BlackRock Emerging Europe plc
(LEI: 549300OGTQA24Y3KMI14)
Annual results announcement for the year ended 31 January 2018
Information disclosed under Article 4 of the Transparency Directive and DTR 4.1
PERFORMANCE RECORD
FINANCIAL HIGHLIGHTS
Attributable to ordinary shareholders |
31 January
2018 |
31 January
2017 |
Change
% |
| Assets |
|
|
|
| US dollar |
|
|
|
| Net assets (US$’000) |
206,427 |
154,951 |
+33.2 |
| Net asset value per ordinary share (US$ cents)1 |
574.75c |
431.28c |
+35.5 |
| MSCI Emerging Europe 10-40 Index (net return)2 |
525.64 |
404.84 |
+29.8 |
| Ordinary share price (mid-market)(US$ cents)1, 3 |
549.64c |
378.06c |
+48.0 |
| Sterling |
|
|
|
| Net assets (£'000)3 |
145,156 |
123,163 |
+17.9 |
| Net asset value per ordinary share (pence)1, 3 |
404.16p |
342.80p |
+19.9 |
| MSCI Emerging Europe 10-40 Index (net return)2 |
369.62 |
321.79 |
+14.9 |
| Ordinary share price (mid-market)(pence)1 |
386.50p |
300.50p |
+30.9 |
| Discount to net asset value4 |
4.4% |
12.3% |
– |
| Gross market exposure5 |
98.4% |
103.1% |
– |
|
Year ended
31 January
2018 |
Year ended
31 January
2017 |
Change
% |
| Revenue |
|
|
|
| Net revenue after taxation (US$’000) |
5,690 |
2,705 |
+110.4 |
| Revenue return per ordinary share (US$ cents) |
15.84c |
7.50c |
+111.2 |
| Final dividend per ordinary share (US$ cents) |
15.00c |
7.50c |
+100.0 |
| Earnings per ordinary share (US$ cents) |
150.95c |
118.81c |
+27.1 |
| Ongoing charges ratio6 |
1.1% |
1.2% |
-8.3 |
Source: BlackRock.
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested. Further details of the calculation of performance with dividends reinvested are given in the glossary in the Company’s Annual Report and Financial Statements.
2 Net return indices calculate the reinvestment of dividends net of withholding taxes using the tax rates applicable to institutional investors who are not resident in the local market.
3 Based on an exchange rate of 1.4221 to £1 (31 January 2017: 1.2581 to £1).
4 This is the difference between the share price and the cum income NAV per share with debt at par. Further details of the calculation of the discount to NAV are given in the glossary in the Company’s Annual Report and Financial Statements.
5 Long positions plus short positions as a percentage of net assets. Further details of the calculation of the gross market exposure are given in the glossary in the Company’s Annual Report and Financial Statements.
6 Ongoing charges represent the management fee and all other operating expenses excluding interest as a % of average shareholders’ funds. Further details of the calculation of ongoing charges are given in the glossary in the Company’s Annual Report and Financial Statements.
CHAIRMAN’S STATEMENT
I am pleased to present the Annual Report and Financial Statements to shareholders for the year ended 31 January 2018.
MARKET OVERVIEW
It has been another strong year for the region with the benchmark index, the MSCI Emerging Europe 10-40 Index, returning +29.8%. Greece and Poland were the standout performers with returns of +56.7% and +52.9% respectively, reflecting the continued progress on Greece’s third bailout and the normalising economic cycle in Poland. Also benefiting from the economic cycle, the Czech Republic and Hungary returned +47.2% and +43.6%, whilst Russia returned +18.5% supported in part by oil reaching its highest level since 2015. In Turkey the market rallied +41.0%, as political uncertainty abated following the referendum in April 2017 resulting in an improving economy. (All performance data is in US dollar terms with income reinvested.)
PERFORMANCE
I am pleased to report that against this background the Company performed well during the year out-performing its benchmark by 5.7% in US dollar terms. In the year to 31 January 2018 the Company’s net asset value (NAV) per share increased by 35.5% in US Dollar terms (19.9% in sterling terms) which compared favourably with the benchmark return of 29.8% in US dollar terms (14.9% in sterling terms). The share price increased by 48.0% (30.9% in sterling terms), reflecting the marked improvement in the level of the Company’s discount over the period which ended the year at 4.4%.
Since BlackRock’s inception as Manager on 30 April 2009 the Company’s net asset value (NAV) per share has increased by 140.3% in US dollar terms (150.3% in sterling terms) which compared favourably with the benchmark return of 80.3% in US dollar terms (87.9% in sterling terms). Over the same period the share price has increased by 159.4% (170.3% in sterling terms). This represents outstanding outperformance over a long period and in each financial year since the change to a focussed portfolio in June 2013.
When compared to the Morningstar peer group of funds investing in Emerging Europe equity the Company was ranked 5/40 over 1 year, 6/40 over 3 years and 3/40 over 5 years as at 31 January 2018.
Stock selection in Russia was the main contributor to performance, including significant contributions from off benchmark positions in Globaltrans and Mail.Ru. Further details on the factors which contributed to performance are set out in the report from the Investment Manager and the attribution analysis.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return for the year amounted to 15.84 cents per share (2017: 7.5 cents). Earnings grew strongly due to rising free cash flow at the underlying companies and an increasing tendency for these cash flows to be paid out to investors, especially in Russia where the government has decreed that all state owned entities should pay out 50% of earnings. The Board is pleased to declare a final dividend of 15.00 cents per share, double the amount paid in 2017. The dividend will be paid in sterling on 28 June 2018 to shareholders on the Company’s register on 18 May 2018; the ex-dividend date is 17 May 2018. Shareholders who wish to receive their dividend in US dollars should either complete the currency election form which will be sent with the annual report or make the appropriate election via CREST.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
The Board has been considering the prospects for, and relevance of, the Company’s mandate post 20 June 2018, the deadline for submission of proposals to shareholders for the option of a cash exit.
Your Board believes that the unconstrained, focused approach of the Investment Manager, as approved by shareholders in June 2013, has assisted performance and still remains relevant. Since the introduction of the revised investment policy absolute performance has been somewhat volatile but relative ouperformance has been very strong: the NAV total return has exceeded the benchmark in the period to 31 January 2018 by 26.6 percentage points. Over the last 2 years’ in particular, shareholders have benefited from very strong absolute performance with the NAV returning 87.3% and the share price 106.6% against the benchmark return of 71.1%. (All performance data is in US dollar terms). Our portfolio Managers, Sam Vecht and Chris Colunga, are both highly rated and their relative performance, as illustrated by the Morningstar peer group figures previously stated, is impressive. Your Managers and Board remain convinced that stock-markets in the region can continue to provide attractive opportunities for active investors.
Notwithstanding the above the Board has committed to submit to shareholders, proposals (which may constitute a tender offer and/or other method of distribution) to provide shareholders with an opportunity to realise the value of their investment in the Company at NAV less applicable costs this year should they so wish. For those that wish to take this option, we have concluded that the most appropriate method is to allow shareholders to tender up to 100% of their shares for repurchase by Winterflood (the Company’s broker). The tender offer proposals will require the approval of shareholders at a general meeting to be held on 20 June 2018, immediately following the Company’s Annual General Meeting (AGM). Further details of the tender will be announced in due course and full details of the proposals will be set out in a circular to shareholders which will be sent out during May of this year.
Shareholders will not be surprised to hear that, given the excellent recent performance of the Company, both in absolute and relative terms, it is expected that a number of shareholders will wish to continue with their investment and not participate in the forthcoming tender. The members of your Board will remain fully invested and will not tender any of their shares in the Company in the proposed tender offer.
Some shareholders may decide to exit some or all of their investment for cash but your Board’s expectation is that this will be limited and the remaining assets in the Company should remain in excess of £100 million which would allow the Company to continue which is a fund size more than adequate to allow the Company to continue in broadly the same manner as it has over the period under review. In the event that the level of the cash exit is significantly higher than expected and the remaining assets are materially below this level and your Board is of the view that the continuance of the Company would not be in the best interests of the continuing shareholders, the tender offer will not proceed. The Board will then put forward proposals as soon as practicable which will include a full cash exit at NAV less applicable costs.
Your Board believes that the Manager can continue to deliver strong performance and also in the effectiveness of a policy of allowing shareholders the opportunity to exit for cash at regular intervals, together with performance based tenders in the interim periods. This has proven to be a successful mechanism; by way of example the Company has enjoyed tighter discounts than its emerging market peers; and one which has been strongly supported by the Company’s shareholders. Your Board is now focused on minimising the Company’s discount to NAV after the forthcoming tender and is considering a further measure; the introduction of a substantially higher dividend to broaden the appeal of the Company to a wider range of investors. The Board will be consulting with shareholders and its advisors on this discount control package and the conclusions of this exercise will be set out in the shareholder circular referred to above.
BOARD
It is more than 15 years since I first joined the Board and 7 years since I became Chairman and the time has now come for me to hand over the baton. I am pleased to report that Mark Bridgeman will succeed me as Chairman at the conclusion of the AGM. Mark has been a Director of the Company since 2012 and brings a wealth of experience both in investment markets and as a director, to the role. During my tenure as Chairman, the Company has experienced periods of volatility but has substantially outperformed its benchmark and I am delighted to end my tenure on a positive note with strong performance in the year under review.
