of the Half Yearly Report 10 8
Broker fees 36 33
Printing and postage fees 13 21
Other expenses 304 286
Total 1,979 2,338
5 Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Fixed term loan 629 1,468 2,097 629 1,468 2,097
Revolving credit facility 331 771 1,102 227 530 757
Bank overdraft interest 2 - 2 2 - 2
Total 962 2,239 3,201 858 1,998 2,856
6 Tax on ordinary activities
2023 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Irrecoverable overseas withholding tax 5,520 - 5,520 4,081 - 4,081
Capital gains tax paid - 2,693 2,693 - 1,352 1,352
Total current tax 5,520 2,693 8,213 4,081 1,352 5,433
Capital gains tax provision - 539 539 - 4,244 4,244
Total tax 5,520 3,232 8,752 4,081 5,596 9,677
2023 2022
£'000
£'000
Profit/(loss) before taxation 11,274 (432,731)
Theoretical tax at UK corporation tax rate of 19% (2022: 19%) 2,142 (82,219)
Effects of:
- Capital element of loss 8,865 87,543
- Irrecoverable overseas withholding tax 5,520 4,081
- Excess management expenses 2,539 3,101
- Overseas capital gains tax paid 2,693 1,352
- Dividends not subject to corporation tax (13,152) (7,924)
- Movement in overseas capital gains tax liability 539 4,244
- UK dividends (224) (248)
- Overseas tax expensed (170) (253)
Actual tax charge 8,752 9,677
As at 31 March 2023 the Company had unutilised management expenses and
non-trade deficits of £295.5 million carried forward (2022: £284.4 million).
These balances have been generated because a large part of the Company's
income is derived from dividends which are not taxed. Based on current UK tax
law, the Company is not expected to generate taxable income in a future period
in excess of deductible expenses for that period and, accordingly, is unlikely
to be able to reduce future tax liabilities by offsetting these excess
management expenses. These excess management expenses are therefore not
recognised as a deferred tax asset of £73.9 million (2022: £54.0 million)
based on a prospective corporation tax rate of 25% (2022: 19%). The UK
corporation tax rate is currently 25% with effect from 1 April 2023.
Movement in provision for capital gains tax((a))
2023 2022
£'000
£'000
Balance brought forward 9,205 4,961
Charge for the year 3,232 5,596
Capital gains tax paid (2,693) (1,352)
Balance carried forward 9,744 9,205
((a)) A provision for deferred capital gains tax has been recognised in
relation to unrealised gains for holdings in India and Pakistan.
7 Earnings per share
2023 2022
Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000
£'000
Earnings 66,858 (64,336) 2,522 40,677 (483,085) (442,408)
2023 2022
Revenue Capital Total Revenue Capital Total
pence
pence
pence
pence
pence
pence
Earnings per share 5.72 (5.50) 0.22 3.44 (40.90) (37.46)
The earnings per share is based on the profit attributable to equity holders
and on the weighted average number of shares in issue, excluding shares held
in treasury, during the year of 1,169,095,903 (year to 31 March 2022:
1,181,093,110).
8 Financial assets - investments
2023 2022
£'000
£'000
Opening investments
Book cost 1,732,693 1,553,330
Net unrealised gains 391,837 1,045,745
Opening fair value 2,124,530 2,599,075
Movements in the year:
Additions at cost 466,037 603,763
Disposals proceeds (543,147) (617,723)
Net losses on investments at fair value (54,645) (460,585)
1,992,775 2,124,530
Closing investments
Book cost 1,705,635 1,732,693
Net unrealised gains 287,140 391,837
Closing investments 1,992,775 2,124,530
All investments have been recognised at fair value with gains and losses
recorded through the Statement of Comprehensive Income.
Transaction costs for the year on purchases were £638,000 (2022: £749,000)
and transaction costs for the year on sales were £1,068,000 (2022:
£1,209,000). The aggregate transaction costs for the year were £1,706,000
(2022: £1,958,000).