ANNUAL GENERAL MEETING
The AGM will be held at 12.00 noon on 20 June 2018 at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL. We hope that as many shareholders as possible will attend. The AGM will include a presentation by the portfolio managers on the Company’s performance and the outlook for the year ahead.
OUTLOOK
Notwithstanding the strong returns achieved in the year under review, your Managers and Board remain convinced that stock-markets in the region can continue to provide attractive opportunities for active investors. Although the region has now made a good start in making up part of the ground lost against developed markets over the last decade, there still remains considerable room for growth. Company valuations are half those of their western peers, dividend yields are higher supported by strong free cash flow, the region has experienced strong earnings growth and the correlation of the benchmark countries with global markets is low, helping to diversify portfolios.
As the global economic upswing now looks increasingly assured, the ability of those countries on the boundaries of developed Europe to capitalise on their strong competitive positions, and prosper against the background of increasing demand, is greater than ever. A selective and focused approach to managing the portfolio remains key. Despite recent geopolitical tensions, your Board remains optimistic about future prospects for the portfolio and the region.
NEIL ENGLAND
Chairman
23 March 2018
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 January 2018.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading, although not eliminating investment risk.
OBJECTIVE
The Company’s objective is to achieve long term capital growth, principally by investing in companies that do business primarily in Eastern Europe, Russia, Central Asia and Turkey.
STRATEGY, BUSINESS MODEL, INVESTMENT POLICY & INVESTMENT PROCESS
The Company invests in accordance with the objective given above and seeks to spread investment risk in accordance with its investment policy as set out below. The Board is collectively responsible to shareholders for the long term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager or BFM). Matters for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing (both bank borrowings and the effect of derivatives), capital structure, governance, and appointing and monitoring of performance of the Manager and other service providers.
The Company’s business model follows that of an externally managed investment trust. Therefore the Company does not have any employees and outsources its activities to third party service providers, including the Manager who is the principal service provider.
In accordance with the Alternative Investment Fund Managers Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager or BIM (UK)). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
Other service providers include the Depositary, The Bank of New York Mellon (International) Limited. BFM delegates fund accounting services to the Investment Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited. The Company delegates registration services to the Registrar, Computershare Investor Services PLC.
Details of the contractual terms with the other third party service providers are set out in the Directors’ Report on page 23 of the Company’s Annual Report and Financial Statements.
INVESTMENT POLICY
The Manager’s portfolio selection is unconstrained by benchmark weightings and the Company’s portfolio is expected to contain between 20 and 30 holdings at any one time. To achieve the Company’s objective, the Manager selects stocks by combining political and macroeconomic insights with fundamental analysis of companies and by looking for long term appreciation from mispriced value or growth. The weightings of holdings within the Company’s portfolio are based upon the Manager’s conviction level and an assessment of upside potential and liquidity. As a result, the weighting of a company in the portfolio could be materially higher or lower than its benchmark weighting.
The portfolio of the Company is not constructed with any yield target.
The Company invests so as not to hold more than 15% of its net assets in any one stock at the time of investment.
The Company may undertake transactions in derivatives for both hedging and investment purposes.
The Company may use derivatives to diversify risk. It may use a variety of strategies which include the purchase or sale of options traded on recognised or designated investment exchanges as well as over-the-counter. The Company may also establish short positions up to a limit of 10% of net assets. To establish short exposures, the Company may use credit default swaps, major generic global indices as well as local indices and individual stocks.
In addition, the Company may borrow to enhance its portfolio performance but the aggregate of gearing through the use of derivatives and borrowing shall not exceed 20% of the Company’s net asset value.
No more than 15% of the gross assets of the portfolio shall be invested in other UK listed investment companies (including other investment trusts).
The Company’s financial statements are maintained in US dollars. Although many investments are likely to be denominated and quoted in currencies other than in US dollars, the Company does not currently employ a hedging policy against fluctuations in exchange rates.
No material change will be made to the Company’s investment policy without shareholder approval.
Portfolio construction is a continuous process, with the Investment Manager analysing constantly the impact of new ideas and information on the portfolio as a whole.
The approach is flexible, varying through market and economic cycles to create a portfolio appropriate to the focused and unconstrained strategy of the Company.
The global and country specific macroeconomic environment is factored into all portfolio decisions. In general, macroeconomic analysis is a more dominant factor in investment decision making when the outlook is negative. The macro process is comprised of three parts: political assessment, macroeconomic analysis and appraisal of the valuation of a country’s market, which can only take place with thorough analysis of stock specific opportunities.
The Investment Manager’s research team generates ideas from a diverse range of sources. These include frequent travel to the markets in which the Company invests and regular conversations with contacts that allow the Emerging Europe team to assess the entire eco-system around a company; namely competitors, suppliers, financiers, customers and regulators. The team leverages the internal research network sharing information between BlackRock’s investment teams using a proprietary research application and database, and develop insights from macroeconomic analysis.
The Board believes that BlackRock’s research platform is a significant competitive advantage, both in terms of information specific to emerging markets equities and through its global insights across asset classes. Access to companies is extremely good given BlackRock’s market presence, which makes it possible to develop a detailed knowledge of a company and its management.
The research process focuses on cash flow, as the investment team believes that this is ultimately the driver of share prices over time. The process is designed with the aim of identifying companies that can translate top line revenue growth to free cash flow and investing in these companies when the analysis suggests that the cash flow stream is undervalued. Financial models are developed focusing on company financials, particularly cash flow statements, rather than relying on third party research.
The Investment Manager’s research team monitors differing levels of risk throughout the process and believes that avoiding major downside events can generate significant outperformance over the long term. Inputs from BlackRock’s Risk & Quantitative Analysis Team (RQA) are an integral part of the investment process. This is particularly important in emerging markets where portfolios are subject to complex correlations. The overall premise of BlackRock’s risk analysis is to try and understand risk as opposed to avoiding risk. RQA analyse market and portfolio risk factors including stress tests, correlations, factor returns, cross-sectional volatility and attributions.
BlackRock’s evaluation procedures and financial analysis of the companies within the portfolio also take into account environmental, social and governance matters and other business issues. The Company invests primarily on financial grounds to meet its stated objectives.
DISCOUNT PROTECTION
The Directors recognise that it is in the long term interests of shareholders that shares do not trade at a significant discount to their prevailing NAV.
SHARE BUY BACKS
The Board seeks to maintain the share price discount to NAV at below 10% in normal market conditions. In the year to 31 January 2018 the average discount to NAV has been 8.0%.
11,800 ordinary shares with a nominal value of 10 cents per share were bought back for cancellation in the year under review for a total consideration of US$46,000 (£37,000). Since the year end no further ordinary shares have been bought back for cancellation or to be held in treasury.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
Prior to 21 June 2018, the Board will formulate and submit to shareholders proposals which will constitute a tender offer to provide shareholders with an opportunity to realise the value of their investment in the Company at NAV less applicable costs. The Board believes in the effectiveness of a policy of allowing shareholders the opportunity to exit for cash at regular intervals, together with performance based tenders in the interim periods. The Board will be consulting with shareholders and its advisors on the Company’s discount control package. Please see the Chairman’s statement for more details.
PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided below.
PERFORMANCE
Details of the Company’s performance are set out in the Chairman’s Statement .
The Chairman’s Statement and the Investment Manager’s Report include a review of the main developments in the Company’s investment markets during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDEND
The results for the Company are set out in the Income Statement . The total net profit for the year, after taxation, was US$54,216,000 (2017: US$42,877,000) of which the revenue return amounted to US$5,690,000 (2017: US$2,705,000), and the capital return amounted to US$48,526,000 (2017: US$40,172,000).
The Company’s revenue return amounted to 15.84 cents per share (2017: 7.50 cents). The Directors recommend the payment of a final dividend as set out in the Chairman’s Statement .
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are set out below.
|
2018
% |
2017
% |
2016
% |
2015
% |
| Change in NAV per share1 |
+35.5 |
+38.2 |
-10.1 |
-20.2 |
| Change in share price2 |
+48.0 |
+39.6 |
-9.9 |
-25.4 |
| Relative NAV per share performance vs benchmark over 1 year |
+5.7 |
+6.4 |
+4.1 |
+4.7 |
| Relative NAV per share performance vs benchmark over 3 years |
+21.3 |
+14.1 |
+9.4 |
+7.9 |
| Average discount to net asset value |
8.0 |
11.9 |
11.7 |
10.3 |
| Ongoing charges ratio3 |
1.1 |
1.2 |
1.3 |
1.3 |
1 Calculated in US dollar terms on a total return basis with dividends reinvested. Further details of the calculation of performance with dividends reinvested are given in the glossary in the Company’s Annual Report and Financial Statements.
2 Calculated in US dollar terms on a mid to mid basis with dividends reinvested. Further details of the calculation of performance with dividends reinvested are given in the glossary in the Company’s Annual Report and Financial Statements.
3 Ongoing charges represent the management fee and all other operating expenses excluding interest as a % of average shareholders’ funds. Further details of the calculation of ongoing charges are given in the glossary in the Company’s Annual Report and Financial Statements.