2023 2022
£'000
£'000
Net losses on investments at fair value comprise:
Net realised gains based on carrying value at 31 March 50,052 193,323
Net movement in unrealised depreciation (104,697) (653,908)
Net losses on investments at fair value (54,645) (460,585)
9 Trade and other receivables
2023 2022
£'000
£'000
Dividends receivable 7,391 8,224
Overseas tax recoverable 419 2,661
Other debtors 76 88
Sales awaiting settlement - 5,955
Total 7,886 16,928
10 Other payables
2023 2022
£'000
£'000
Purchase of investments for future settlement 3,790 3,292
AIFM fee 1,396 1,515
Accrued expenses 556 747
Interest and fees on borrowings 343 601
Amounts owed for share buybacks 317 1,563
Revolving credit facility payable - 50,000
Total 6,402 57,718
Interest and fees on borrowings consist of:
2023 2022
£'000 £'000
Fixed term loan 343 352
Revolving credit facility - 249
Total 343 601
Revolving credit facility
On 31 January 2020, the Company entered into a £120 million multi-currency
unsecured revolving credit facility (the "facility") for a period of three
years with The Bank of Nova Scotia, London Branch. The agreement was amended
on 31 January 2023 extending the maturity date to 30 January 2024. The
commitment fee on unutilised commitments was also amended to a flat fee of
0.40% per annum. The previous fee structure was 0.40% per annum charged on
undrawn balances in excess of £60 million and 0.35% per annum on any undrawn
portion below £60 million.
Under the facility balances can be drawn down in GBP, USD or CNH. The interest
margin was increased to 1.20% from 1.125% following the amendment of the
agreement as follows: USD drawdowns bear interest at 1.20% per annum over the
daily secured overnight financing rate ("SOFR") administered by the Federal
Reserve Bank of New York, while any GBP drawdowns bear interest at 1.20% per
annum over the daily sterling overnight index average ("SONIA") published by
the Bank of England. The rate for any CNH drawdowns is 1.20% per annum over
the Hong Kong Interbank Offered Rate. GBP drawdowns were also charged a credit
adjustment spread, but this has been removed following the amendment of the
agreement on 31 January 2023.
Under the terms of the facility, the net assets shall not be less than £1,015
million and the adjusted net asset coverage to all borrowings shall not be
less than 3.5:1.
On 19 October 2022, the Company fully repaid the £50 million revolving
facility drawdown (2022: £50 million was outstanding under the revolving
credit facility).
Any facility drawdown is shown at amortised cost and revalued for exchange
rate movements. Any gain or loss arising from changes in exchange rates is
included in the capital reserves and shown in the capital column of the
Statement of Comprehensive Income. Interest costs are charged to capital (70%)
and revenue (30%) in accordance with the Company's accounting policies.
11 Other payables falling due after more than one year
2023 2022
Book value Book value
£'000
£'000
Fixed term loan 100,000 100,000
100,000 100,000
Fixed term loan
On 31 January 2020, the Company entered into a term loan (the "term loan") for
a period of five years with Scotiabank Europe plc for £100 million. With
effect from 28 September 2022, the term loan was transferred by novation from
Scotiabank Europe plc to The Bank of Nova Scotia, London Branch. All other
contractual terms and conditions remain the same.
The term loan bears interest at the fixed rate of 2.089%. Under the conditions
of the term loan, the net assets shall not be less than £1,015 million and
the adjusted net asset coverage to all borrowings shall not be less than
3.5:1.
The facility is shown at amortised cost. Interest costs are charged to capital
(70%) and revenue (30%) in accordance with the Company's accounting policies.