The Board regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance and ongoing charges of the Company against a peer group of Emerging Europe focused open and closed-end funds.
Performance is assessed on a total return basis for both the NAV and the share price. The relative performance of the benchmark is assessed on a net return basis, reflecting the withholding tax rates applicable to institutional investors who are not resident in the local market.
As set out on page 8 of the Company’s Annual Report and Financial Statements, the Directors recognise that it is in the long term interests of shareholders that shares do not trade at a significant discount to their prevailing NAV.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. The Board has in place a robust process to identify, understand and monitor the principal risks of the Company. A core element of this process is the Company’s risk register which identifies the risks facing the Company, the likelihood and potential impact of each risk and the controls established for mitigation. A residual risk rating is calculated for each risk.
The risk register, its method of preparation and the operation of key controls in the Manager’s and third party service providers systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of the Manager’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit Committee periodically receives reports from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams. In addition, the Chairman of the Audit Committee meets with BlackRock’s Internal Audit team on an annual basis. Where produced, the Audit Committee also reviews Service Organisation Control (SOC 1) reports from the Company’s service providers. The current risk register includes 51 risks which have been categorised as follows:
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors, are set out in the following table.
| Principal Risk |
Mitigation/Control |
| Counterparty |
|
| Potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. |
Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties.
The Depositary is liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control. |
| Investment performance |
|
The Board is responsible for:
- deciding the investment strategy to fulfil the Company's objective; and
- for monitoring the performance of teh INvestment Manager and the implementaation of the investment stratgey.
An inappropriate, or poorly executed, investment strategy may lead to:
- poor performance compared to the Benchmark Index and the Company's peer group;
- a loss of capital; and
- dissatisfied shareholders. |
To manage this risk the Board:
- regularly reviews the Company’s investment mandate and long term strategy;
- has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on;
- receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; and
- monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with factors specific to particular sectors, based on the diversification requirements inherent in the investment policy. |
| Legal & Compliance |
|
The Company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments.
Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected.
Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010.
The Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Manager’s Directive, the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations. |
The Investment Manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.
Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored.
The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. |
| Operational |
|
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties. Accordingly, it is dependent on the control systems of the Manager, BNYM (the Depositary and fund accountant), who maintain the Company’s assets, dealing procedures and accounting records.
Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers. |
Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board.
BlackRock and BNYM produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee.
The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control.
The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the investment management agreement on a regular basis.
The Board also considers the business continuity arrangements of the Company’s key service providers. |
| Market (including political) |
|
Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Investment in securities of issuers in Eastern Europe (including Ukraine), Russia, Central Asia and Turkey involves significant risks and special considerations, which are not typically associated with investing in securities of issuers in the United Kingdom. They are additional to the normal risks inherent in any such investments and include political, economic, legal, currency, inflation and taxation risks.
In addition the securities markets of developing countries are not as large as the more established securities markets and have substantially less trading volume, which may result in a lack of liquidity and higher price volatility. Accounting, auditing and financial reporting standards and practices and disclosure requirements applicable to many companies in developing countries are less rigorous. As a result there may be less information available publicly to investors in such securities. Such information which is available is often less reliable.
Investment in securities of issuers in Eastern Europe including Ukraine, Russia, Central Asia and Turkey involves a high degree of political risk. This may entail sudden changes in political leadership, disputes over territorial sovereignty and political interference in the business environment and the rights of shareholders. Sanctions imposed either by, or on these countries arising from political events may have a substantial impact at times upon the countries in which the Company invests, and their economies, which in turn could have a material adverse effect on the Company’s performance. |
The Board considers asset allocation, stock selection, unquoted investments, if any, and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager.
The Board monitors the implementation and results of the investment process with the Investment Manager. |
| Financial |
|
| The Company’s investment activities expose it to a variety of financial risks that include interest rate, currency and liquidity risk. |
Details of these risks are disclosed in note 17 of the Company's Annual Report and Financial Statements, together with a summary of the policies for managing these risks. |
| Marketing |
|
| Marketing efforts are inadequate, do not comply with relevant regulatory requirements, and fail to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening discount, or, with respect to the 2018 return of capital event, a subsequent possible lack of scale and the risk of liquidation. |
The Board and Manager monitor the share register on an ongoing basis and focus significant time on communicating directly with the major shareholders and reviewing marketing strategy and initiatives. The Board and Manager have agreed a specific program of marketing with 2018 return of capital event in mind. All investment trust marketing documents are subject to appropriate review and authorisation. |
As required by the UK Corporate Governance Code (the 2016 Code), the Board has undertaken a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Those principal risks have been described in the above table together with an explanation of how they are managed and mitigated. The Board will continue to assess these risks on an ongoing basis.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 Code on UK Corporate Governance, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines. The Board is obliged to formulate and submit to shareholders by 21 June 2018 proposals (which may constitute a tender offer and/or other method of distribution) to provide an opportunity to realise the value of their investment in the Company at NAV less applicable costs. The degree to which shareholders will realise the value of their investment is an uncertainty in assessing the prospects of the Company beyond June 2018 and is discussed further in the Statement on Going Concern on page 24 of the Company's Annual Report and Financial Statements and in the Chairman’s Statement. In addition, the Company’s next triennial continuation vote is due to take place at the AGM in 2019. However, given the factors stated below, and assuming that, following the 2018 return of capital, the Company has sufficient scale to continue as an independent Company, the Board is confident that the continuation vote would be passed. Notwithstanding these uncertainties, the Board has conducted this review for the period up to 31 January 2023.
In choosing this period of approximately 5 years for its assessment of the viability of the Company the Directors have considered the following matters:
-
the Company has a relatively liquid portfolio (as at 31 January 2018, 98% of the portfolio was estimated as being capable of being liquidated within 20 days);
-
the Company’s expenses and liabilities are relatively stable;
-
the Company’s principal risks and uncertainties as set out above are unlikely to change materially;
-
the Company’s business model should remain attractive for much longer than the period up to 31 January 2023, unless there is a significant economic or regulatory change;
-
the impact of a significant fall in Emerging European markets on the value of the Company’s investment portfolio;
-
the ongoing relevance of the Company’s investment objective, business model and investment policy in the current environment; and
-
the level of demand for the Company’s shares.
The Directors reviewed the assumptions and considerations underpinning the Company’s existing going concern assertion which are based on:
-
processes for monitoring costs;
-
key financial ratios;
-
evaluation of risk management and controls;
-
portfolio risk profile;
-
share price discount to NAV;
-
gearing; and
-
counterparty exposure and liquidity risk.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
FUTURE PROSPECTS
The Board’s main focus is the achievement of capital growth and an attractive total return. The future of the Company is dependent upon the success of the Company’s investment strategy. The outlook for the Company is discussed in both the Chairman’s Statement and the Investment Manager’s Report.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider human rights issues, environmental, social and governance factors when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on pages 33 and 34 of the Company's Annual Report and Financial Statements.
DIRECTORS AND EMPLOYEES AND GENDER REPRESENTATION
The Directors of the Company as at 31 January 2018, all of whom held office throughout the year, are set out in the governance structure and Directors’ biographies on page 21 of the Company's Annual Report and Financial Statements.
The Board consists of four men and one woman. The Company does not have any employees, therefore there are no disclosures to be made in respect of employees.
The Chairman’s Statement together with the Investment Manager’s Report and portfolio analysis form part of the Strategic Report.
The Strategic Report was approved by the Board at its meeting on 23 March 2018.
BY ORDER OF THE BOARD
SARAH BEYNSBERGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
23 March 2018
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Note 4 on page 52 of the Company’s Annual Report and Financial Statements. In addition to the above services, BlackRock has provided the Company with marketing services. The total fees paid or payable for these services for the year ended 31 January 2018 amounted to US$45,000 excluding VAT (2017: US$27,000). Marketing fees of US$47,000 (2017: US$29,000) were outstanding at 31 January 2018.
The Board consists of five non-executive Directors, all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company. In respect of the year ended 31 January 2018 the Chairman received an annual fee of £38,500, the Chairman of the Audit Committee received an annual fee of £28,500 and each other Director received an annual fee of £24,250. This excludes expenses paid to each of the Directors which are set out in the Directors' Remuneration Report in the Annual Report and Financial Statements.
All members of the Board hold ordinary shares in the Company. Neil England holds 156,633 ordinary shares, Rachel Beagles holds 20,209 ordinary shares, Mark Bridgeman holds 8,650 ordinary shares, Philippe Delpal holds 12,000 ordinary shares and Robert Sheppard holds 10,000 ordinary shares.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company as at the end of each financial year and of the profit or loss of the Company for that year.