12 Equity share capital
2023 2022
Ordinary shares in issue £'000 Number £'000 Number
Opening ordinary shares of 5 pence 58,945 1,178,896,985 59,062 1,181,228,655((a))
Purchase and cancellation of own shares (988) (19,758,613) (117) (2,331,670)
Closing ordinary shares of 5 pence 57,957 1,159,138,372 58,945 1,178,896,985
2023 2022
Ordinary shares held in treasury £'000 Number £'000 Number
Opening ordinary shares of 5 pence 5,191 103,825,895 5,191 103,825,895((a))
Closing ordinary shares of 5 pence 5,191 103,825,895 5,191 103,825,895
Total ordinary shares in issue and held in treasury at the end of the year 63,148 1,262,964,267 64,136 1,282,722,880
((a)) Comparative figures for the year ended 31 March 2022 have been
retrospectively adjusted following the sub-division of each existing ordinary
share of 25 pence into five ordinary shares of 5 pence each on 26 July 2021.
The Company's shares (except those held in treasury) have unrestricted voting
rights at all general meetings, are entitled to all of the profits available
for distribution by way of dividend and are entitled to repayment of all of
the Company's capital on winding up.
During the year, 19,758,613 shares were bought back for cancellation at a cost
of £29,207,000 (2022: 2,331,670 shares were bought back for cancellation at a
cost of £3,604,000). All shares bought back in the year were cancelled, with
none being placed in treasury (2022: no shares were placed into treasury).
13 Dividends
2023 2022
Rate £'000 Rate £'000
(pence)
(pence)
Declared and paid in the financial year
Dividend on shares:
Final dividends for the years ended 2.80 32,941 2.80((a)) 33,074
31 March 2022 and 31 March 2021
Interim dividends for the six-month periods ended 30 September 2022 and 2.00 23,261 1.00 11,811
30 September 2021
Total 4.80 56,202 3.80 44,885
Proposed for approval at the Company's AGM
Dividend on shares:
Final dividend for the year ended 31 March 2023 3.00 34,599
((a)) Comparative figures for the year ended 31 March 2022 have been
retrospectively adjusted following the sub-division of each existing ordinary
share of 25 pence into five ordinary shares of 5 pence each on 26 July 2021.
Dividends are recognised when the shareholders' right to receive the payment
is established. In the case of the final dividend, this means that it is not
recognised until approval is received from shareholders at the AGM. The
proposed final dividend of 3.00 pence per share will be funded from the
revenue reserve and the payment of this dividend will not threaten the going
concern or viability of the Company.
14 Related party transactions
There were no transactions with related parties, other than the fees paid to
the Directors and the AIFM during the financial years ended 31 March 2023 and
31 March 2022 respectively, which have a material effect on the results or the
financial position of the Company. Details of fees paid to the Directors are
included in the full Annual Report and details of the fee paid to the AIFM are
included in the full Annual Report.
15 Risk management
In pursuing the Company's objective, as set out in the full Annual Report, the
Company holds a number of financial instruments which are exposed to a variety
of risks that could result in either a reduction in the Company's net assets
or a reduction in the profits available for dividends.
The main risks arising from the Company's financial instruments are investment
and concentration risk, market risk (which comprises market price risk,
foreign currency risk and interest rate risk), liquidity risk and counterparty
and credit risk.
The objectives, policies and processes for managing these risks, and the
methods used to measure the risks, are set out below. These policies have
remained unchanged since the beginning of the year to which these Financial
Statements relate.
Investment and concentration risk
The Company may invest a greater portion of its assets than the benchmark in
the securities of one issuer, securities of a particular country, or
securities within one sector. As a result, there is the potential for an
increased concentration of exposure to economic, business, political or other
changes affecting similar issues or securities, which may result in greater
fluctuation in the value of the portfolio. Investment risk and a certain
degree of concentration risk is a known and necessary effect of the stated
investment approach in line with the investment policy. The Directors
regularly review the portfolio composition and asset allocation and discuss
related developments with the Investment Manager. Security, country, and
sector concentrations are monitored by the Manager's risk and compliance teams
on a regular basis and any concerns are highlighted to the Investment Manager
for remedial action and brought to the attention of the Directors.