In preparing those financial statements, the Directors are required to:
-
present fairly the financial position, financial performance and cash flows of the Company;
-
select suitable accounting policies and then apply them consistently;
-
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-
make judgements and estimates that are reasonable and prudent;
-
state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
-
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
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 also responsible for preparing the Strategic Report, Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. The Directors have delegated responsibility to the Investment Manager for the maintenance and integrity of the Company’s corporate and financial information included on the Investment Managers’ website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 21 of the Company's Annual Report and Financial Statements, confirm to the best of their knowledge that:
-
the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
-
the Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2016 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Audit Committee has reached these conclusions is set out in the Audit Committee’s report on pages 36 to 38 of the Company's Annual Report and Financial Statements . As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 31 January 2018, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
NEIL ENGLAND
Chairman
23 March 2018
INVESTMENT MANAGER’S REPORT
MARKETS
In the 12 months to 31 January 2018, the MSCI Emerging Europe 10-40 Index returned +29.8% in US dollar terms. To put this into perspective, the UK FTSE returned +24.5% and the US S&P 500 returned 26.4% over the same time period. (All performance data is in US dollar terms with income reinvested.)
All countries in the Emerging Europe index saw solid positive returns over the period, with Greece and Poland being the largest drivers of performance.
Greece (+56.7% in US dollar terms) posted strong returns over the 12 months as continued progress was made on the country’s third bailout. The second review was completed in the summer and the third review is likely to be completed in the Spring of 2018 in record time. These successes have caught the credit agencies’ eyes, which in turn have upgraded the sovereign credit ratings and outlook, and enabled Greece to return to the bond markets for the first time since 2014, helping drive bond yields to their lowest level since 2005.
The Polish equity market finished the period up +52.9% in US dollar terms. Elsewhere in the Central and Eastern European region, the Czech Republic (+47.2% in US dollar terms) and Hungary (+43.6% in US dollar terms) also rallied and continued to benefit from a normalising European economic cycle. These economies are experiencing accelerating wage growth, multi-decade low unemployment, and an increase in investment spending. Combined with higher inflation, this should allow the regional banks to recover from the damaging effects of years of low interest rates.
Turkey returned to form and was up +41.0% in US dollar terms over the period. The constitutional referendum in April alleviated investor concerns regarding political uncertainty. The ‘Yes’ vote won the referendum with 51.4% of the vote to change Turkey from a parliamentary democracy into a presidential republic, cementing Erdogan’s leadership position. With political clarity restored, the markets focused on the improving economy and significant growth in earnings, lifting the market higher through the first nine months of the year. This rally stalled in the fourth quarter when inflation rose significantly, as witnessed by the CPI (Consumer Price Index) hitting a 15-year high at 13% in November 2017. High inflation coupled with an expanding current account deficit started to put significant pressure on the currency, forcing the Central Bank of Turkey to hike rates to 12.75% at its 14 December 2017 meeting.
Following a +57.4% US dollar return over the 12 months to 31 January 2017, Russia managed to return a further +18.5% in US dollar terms for the 12 months to 31 January 2018. The economy continued to recover with expanded industrial production (IP) numbers, solid wage growth and credit impulse (change in net new credit issued as % of GDP over last four quarters) turning positive. Inflation fell rapidly and reached the Central Bank of Russia’s target of 4% faster than expected, hitting a record low level of 2.2% in January 2018. This allowed the Central bank to cut interest rates and bring down the cost of borrowing, continuing the monetary easing cycle and supporting the economy. The Brent oil price gained and closed the year at US$69 per barrel in January, which marked its highest level since 2014.
PORTFOLIO
In the 12 months to 31 January 2018, the Company’s net asset value (NAV) returned +35.5% in US dollar terms (+19.9% in sterling terms, all percentages with income reinvested), outperforming the MSCI Emerging Europe 10-40 Index by +5.7% in US dollar terms.
As with prior years, significant contributions to performance came from positions that are not represented in the benchmark, highlighting the opportunities that exist beyond the index stocks.
Strong stock selection in Russia contributed the most to returns. The off-benchmark position in Globaltrans, the leading private freight rail transportation company, continued to benefit from rising transportation tariffs in Russia, and has made it into our top attribution list two years running. Another off-benchmark position, Mail.Ru, Russia’s leading social network, contributed positively as the company reported strong results and investors gained confidence in management’s ability to put adjacent businesses (Youla, Delivery Club) onto the social networking platform. On a relative basis the portfolio benefited greatly by not holding index heavyweight Magnit, Russia’s largest food retailer. Magnit continually disappointed on sales and margins throughout the year, causing the stock to drop by 39.6% in US dollar terms. However, our chosen Russian retailer Lenta, detracted from returns as the stock was down by 11% as falling inflation put pressure on food retail businesses.
Our faith in Greece was amply rewarded this year. The overweight position in Greek banks, National Bank of Greece and Alpha Bank, benefited from a stronger economy and continued progress of the bailout reviews. Greek gaming company, OPAP (Greek Organisation of Football Prognostics), also performed well on solid results and we took some profits as the company reached our target price.
In the Central and Eastern European region, stock selection in Poland added value. In particular, the overweight in Polish bank, PKO Bank Polski, contributed to returns as the company announced better than expected third quarter results and was able to fulfil the regulator’s guidelines for paying a dividend of up to 25% of profits. In Hungary, not holding OTP Bank detracted from performance as the stock rallied in line with other CEE financials on the back of rising global reflation expectations.
Stock selection in Turkey detracted most from relative returns. The off-benchmark position in Eldorado Gold Corporation, a gold miner with operations in Turkey and Greece, was the largest individual detractor as the stock fell after it downgraded production guidance at its main cash flow generating asset. We believe that the stock has seen the worst and continue to hold the position. On a positive note, our position in Turkish Airlines took off on the back of improving passenger numbers and higher margins, which drove substantial positive earnings per share revisions. We also profited from being overweight the Turkish oil refiner, Tupras, which was supported by improving refining margins.
The Company’s off-benchmark position in MHP, a Ukrainian poultry producer, added to performance as it rallied on the back of strong results and increased pricing both domestically and in the export market.
OUTLOOK
Emerging Europe continues to recover from a lost decade of performance and we believe still has plenty of room to deliver further returns. We maintain our positive outlook and think that Emerging European equities will provide an attractive opportunity for investors given the economic recovery in the region, the uncorrelated equity returns of its markets, attractive valuations supported by high dividend yields, growing earnings and strong free cash flows. Furthermore, when compared to other areas of global markets, Emerging Europe equities trade at a significant discount.
In Russia, positive monetary and fiscal policies are ongoing and the potential remains for the market to re-rate higher, on the back of lower interest rates. The possibility of increased economic sanctions continued to weigh on market sentiment, however record low inflation, the potential for further interest rate cuts and an improving economy support our positive stance on Russia. Combined with low valuations, high dividend yields and the recent rally in oil prices not being fully reflected in the market, we think Russia offers a good upside.
In the Central European economies of Poland, Czech Republic and Hungary inflationary pressures continue to build on the back of accelerating wage growth, low unemployment, and a pickup in investment spending. This creates opportunities for CEE banks as inflationary pressures could allow them to increase lending spreads.
In Greece the successful conclusion of the current bailout program this summer appears just within its grasp. The recent bond issuances, the credit upgrades, the falling bond yields and the reduction in bad debt levels are all starting to reassure investors. This coupled with positive macro data for the country: accelerating GDP growth, rising ESI (Economic Sentiment Indicators) and a PMI (Purchase Managers Index) at the highest level since August 2008 are setting the scene for a sustainable recovery. Despite these improvements, the Greek financial sector is still much cheaper than its peers and trades at discount of 50%+ on price to book multiples. Whilst there will be some volatility during the final Bailout Reviews, we believe that the program will ultimately end with a successful conclusion and higher equity valuations.
Finally, Turkey remains a trading market prone to both exuberance and excessive pessimism. The economy has been normalizing and we have seen an improvement in tourism trends. However, the market has rallied significantly, and we are seeing that the persistently high inflation and expanding twin deficits are pressuring the currency. Furthermore, the spectre of tighter global liquidity may constrain the upside in the near term.
In conclusion, we believe that the economic recovery of the region, the uncorrelated equity returns of the different regional markets, the attractive valuations supported by high dividend yields, and the lost decade of performance yet to be recovered continue to make the Emerging European equities an attractive opportunity for investors.
SAM VECHT and CHRISTOPHER COLUNGA
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
23 March 2018
PERFORMANCE ATTRIBUTION
|
Contribution to return against
the benchmark1 |
|
| Country |
Country selection % |
Stock selection2 % |
Total
Effect % |
Commentary |
| Russia & CIS |
|
|
|
|
| Russia |
0.3 |
5.2 |
5.5 |
Stock selection in Russia contributed to outperformance. The fund benefited from not holding Magnit, the largest retailer in the country, as the company released weaker than expected results and continued to miss on expectations. Off-benchmark in Russia, Globaltrans, the leading private freight rail transportation company, continued to benefit from rising transportation tariffs in Russia. The off-benchmark position in Mail.Ru, Russia’s leading social network, contributed positively after it reported strong results and investors gained confidence in management ability to put adjacent businesses onto the social networking platform. |
| Kazakhstan |
-0.2 |
0.0 |
-0.2 |
The off-benchmark position in the oil company, KazMunaiGas, detracted from returns on a relative basis as it lagged the benchmark, however it added to returns on an absolute basis. |
|
|
|
|
|
| Ukraine |
0.4 |
0.0 |
0.4 |
The Company’s off-benchmark position in MHP, a poultry producer, added to performance as it rallied on the back of strong results and increasing pricing both domestically and in the exports market. |
| Central and Eastern Europe |
|
|
|
|
| Czech Republic |
0.3 |
-0.2 |
0.1 |
The overweight in Moneta Bank contributed to relative returns as it rallied on the back of rising global reflation expectations which are creating the potential for interest rates to increase from multi-year low levels. However, no holdings in other stocks in the Czech Republic, detracted from relative returns. |
| Poland |
-1.9 |
2.2 |
0.3 |
The overweight in Polish bank, PKO Bank Polski, contributed to relative returns as the company announced Q3 results better than expected and was able to fulfil the regulator’s guidelines for paying out up to 25% of profits. |
| Hungary |
-0.6 |
-0.3 |
-0.9 |
No holding of OTP Bank detracted most as the stock rallied in line with other CEE financials on the back of rising global reflation expectations. |
| Turkey |
1.0 |
-2.3 |
-1.3 |
The off-benchmark position in Eldorado Gold Corporation, a gold miner with operations in Turkey and Greece, detracted as the stock was down after it downgraded production guidance at their main cash flow generating asset. |
| Greece |
1.3 |
0.2 |
1.5 |
Our overweight positions in banks benefited from the successful completion of the second bailout review and the fall in Greek bond yields. |
| Other Pan-Emerging Europe |
0.2 |
0.0 |
0.2 |
The position in Erste Group, the largest financial services provider in Central and Eastern Europe, rallied as it reacted positively to rising global reflation expectations in the region, which are creating the potential for interest rates to increase from multi-year low levels. |
| Cash/gearing |
|
|
0.7 |
|
| Other effects |
|
|
0.7 |
|
| Other factors |
|
|
-1.3 |
|
Management fees
Other operating costs |
|
|
-0.9
-0.4 |
Includes the impact of operating expenses, taxation and finance charges. |
|
|
|
|
|
| Total |
|
|
5.7 |
|
1. Due to the limitations of a static attribution methodology, the numbers quoted are indicative and not exact.
2. The interaction effect is included within stock selection. |
|
FIFTEEN LARGEST EQUITY INVESTMENTS
Sberbank – 9.6% (2017: 10.4%) is Russia’s largest bank and is state-owned. It has branches throughout the country and a 46% share in the retail deposit market. The bank continues to build on its restructuring strategy that has driven much of its success over the past few years, improving its services and the efficiency with which they are delivered.
Lukoil – 9.2% (2017: 6.0%) was formed in 1991 following the merger of three state-run companies in western Siberia. The three companies were called Langepasneftegaz, Urayneftegaz, and Kogalymneftegaz and this heritage is preserved in the company’s current name. Today, the company is the largest privately-owned company by proved oil reserves. Lukoil is a highly competitive oil producer even at current low oil prices and generates significant free cashflow.
Gazprom – 8.9% (2017: 9.0%) is Russia’s largest gas producer and transporter, with a pipeline export monopoly. Despite its status as one of the most profitable companies in the world, Gazprom has been out of favour with investors. We believe that the risks of Gazprom are more than priced into the valuation and the company pays an attractive dividend yield.
PKO Bank Polski – 7.4% (2017: 3.8%) is Poland’s largest bank. PKO has one of the strongest deposit franchises in the country, meaning it has a structurally lower cost of funding than its peers. The bank trades at attractive valuations and should benefit from inflationary pressures building up in the region.
Bank Pekao – 5.3% (2017: nil) is the second largest bank in Poland with its headquarters in Warsaw. The bank trades at attractive valuations and should benefit from inflationary pressures building up in the region.
Novatek – 5.1% (2017: 6.4%) is Russia’s largest independent natural gas producer. The company is set to enter a new phase of growth through launching its Yamal LNG project and breaking ground on the even larger Arctic LNG2.
Lenta – 4.6% (2017: nil) is one of the largest retail chains in Russia and the country’s largest hypermarket chain founded in 1993 in St. Petersburg. Lenta operates 195 hypermarkets in 78 cities across Russia and 59 supermarkets in the Moscow, St. Petersburg, Novosibirsk and the Central region with a total of approximately 1.38 million sq.m. of selling space. The company continues to grow its business and should benefit from improved consumer spending on the back of macro recovery with its stock trading at attractive valuations.
Rosneft Oil Company – 4.2% (2017: nil) is the leader of Russia’s petroleum industry including exploration, production, and refining. The company has been undergoing a restructuring phase, increasing efficiency, acquiring new assets within Russia and abroad, whilst disposing of stakes in mature fields. The production growth profile coupled with improving cash flow make the company attractive.
PZU – 4.1% (2017: 3.8%) is Poland’s largest insurance company, active in both the life and non-life segments for over 16 million customers. Its scale and unparalleled distribution network – both through direct sales and 12,000 agents – provide a strong competitive advantage that enables the company to generate attractive returns.
Gedeon Richter – 3.7% (2017: nil) is a generic pharmaceuticals producer in Central Eastern Europe and Russia that is currently in the process of transforming itself into a specialty pharma company. In the past, it has largely developed APIs (Active Pharmaceutical Ingredients) and generics, but it is now starting to generate an increasing share of its profits from higher margin, innovative drugs both for women’s health care and the central nervous system. We hold the stock on the premise that these higher margin and faster growing specialty drugs will drive up both the company’s revenues and margins.
National Bank of Greece – 3.6% (2017: 2.5%) is a leading banking and financial services company in Greece. It has one of the strongest capital bases in the country and has been showing steady improvement in the quality of its loan book.
Mobile Telesystems (MTS) – 3.6% (2017: nil) is the largest mobile operator in Russia and CIS. The company provides mobile and fixed line voice and data telecommunications services, including data transfer, broadband, pay-television and various value-added services, as well as selling equipment and accessories. The industry has improving competitive dynamics and the stock pays an attractive dividend yield.
Alpha Bank – 3.4% (2017: 2.5%) is the third largest Greek bank by total assets, and the largest by market capitalisation. The bank offers a wide range of high-quality financial products and services, including retail banking, SMEs and corporate banking, asset management and private banking, the distribution of insurance products, investment banking, brokerage and real estate management.
MHP – 3.1% (2017: 2.5%) is a leader in the Ukrainian poultry market, with a market share of more than 50% of industrially produced poultry. MHP accounts for 35% of domestic consumption with one of the strongest and best-recognised Ukrainian food brands: Nasha Riaba.
Erste Group Bank – 3.0% (2017: nil) is one of the largest financial services providers in Central and Eastern Europe. We hold the stock with the view that inflationary pressures are building in Central and Eastern Europe and are creating the potential for the banking sector to break away from the destructive low rate environment.
All percentages reflect the value of the holding as a percentage of net assets. Percentage in brackets represents the value of the holding at 31 January 2017. Together, the fifteen largest investments represents 78.8% of net assets (31 January 2017: 72.9%).
TOP AND BOTTOM 5 CONTRIBUTORS TO RELATIVE PERFORMANCE
TOP 5 POSITIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Magnit (total effect on relative performance +2.8%) is Russia’s largest retailer operating in four different formats: convenience store, hypermarket, “Magnit Family” store and cosmetics store. The portfolio benefited from not holding the stock as the company released weaker than expected results and continued to miss on expectations.
Globaltrans (total effect on relative performance +2.1%) is one of Russia’s leading private freight rail transportation groups operating over 66,000 rail cars and specialising in oil products, construction materials and metallurgical cargos. The off?benchmark position continued to contribute to performance in 2017 due to increased transportation tariffs in Russia.
Turkish Airlines (total effect on relative performance +1.8%) is the national carrier of Turkey with its headquarters in Istanbul. The off benchmark position added to performance as the stock rallied on positive EPS (earnings per share) revisions, improving tourism trends and signs of operational improvement.
Mail.Ru (total effect on relative performance +1.3%) owns Russia’s leading social network and associated internet businesses. Our position in Mail.ru was a large contributor to the relative performance as it reported strong results and investors gained confidence in management’s ability to put adjacent businesses (Youla, Delivery Club) onto the social networking platform.
PKO Bank Polski (total effect on relative performance +1.2%) is Poland’s largest bank and has one of the strongest deposit franchises in the country, meaning it has a structurally lower cost of funding than its peers. The overweight in the bank contributed to relative returns as the company announced better than expected Q3 results and was able to fulfil the regulator’s guidelines for paying out up to 25% of profits as a dividend.
TOP 5 NEGATIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Eldorado Gold Corporation (total effect on relative performance -2.9%) is a gold miner with operations in Turkey and Greece. The off-benchmark position detracted after it downgraded production guidance at the Turkish Kisladag mine, which is their main cash flow generating asset.
Lenta (total effect on relative performance -1.8%) is one of the largest food retail chains in Russia and operates the country’s largest hypermarket chain. The stock was down in line with the rest of the retail sector as falling inflation put pressure on food retail businesses.
Tatneft (total effect on relative performance -1.2%) is a Russian vertically integrated oil and gas company with headquarters in Almetyevsk, in the Republic of Tatarstan. It is the sixth largest oil company in Russia and engages in exploration, development, and production of crude oil primarily in Russia. We did not have a position in the stock, which rose as the company reported good production results in 2017.