Market price risk
Market risk arises mainly from uncertainties about future prices of financial
instruments held. It represents the potential loss that the Company might
suffer through holding market positions in the face of price movements.
The Directors meet quarterly to consider the asset allocation of the portfolio
and to discuss the risks associated with particular securities, countries or
sectors. The Investment Manager selects securities in the portfolio in
accordance with the investment policy, and the overall asset allocation
parameters described above, and seeks to ensure that individual stocks also
meet the intended risk/reward profile.
The Company does not use derivative instruments to hedge the investment
portfolio against market price risk as, in the Investment Manager's opinion,
such a process could result in an unacceptable level of cost and/or a
reduction in the potential for capital growth.
100% (2022: 100%) of the Company's investment portfolio is listed on stock
exchanges. If share prices as at 31 March 2023 had decreased by 30% (2022: 30%
decrease) with all other variables remaining constant, the Statement of
Comprehensive Income capital return and the net assets attributable to equity
shareholders would have decreased by £597,833,000 (2022: £637,359,000). A
30% increase (2022: 30% increase) in share prices would have resulted in a
proportionate equal and opposite effect on the above amounts, on the basis
that all other variables remain constant.
Foreign currency risk
Currency translation movements can significantly affect the income and capital
value of the Company's investments, as the majority of the Company's assets
and income are denominated in currencies other than sterling, which is the
Company's functional currency.
The Investment Manager has identified three principal areas where foreign
currency risk could affect the Company:
• Movements in rates affect the value of investments;
• Movements in rates affect short-term timing differences; and
• Movements in rates affect the income received.
The Company does not hedge the sterling value of investments that are priced
in other currencies. The Company may be subject to short-term exposure to
exchange rate movements, for instance where there is a difference between the
date on which an investment purchase or sale is entered into and the date on
which it is settled.
The Company receives income in currencies other than sterling and the sterling
values of this income can be affected by movements in exchange rates. The
Company converts all receipts of income into sterling on or near the date of
receipt. However, it does not hedge or otherwise seek to avoid rate movement
risk on income accrued but not received.
The fair value of the Company's items that have foreign currency exposure at
31 March are shown below:
2023
Currency Trade and Cash at Trade, bank Total net Investment
other
bank
loans, and
foreign
at fair
receivables
£'000
other
currency
value through
£'000
payables
exposure
profit or loss
£'000
£'000
£'000
Hong Kong dollar - - (1,786) (1,786) 421,688
Korean won 5,561 - (1,834) 3,727 397,800
Taiwan dollar 1,494 98 - 1,592 316,317
US dollar 420 - - 420 232,164
Indian rupee - - - - 226,039
Other 320 4,680 (72) 4,928 366,798
2022
Currency Trade and Cash at Trade, bank Total net Investment
other
bank
loans, and
foreign
at fair
receivables
£'000
other
currency
value through
£'000
payables
exposure
profit or loss
£'000
£'000
£'000
Korean won 6,523 - - 6,523 486,879
Hong Kong dollar 19 - (219) (200) 376,797
Taiwan dollar 3,791 2,069 (2,069) 3,791 363,488
US dollar 53 - (1,000) (947) 252,082
Indian rupee - 323 - 323 188,326
Other 6,473 116 (23) 6,566 427,793
The above tables are based on the currencies of the country where shares are
listed rather than the underlying currencies of the countries where the
companies earn revenue.
As at 31 March 2023, 68.8% (2022: 65.4%) of the investments shown as US dollar
and Hong Kong dollar are Chinese companies with exposure to the Chinese yuan.
The total exposure to Chinese yuan was £616.3 million (2022: £604.9
million), out of which £109.4 million (2022: £158.5 million) were
investments denominated in Chinese yuan.