MD Medical Group (total effect on relative performance -1.0%) is the leading player in the Russian private healthcare market for women and children offering a full range of high-quality services including infertility treatment, diagnostics and familial care. We hold the off-benchmark position in the stock, which was marginally down over the year as the company continued to expand its domestic presence and launched new hospitals, which were not fully utilised yet.
Luxoft (total effect on relative performance -1.0%) is an international software development and IT outsourcing company with 90% of the company’s employee base in Emerging Europe. Many of the company’s customers are global financial services and automotive firms, and Luxoft has been rapidly capturing market share as it was able to deploy high-quality human capital at competitive cost. The company suffered following disappointing earnings and a lowering guidance as the company was experiencing slowing business trends from their clients on IT outsourcing.
Total effect on relative performance includes the contribution from asset allocation, stock selection and interaction relative to the benchmark index.
PORTFOLIO ANALYSIS AS AT 31 JANUARY 2018
|
%
Russia |
%
Poland |
%
Turkey |
%
Greece |
%
Ukraine |
%
Other |
% Net
current
assets |
% Net
assets
31.01.18 |
% Net
assets
31.01.17 |
% MSCI
Emerging
Europe
10-40
Index
31.01.18 |
| Consumer Discretionary |
– |
– |
0.5 |
– |
– |
– |
– |
0.5 |
2.3 |
4.5 |
| Consumer Staples |
4.6 |
– |
2.8 |
– |
3.1 |
– |
– |
10.5 |
4.8 |
4.4 |
| Energy |
27.4 |
(1.7) |
0.6 |
– |
– |
– |
– |
26.3 |
25.3 |
32.2 |
| Financials |
9.6 |
16.8 |
2.6 |
7.0 |
– |
3.0 |
– |
39.0 |
41.9 |
34.9 |
| Health Care |
2.1 |
– |
– |
– |
– |
3.7 |
– |
5.8 |
3.2 |
1.0 |
| Industrials |
1.2 |
– |
– |
– |
– |
– |
– |
1.2 |
6.9 |
2.6 |
| Information Technology |
2.4 |
– |
– |
– |
0.7 |
– |
– |
3.1 |
5.4 |
0.6 |
| Materials |
2.9 |
– |
1.4 |
– |
– |
– |
– |
4.3 |
7.4 |
11.4 |
| Real Estate |
– |
– |
– |
– |
– |
– |
– |
– |
– |
0.4 |
| Telecommunication Services |
7.7 |
– |
– |
– |
– |
– |
– |
7.7 |
3.0 |
4.9 |
| Utilities |
– |
– |
– |
– |
– |
– |
– |
– |
2.9 |
3.1 |
| Other |
– |
– |
– |
– |
– |
– |
1.6 |
1.6 |
(3.1) |
– |
| % net assets 31.01.18 |
57.9 |
15.1 |
7.9 |
7.0 |
3.8 |
6.7 |
1.6 |
100.0 |
– |
|
| % net assets 31.01.17 |
48.1 |
9.0 |
23.5 |
7.2 |
8.8 |
6.5 |
(3.1) |
– |
100.0 |
|
| MSCI EM Europe 10-40 Index 31.01.18 |
49.8 |
20.8 |
16.1 |
5.4 |
– |
7.9 |
– |
– |
– |
100.0 |
The table above shows the analysis of the net assets as at 31 January 2018 by sector and region, compared with the net assets as at 31 January 2017 and the MSCI EM Europe 10-40 Index breakdown as at 31 January 2018.
INVESTMENTS AS AT 31 JANUARY 2018
|
Country of
operation |
Market value
exposure
US$’000 |
% of
net assets |
| Financials |
|
|
|
| Sberbank |
Russia |
19,875 |
9.6 |
| PKO Bank Polski |
Poland |
15,286 |
7.4 |
| Bank Pekao |
Poland |
11,040 |
5.3 |
| PZU |
Poland |
8,470 |
4.1 |
| National Bank of Greece |
Greece |
7,402 |
3.6 |
| Alpha Bank |
Greece |
6,918 |
3.4 |
| Erste Group Bank |
Austria |
6,154 |
3.0 |
| TSKB |
Turkey |
5,415 |
2.6 |
| Aviva Emeklilik ve Hayat |
Turkey |
– |
0.0 |
|
|
80,560 |
39.0 |
| Energy |
|
|
|
| Lukoil |
Russia |
19,004 |
9.2 |
| Gazprom |
Russia |
18,412 |
8.9 |
| Novatek |
Russia |
10,436 |
5.1 |
| Rosneft Oil Company |
Russia |
8,724 |
4.2 |
| Tupras |
Turkey |
1,227 |
0.6 |
| Short CFD Position |
Poland |
(3,476) |
(1.7) |
|
|
54,327 |
26.3 |
| Consumer Staples |
|
|
|
| Lenta |
Russia |
9,533 |
4.6 |
| MHP |
Ukraine |
6,335 |
3.1 |
| Migros Ticaret |
Turkey |
5,783 |
2.8 |
|
|
21,651 |
10.5 |
| Telecommunication Services |
|
|
|
| Mobile Telesystems (MTS) |
Russia |
7,394 |
3.6 |
| Megafon |
Russia |
4,997 |
2.4 |
| Sistema |
Russia |
3,454 |
1.7 |
|
|
15,845 |
7.7 |
| Health Care |
|
|
|
| Gedeon Richter |
Hungary |
7,718 |
3.7 |
| MD Medical Group |
Russia |
4,234 |
2.1 |
|
|
11,952 |
5.8 |
| Materials |
|
|
|
| Norilsk Nickel |
Russia |
6,111 |
2.9 |
| Eldorado Gold Corporation |
Turkey |
2,827 |
1.4 |
|
|
8,938 |
4.3 |
| Information Technology |
|
|
|
| Mail.Ru |
Russia |
5,012 |
2.4 |
| Luxoft |
Ukraine |
1,347 |
0.7 |
|
|
6,359 |
3.1 |
| Industrials |
|
|
|
| Globaltrans |
Russia |
2,605 |
1.2 |
|
|
2,605 |
1.2 |
| Consumer Discretionary |
|
|
|
| Arcelik |
Turkey |
970 |
0.5 |
|
|
970 |
0.5 |
| Total investments – gross exposure |
|
203,207 |
98.4 |
| Add: gross exposure on CFDs |
|
3,476 |
1.7 |
| Equity investments held at fair value |
|
206,683 |
100.1 |
| Net current liabilities |
|
(237) |
(0.1) |
| Preference shares |
|
(19) |
0.0 |
| Net assets |
|
206,427 |
100.0 |
| Long positions |
|
206,683 |
100.1 |
| Short positions |
|
3,476 |
1.7 |
| Gross positions |
|
210,159 |
101.8 |
The total number of investments (excluding CFD positions) held at 31 January 2018 was 28 (31 January 2017: 29). All investments are in equity shares unless otherwise stated.
During the year, the Company entered into CFDs to gain long and short exposure on individual securities. At the year end, one short CFD position was held (31 January 2017: nil) with a fair value loss of US$102,000 and an underlying market value of US$3,476,000. At the year end, no long CFD positions were held (31 January 2017: one, with a net fair value profit of US$71,000 and an underlying market value of US$2,680,000).
The Company did not hold any equity interest comprising more than 3% of any company’s ordinary share capital as at 31 January 2018.