Foreign currency sensitivity
The following table illustrates the foreign currency sensitivity on the
revenue and capital return. The revenue return impact represents the impact on
total income (which is mainly comprised of dividend income) had sterling
strengthened relative to the top 5 currencies by 10% throughout the year. The
capital return impact represents the impact of the financial assets and
liabilities of the Company if sterling had strengthened by 10% relative to the
top 5 currencies on the reporting date. With all other variables held
constant, the revenue and capital return would have decreased by the
below amounts.
2023 2022
Revenue Capital Revenue Capital
Return
Return
Return
Return
£'000
£'000
£'000
£'000
Hong Kong dollar 657 41,990 482 37,660
Korean won 1,008 40,153 1,083 48,688
Taiwan dollar 1,226 31,791 955 36,349
US dollar 917 23,258 994 25,108
Indian rupee 241 22,604 169 18,865
Total 4,049 159,796 3,683 166,670
A 10% weakening of sterling against the above currencies would have resulted
in an equal and opposite effect on the above amounts.
Interest rate risk
The Company is permitted to invest in interest bearing securities. Any change
to the interest rates relevant to particular securities may result in income
either increasing or decreasing, or the Investment Manager being unable to
secure similar returns on the expiry of contracts or the sale of securities.
In addition, changes to prevailing rates or changes in expectations of future
rates may result in an increase or decrease in the value of the securities
held and the interest payable on bank loans when interest rates are reset.
The fixed term loan incurs a fixed rate of interest and is carried at
amortised cost rather than fair value. Hence, movements in interest rates will
not affect net asset values, as reported under the Company's accounting
policies.
Interest rate risk profile
The exposure of the financial assets and liabilities to floating interest rate
risks at 31 March is shown below:
2023 2022
£'000 £'000
Cash 132,988 125,855
Revolving credit facility - (50,000)
Net exposure at year end 132,988 75,855
Exposures vary throughout the year as a consequence of changes in the make-up
of the net assets of the Company. Cash balances are held on call deposit and
earn interest at the bank's daily rate. The Company's net assets are sensitive
to changes in interest rates on borrowings. There was no exposure to fixed
interest investment securities during the year or at the year end.
Interest rate sensitivity
If the above level of cash was maintained for a year (2022: level of cash and
revolving credit facility were maintained for a year) and interest rates were
100 basis points higher or lower, the net profit after taxation would be
impacted by the following amounts:
2023 2022
100 basis 100 basis 100 basis 100 basis
points increase
points decrease
points increase
points decrease
in rate
in rate
in rate
in rate
£'000
£'000
£'000
£'000
Revenue 1,330 (1,330) 1,109 (1,109)
Capital - - (350) 350
Total 1,330 (1,330) 759 (759)
Liquidity risk
The Company's assets comprise mainly securities listed on the stock exchanges
of emerging economies. Liquidity can vary from market to market and some
securities may take a significant period to sell. As a closed ended investment
trust, liquidity risks attributable to the Company are less significant than
for an open-ended fund.
The risk of the Company not having sufficient liquidity at any time is not
considered by the Board to be significant, given the large number of quoted
investments held in the portfolio and the liquid nature of the portfolio of
investments.
The Investment Manager reviews liquidity at the time of making each investment
decision and monitors the evolving liquidity profile of the portfolio
regularly.
The below table details the maturity profile of the Company's financial
liabilities as at 31 March 2023, based on the earliest date on which payment
can be required and current exchange rates as at the balance sheet date:
As at 31 March 2023 In one year More than More than More than Total
or less
one year
two years
three years
£'000
£'000
and not
and not
£'000
later than
later than
two years
three years
£'000
£'000
Fixed term loan 2,089 102,095 - - 104,184
Revolving credit facility 401 - - - 401
Other payables 6,059 - - - 6,059
Total 8,549 102,095 - - 110,644
As at 31 March 2022 In one year More than More than More than Total
or less
one year
two years
three years
£'000
£'000
and not
and not
£'000
later than
later than
two years
three years
£'000
£'000
Fixed term loan 2,089 2,089 102,095 - 106,273
Revolving credit facility 51,117 - - - 51,117
Other payables 7,117 - - - 7,117
Total 60,323 2,089 102,095 - 164,507
Counterparty and credit risk
Certain transactions in securities that the Company enters into expose it to
the risk that the counterparty will not deliver the investment (purchase) or
cash (in relation to sale or declared dividend) after the Company has
fulfilled its responsibilities. The Company only buys and sells through
brokers which have been approved by the Investment Manager as an acceptable
counterparty. In addition, limits are set as to the maximum exposure to any
individual broker that may exist at any time. These limits are reviewed
regularly. The amounts under trade and other receivables and cash and cash
equivalents shown in the Statement of Financial Position represent the maximum
credit risk exposure at the year end.