FIFTEEN LARGEST INVESTMENTS AS AT 31 JANUARY 2018
|
|
|
2018 |
2017 |
Security |
Country |
Sector |
Market
value
US$’000 |
% of
net assets |
Market
value
US$’000 |
% of
net assets |
| Sberbank |
Russia |
Financials |
19,875 |
9.6 |
16,101 |
10.4 |
| Lukoil |
Russia |
Energy |
19,004 |
9.2 |
9,337 |
6.0 |
| Gazprom |
Russia |
Energy |
18,412 |
8.9 |
14,005 |
9.0 |
| PKO Bank Polski |
Poland |
Financials |
15,286 |
7.4 |
5,937 |
3.8 |
| Bank Pekao |
Poland |
Financials |
11,040 |
5.3 |
– |
– |
| Novatek |
Russia |
Energy |
10,436 |
5.1 |
9,930 |
6.4 |
| Lenta |
Russia |
Consumer Staples |
9,533 |
4.6 |
– |
– |
| Rosneft Oil Company |
Russia |
Energy |
8,724 |
4.2 |
– |
– |
| PZU |
Poland |
Financials |
8,470 |
4.1 |
5,856 |
3.8 |
| Gedeon Richter |
Hungary |
Health Care |
7,718 |
3.7 |
– |
– |
| National Bank of Greece |
Greece |
Financials |
7,402 |
3.6 |
3,909 |
2.5 |
| Mobile Telesystems (MTS) |
Russia |
Telecommunication Services |
7,394 |
3.6 |
– |
– |
| Alpha Bank |
Greece |
Financials |
6,918 |
3.4 |
3,895 |
2.5 |
| MHP |
Ukraine |
Consumer Staples |
6,335 |
3.1 |
3,802 |
2.5 |
| Erste Group Bank |
Austria |
Financials |
6,154 |
3.0 |
– |
– |
INCOME STATEMENT FOR THE YEAR ENDED 31 JANUARY 2018
|
Notes |
Revenue
2018
US$’000 |
Revenue
2017
US$’000 |
Capital
2018
US$’000 |
Capital
2017
US$’000 |
Total
2018
US$’000 |
Total
2017
US$’000 |
| Gains on investments held at fair value through profit or loss |
8 |
– |
– |
49,550 |
40,597 |
49,550 |
40,597 |
| Gains on foreign exchange |
|
– |
– |
26 |
171 |
26 |
171 |
| (Losses)/gains on contracts for difference |
|
(107) |
47 |
21 |
302 |
(86) |
349 |
| Income from investments held at fair value through profit or loss |
3 |
7,533 |
3,921 |
– |
– |
7,533 |
3,921 |
| Other income |
3 |
28 |
20 |
– |
– |
28 |
20 |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Total income |
|
7,454 |
3,988 |
49,597 |
41,070 |
57,051 |
45,058 |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Expenses |
|
|
|
|
|
|
|
| Investment management fee |
4 |
(421) |
(337) |
(981) |
(785) |
(1,402) |
(1,122) |
| Other operating expenses |
5 |
(507) |
(502) |
(58) |
(76) |
(565) |
(578) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Total operating expenses |
|
(928) |
(839) |
(1,039) |
(861) |
(1,967) |
(1,700) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Net profit on ordinary activities before finance costs and taxation |
|
6,526 |
3,149 |
48,558 |
40,209 |
55,084 |
43,358 |
| Finance costs |
|
(14) |
(16) |
(32) |
(37) |
(46) |
(53) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Net profit on ordinary activities before taxation |
|
6,512 |
3,133 |
48,526 |
40,172 |
55,038 |
43,305 |
| Taxation |
|
(822) |
(428) |
– |
– |
(822) |
(428) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Net profit on ordinary activities after taxation |
7 |
5,690 |
2,705 |
48,526 |
40,172 |
54,216 |
42,877 |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Earnings per ordinary share (US$ cents) |
9 |
15.84 |
7.50 |
135.11 |
111.31 |
150.95 |
118.81 |
|
|
======== |
======== |
======== |
======== |
======== |
======== |
The total column of this statement represents the Company’s profit and loss account.
The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The net profit for the year disclosed above represents the Company’s total comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JANUARY 2018
|
Notes |
Called up
share
capital
US$’000 |
Share
premium
account
US$’000 |
Capital
redemption
reserve
US$’000 |
Capital
reserves
US$’000 |
Revenue
reserve
US$’000 |
Total
US$’000 |
| For the year ended 31 January 2018 |
|
|
|
|
|
|
|
| At 31 January 2017 |
|
4,133 |
41,684 |
5,889 |
114,768 |
(11,523) |
154,951 |
| Total comprehensive income: |
|
|
|
|
|
|
|
| Profit for the year |
|
– |
– |
– |
48,526 |
5,690 |
54,216 |
| Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
| Shares purchased and cancelled |
12 |
(1) |
– |
1 |
(46) |
– |
(46) |
| Treasury shares cancelled |
12 |
(40) |
– |
40 |
– |
– |
– |
| Dividend paid1 |
6 |
– |
– |
– |
– |
(2,694) |
(2,694) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| At 31 January 2018 |
|
4,092 |
41,684 |
5,930 |
163,248 |
(8,527) |
206,427 |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| For the year ended 31 January 2017 |
|
|
|
|
|
|
|
| At 31 January 2016 |
|
4,162 |
41,684 |
5,860 |
75,565 |
(14,228) |
113,043 |
| Total comprehensive income: |
|
|
|
|
|
|
|
| Profit for the year |
|
– |
– |
– |
40,172 |
2,705 |
42,877 |
| Transactions with owners, recorded directly to equity: |
|
|
|
|
|
|
|
| Shares cancelled |
12 |
(29) |
– |
29 |
(969) |
– |
(969) |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| At 31 January 2017 |
|
4,133 |
41,684 |
5,889 |
114,768 |
(11,523) |
154,951 |
|
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
|
|
|
|
|
|
|
|
|
|
======== |
======== |
======== |
======== |
======== |
======== |
-
Final dividend paid in respect of the year ended 31 January 2017 of 7.50 cents per share was declared on 28 March 2017 and paid on 28 June 2017.
BALANCE SHEET AS AT 31 JANUARY 2018
|
Notes |
2018
US$’000 |
2017
US$’000 |
| Fixed assets |
|
|
|
| Investments held at fair value through profit or loss |
8 |
206,683 |
157,134 |
|
|
-------- |
-------- |
| Current assets |
|
|
|
| Debtors |
9 |
7,000 |
387 |
| Derivative financial assets |
|
– |
71 |
| Cash and cash equivalents |
|
1 |
1 |
|
|
-------- |
-------- |
|
|
7,001 |
459 |
|
|
-------- |
-------- |
| Creditors – amounts falling due within one year |
|
|
|
| Bank overdraft |
|
(4,794) |
(1,496) |
| Derivative financial liabilities |
|
(102) |
– |
| Other creditors |
10 |
(2,342) |
(1,127) |
|
|
-------- |
-------- |
|
|
(7,238) |
(2,623) |
|
|
-------- |
-------- |
| Net current liabilities |
|
(237) |
(2,164) |
| Total assets less current liabilities |
|
206,446 |
154,970 |
|
|
-------- |
-------- |
| Creditors – amounts falling due after more than one year |
|
|
|
| Preference shares of £1.00 each (one quarter paid) |
11 |
(19) |
(19) |
|
|
-------- |
-------- |
| Net assets |
|
206,427 |
154,951 |
|
|
-------- |
-------- |
| Capital and reserves |
|
|
|
| Called up share capital |
12 |
4,092 |
4,133 |
| Share premium account |
13 |
41,684 |
41,684 |
| Capital redemption reserve |
13 |
5,930 |
5,889 |
| Capital reserves |
13 |
163,248 |
114,768 |
| Revenue reserve |
13 |
(8,527) |
(11,523) |
|
|
-------- |
-------- |
| Total shareholders’ funds |
|
206,427 |
154,951 |
|
|
-------- |
-------- |
| Net asset value per ordinary share (US$ cents) |
7 |
574.75 |
431.28 |
|
|
======== |
======== |
STATEMENT OF THE CASH FLOW FOR THE YEAR ENDED 31 JANUARY 2018
|
2018
US$’000 |
2017
US$’000 |
| Operating activities |
|
|
| Net profit before taxation |
55,038 |
43,305 |
| Add back finance costs |
46 |
53 |
| Gains on investments held at fair value through profit or loss |
(49,613) |
(40,945) |
| Gains on foreign exchange |
(26) |
(171) |
| Sales of investments |
121,276 |
77,638 |
| Purchase of investments |
(127,378) |
(76,329) |
| Realised gains on contracts for difference |
2,425 |
1,026 |
| Realised losses on contracts for difference |
(2,189) |
(837) |
| Decrease in debtors |
190 |
21 |
| Increase/(decrease)in other creditors |
742 |
(848) |
| Net movement in collateral pledged with brokers |
– |
204 |
| Tax on investment income |
(1,049) |
(414) |
|
-------- |
-------- |
| Net cash (used)/generated in operating activities |
(538) |
2,703 |
|
-------- |
-------- |
| Financing activities |
|
|
| Ordinary shares purchased and cancelled |
(46) |
(1,039) |
| Interest paid |
(46) |
(53) |
| Dividend paid |
(2,694) |
– |
|
-------- |
-------- |
| Net cash used in financing activities |
(2,786) |
(1,092) |
|
-------- |
-------- |
| (Decrease)/increase in cash and cash equivalents |
(3,324) |
1,611 |
|
-------- |
-------- |
| Cash and cash equivalents at the beginning of the year |
(1,495) |
(3,277) |
| Effect of foreign exchange rate changes |
26 |
171 |
|
-------- |
-------- |
| Cash and cash equivalents at end of year |
(4,793) |
(1,495) |
|
-------- |
-------- |
| Comprised of: |
|
|
| Cash at bank |
1 |
1 |
| Bank overdraft |
(4,794) |
(1,496) |
|
-------- |
-------- |
|
(4,793) |
(1,495) |
|
-------- |
-------- |
NOTES TO THE FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set out below.
(a) Basis of preparation
Notwithstanding the material uncertainty in respect of the cash exit in June 2018 which is detailed on page 24 of the Company’s Annual Report and Financial Statements, the financial statements have been prepared on a going concern basis in accordance with FRS 102, the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014 and the provisions of the Companies Act 2006.
The Company’s Articles of Association require that an ordinary resolution be put to the Company’s shareholders to approve the continuation of the Company every three years. The Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and therefore consider the going concern assumption to be appropriate. The last resolution was put to shareholders at the 2016 AGM and the next such resolution will be put to shareholders at the AGM in 2019. (See page 22 of the Company’s Annual Report and Financial Statementsfor further details.) The Directors have no reason to believe that this resolution will not be passed.
The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, the policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company’s operations are of a continuing nature.