The Company has an ongoing contract with its custodian (JPMorgan Chase Bank)
for the provision of custody services.
As part of the annual risk and custody review, the Company reviewed the
custody services provided by JPMorgan Chase Bank and concluded that, while
there are inherent custody risks in investing in emerging markets, the custody
network employed by TEMIT has appropriate controls in place to mitigate those
risks, and that these controls are consistent with recommended industry
practices and standards.
Securities held in custody are held in the Company's name or to its accounts.
Details of holdings are received and reconciled monthly. Cash is actively
managed by Franklin Templeton and is typically invested in overnight time
deposits in the name of TEMIT with an approved list of counterparties. Any
excess cash not invested will remain in a JPMorgan Chase interest bearing
account. There is no significant risk on debtors and accrued income or tax at
the year end.
During the year, the Company participated in a securities lending programme
through JPMorgan as the lending agents. All securities on loan are Level 1
financial instruments, and their value is determined by reference to the
trading prices on the stock market. As at 31 March 2023, the market value of
the securities on loan and the corresponding collateral received were as
follows:
31 March 2023 31 March 2022
Counterparty Market value Market value Market value Market value
of securities
of collateral
of securities
of collateral
on loan
received
on loan
received
£'000
£'000
£'000
£'000
Merrill Lynch International 543 739 2,908 4,047
Citigroup 17 22 382 558
Total 560 761 3,290 4,605
The maximum aggregate value of securities on loan at any time during the year
was £9,470,125. Full details of the collateral received is noted in the full
Annual Report.
Fair value
Fair values are derived as follows:
• Where assets are denominated in a foreign currency, they are
converted into the sterling amount using period end rates of exchange;
• Investments held by the Company on the basis set out in the
accounting policies included in Note 1;
• Cash at the denominated currency of the account; and
• Other financial assets and liabilities at the carrying value which
is a reasonable approximation of the fair value.
The tables below analyse financial instruments carried at fair value by
valuation method. The different levels have been defined as follows:
Level 1 Quoted prices (unadjusted) in active markets for identical assets
and liabilities;
Level 2 Inputs other than quoted prices included with level 1 that are
observable for the asset or liability, either directly (prices) or indirectly
(derived from prices); and
Level 3 Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
The hierarchy valuation of listed investments through profit and loss are
shown below:
31 March 2023 31 March 2022
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
£'000
£'000
£'000
£'000
£'000
£'000
£'000
£'000
Listed investments 1,992,775 - -((a)) 1,992,775 2,103,727 - 20,803((a)(b)) 2,124,530
((a)) Russian investments in LUKOIL, Sberbank of Russia, and Yandex
continue to be fair valued at zero as at 31 March 2023 as a result of trading
being suspended on international stock exchanges in February 2022. These
investments were transferred from Level 1 to Level 3 during the financial year
ended 31 March 2022.
((b)) Trading in Brilliance China Automotive shares on the Hong Kong
stock exchange was suspended from 31 March 2021 and, as a result, the stock
was fair valued using a beta model (which applied an index movement to
observed trade prices) until 5 October 2022 when trading resumed. The fair
value as at 31 March 2022 was £20,803,000 and the stock was disclosed as
Level 3. After the shares resumed trading, the stock has been transferred from
Level 3 to Level 1.
Given the current market conditions and the inability of the Company to access
the local Moscow equity markets and the very limited access to the
over-the-counter market, the Russian investments continued to be valued based
on a liquidity discount of 100% to the last traded price for an exit price of
zero.
The following table presents the movement in Level 3 investments for the year
ended:
31 March 2023 31 March 2022
£000 £000
Opening balance 20,803 -
Transfers from Level 1 into Level 3 - 149,593
Transfers from Level 2 into Level 3 - 50,954
Transfers from Level 3 into Level 1 (17,734) -
Disposal proceeds - sale of Level 3 assets((a)) (1,613) -
Net losses on investments at fair value (1,456) (179,744)
Level 3 closing balance - 20,803
((a)) Represents the sale of the holdings in Gazprom on 25 April 2022
for £617,000, and the sale of VK on 9 March 2023 for £996,000.
The fixed term loan is shown at amortised cost within the Statement of
Financial Position. If the fixed term loan was shown at fair value the impact
would be:
31 March 2023 31 March 2022
£000 £000
Fixed term loan at amortised cost 100,000 100,000
Fixed term loan at fair value 94,470 100,390
Increase/(decrease) in net assets 5,530 (390)
The fair value of the fixed term loan included in the table above is
calculated by aggregating the expected future cash flows which are discounted
at a rate comprising the sum of SONIA rate plus a static spread. The fixed
term loan at fair value is considered to be classed as Level 2.
16 Significant holdings in investee undertakings
As at 31 March 2023 and 2022, TEMIT had no significant holdings of 3% or more
of any issued class of security within the portfolio whose shares are admitted
to trading.
17 Contingent liabilities
No contingent liabilities existed as at 31 March 2023 or 31 March 2022.
18 Contingent assets
No contingent assets existed as at 31 March 2023 or 31 March 2022.
19 Financial commitments
No financial commitments existed as at 31 March 2023 or 31 March 2022.
20 Capital management policies and procedures
The Company's objective is to provide long-term capital appreciation for
private and institutional investors seeking exposure to global emerging
markets, supported by a culture of both strong customer service and corporate
governance.
The Board monitors and regularly reviews the structure of the Company's
capital on an ongoing basis. This review includes the investment performance
and outlook, discount management mechanisms including share buybacks, gearing
and the extent to which revenue in excess of that which is required to be
distributed under the investment trust rules should be retained.
The Company's investment policy allows borrowing of up to 20% of net assets,
measured at the time of borrowing.
As at 31 March 2023, the Company had share capital and reserves of
£2,017,503,000 (31 March 2022: £2,100,390,000). The Company's policies and
procedures for managing capital are consistent with the previous year.
21 Events after the reporting period
The only material post balance sheet event is in respect of the proposed final
dividend, which is disclosed in Note 13.
The statutory accounts for the period ended 31 March 2023 received an audit
report which was unqualified, did not include a reference to any matters to
which the Auditors drew attention by way of emphasis without qualifying the
report, and did not contain statements under section 498(2) and (3) of the
Companies Act 2006, and will be delivered to the Registrar of Companies.
The Annual Report and Accounts will be sent to Shareholders shortly. Copies
will be uploaded and available for viewing on the National Storage Mechanism,
copies will also be posted to the website www.temit.co.uk
(http://www.temit.co.uk/) and may also be requested during normal business
hours from Client Dealer Services at Franklin Templeton Investment Management
Limited on freephone 0800 305 306.
For further information please e-mail temitcosec@franklintempleton.com
(mailto:CompanySecretarialEdinburgh@franklintempleton.com) or contact Client
Dealer Services at Franklin Templeton on free phone 0800 305 306, +44 (0) 20
7073 8690 for overseas investors, or e-mail enquiries@franklintempleton.co.uk
(mailto:enquiries@franklintempleton.co.uk) .
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