The Company’s financial statements are presented in US dollars, which is the functional and presentation currency of the Company. The US Dollar is the functional currency because it is the currency most related to the primary economic environment in which the Company operates. All values are rounded to the nearest thousand dollars (US$’000) except where otherwise stated.
(b) Presentation of Income Statement
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and a capital nature has been presented alongside the Income Statement.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) 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 receivable on or before the year end are treated as revenue for the year. Provisions are made for dividends not expected to be received. The return on a debt security is recognised on a time apportionment basis.
Special dividends are recognised on an ex–dividend basis and are treated as capital or revenue items depending on the facts or circumstances of each dividend.
Dividends are accounted for in accordance with section 29 of FRS 102 on the basis of income actually receivable, without adjustment for tax credits attaching to the dividends. Dividends from overseas companies continue to be shown gross of withholding tax.
Deposit Interest receivable is accounted for on an accruals basis.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares over the amount of the cash dividend is recognised in capital reserves.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses have been treated as revenue except as follows:
-
expenses which are incidental to the acquisition or disposal of an investment are treated as capital. Details of transaction costs on the purchases and sales of investments are disclosed in note 8;
-
the investment management fee has been allocated 70% to the capital column and 30% to the revenue column of the Income Statement in line with the Board’s expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.
(f) Finance costs
Finance costs are accounted for on an effective yield method and on an accrual basis. Finance costs are allocated, insofar as they relate to the financing of the Company’s investments, 70% to the capital column and 30% to the revenue column of the Income Statement, in line with the Board’s expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.
(g) Taxation
The current tax effect of different items of expenditure is allocated between capital and revenue on the marginal basis using the Company’s effective rate of corporation taxation for the accounting period.
Deferred taxation is recognised in respect of all timing differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. Deferred tax is measured on a non–discounted basis, at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the timing differences can be deducted.
(h) Investments held at fair value through profit or loss
The Company’s investments are classified as held at fair value through profit or loss in accordance with section 11 and 12 of FRS 102 and are managed and evaluated on a fair value basis in accordance with its investment strategy.
All investments are designated upon initial recognition as held at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales of assets are recognised at the trade date of the disposal. Proceeds will be measured at fair value, which will be regarded as the proceeds of sale less any transaction costs.
The fair value of the financial investments is based on their quoted bid price at the balance sheet date on the exchange on which the investment is quoted, without deduction for the estimated future selling costs.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as ‘Gains or losses on investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the purchase or sale of investments.
The fair value hierarchy has the following three categories:
Level 1 – Quoted market price for identical instruments in active markets
Level 2 – Valuation techniques using observable inputs
Level 3 – Valuation techniques using significant unobservable inputs
(i) Valuation of derivative financial instruments
Derivatives are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value. The gain or loss on re–measurement is taken to the Income Statement. The sources of the return under the derivative contract (e.g. notional dividends, financing costs, interest returns and capital charges) are allocated to the revenue and capital columns of the Income Statement in alignment with the nature of the underlying source of income and in accordance with the guidance given in the AIC SORP.
(j) Preference shares
The Company’s preference shares are classified as a liability under Section 22 of FRS 102.
(k) Dividends payable
Under Section 32 of FRS 102, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date. Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they have been approved by the shareholders and become a liability of the Company. Interim dividends are only recognised in the financial statements in the period in which they are paid.
(l) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency being the currency in which the Company predominately operates. The functional and reporting currency is US dollars, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated in US dollars at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into sterling at the rates of exchange ruling at the Balance Sheet date. Profits and losses thereon are recognised in the capital column of the Income Statement and taken to the capital reserve.
(m) Shares repurchased and held in treasury
The full cost of shares repurchased and held in treasury is charged to capital reserves. Where treasury shares are subsequently reissued, any surplus is taken to the share premium account.
(n) Debtors
Debtors include sales for future settlement, other debtors, pre–payments and accrued income in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non–current assets.
(o) Creditors
Creditors include purchases for future settlements, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors are classified as creditors – amounts due within one year if payment is due within one year or less. If not, they are presented as creditors – amounts falling due after more than one year.
(p) Cash and cash equivalents
Cash comprises cash in hand, on demand deposits and bank overdrafts repayable on demand. Cash equivalents include short term, highly liquid investments, that are readily convertible to known amounts of cash and that are subject to an insignificant risk of change in value.
3. INCOME
|
2018
US$’000 |
2017
US$’000 |
| Investment income: |
|
|
| UK listed dividends |
2 |
– |
| UK listed special dividends |
21 |
– |
| Overseas listed dividends |
7,370 |
3,620 |
| Overseas listed special dividends |
140 |
301 |
|
-------- |
-------- |
|
7,533 |
3,921 |
|
-------- |
-------- |
| Other income: |
|
|
| Bank interest |
28 |
1 |
| Other income |
– |
19 |
|
-------- |
-------- |
| Total |
7,561 |
3,941 |
|
======== |
======== |
Dividends and interest received during the period amounted to US$7,740,000 and US$28,000 (2017: US$3,881,000 and US$1,000).
No special dividends have been recognised in capital (2017: nil).
4. INVESTMENT MANAGEMENT FEE
|
2018 |
2017 |
|
Revenue
US$’000 |
Capital
US$’000 |
Total
US$’000 |
Revenue
US$’000 |
Capital
US$’000 |
Total
US$’000 |
| Investment management fee |
421 |
981 |
1,402 |
337 |
785 |
1,122 |
|
======== |
======== |
======== |
======== |
======== |
======== |
With effect from 1 April 2017, the management fee has been reduced from 1.0% per annum of the Company’s daily market capitalisation to 0.8% per annum of the Company’s daily net asset value. Any charges in respect of BlackRock managed funds are deducted from the management fee.
The management fee is allocated 70% to capital reserve and 30% to the revenue reserve.
5. OTHER OPERATING EXPENSES
|
2018
US$’000 |
2017
US$’000 |
| Taken to revenue: |
|
|
| Custody fee |
80 |
67 |
| Custody fee – write back |
(33) |
– |
| Depositary fees |
19 |
15 |
| Audit fee |
41 |
39 |
| Registrar’s fees |
29 |
29 |
| Directors’ emoluments |
189 |
171 |
| Directors’ emoluments – write back |
(28) |
– |
| Marketing fees |
45 |
27 |
| Marketing fees – write back |
(5) |
(60) |
| Other administrative costs |
170 |
214 |
|
-------- |
-------- |
|
507 |
502 |
|
-------- |
-------- |
| Taken to capital: |
|
|
| Transaction costs |
58 |
76 |
|
-------- |
-------- |
|
565 |
578 |
|
======== |
======== |
| The Company’s ongoing charges – calculated as a percentage of average shareholders’ funds and including management fees, and operating expenses but excluding finance costs and taxation were: |
1.1% |
1.2% |
|
======== |
======== |
A significant proportion of the Company’s operating expenses are paid in sterling and are therefore subject to exchange rate fluctuations.
The Company has no employees.
6. DIVIDENDS
|
Record date |
Payment date |
2018
US$’000 |
2017
US$’000 |
| 2017 Final dividend of 7.50 cents |
19 May 2017 |
28 June 2017 |
2,694 |
- |
|
======== |
======== |
======== |
======== |
The Directors have proposed a final dividend of 15.00 cents in respect of the year ended 31 January 2018. The proposed dividend will be paid on 28 June 2018, subject to shareholders’ approval on 20 June 2018, to shareholders on the Company’s register on 18 May 2018. The proposed final dividend has not been included as a liability in these financial statements, as final dividends are only recognised in the financial statements when they have been approved by shareholders.
The total dividends payable in respect of the year which form the basis of determining retained income for the purpose of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amount proposed for the year ended 31 January 2018, meet the relevant requirements as set out in this legislation.
Dividends paid or proposed on equity shares |
2018
US$’000 |
2017
US$’000 |
| Final proposed of 15.00 c* (2017: 7.50 cents) |
5,387 |
2,694 |
|
======== |
======== |
* Based on 35,916,028 ordinary shares (excluding treasury shares) in issue on 21 March 2018.
All dividends paid or payable are distributed from the Company’s distributable reserves.
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital returns per share are shown below and have been calculated using the following:
|
2018 |
2017 |
| Net revenue profit attributable to ordinary shareholders (US$’000) |
5,690 |
2,705 |
| Net capital profit attributable to ordinary shareholders (US$’000) |
48,526 |
40,172 |
|
-------- |
-------- |
| Total profit attributable to ordinary shareholders (US$’000) |
54,216 |
42,877 |
|
-------- |
-------- |
| Equity shareholders’ funds (US$’000) |
206,427 |
154,951 |
|
-------- |
-------- |
| The weighted average number of ordinary shares in issue during the year on which the return per ordinary share was calculated was: |
35,916,352 |
36,087,772 |
|
-------- |
-------- |
| The actual number of ordinary shares in issue at the year end on which the net asset value per share was calculated was: |
35,916,028 |
35,927,828 |
|
-------- |
-------- |
| The number of ordinary shares in issue, including treasury shares, at the year end was: |
40,916,028 |
41,327,828 |
|
======== |
======== |
|
2018 |
2017 |
|
Revenue
cents |
Capital
cents |
Total
cents |
Revenue
cents |
Capital
cents |
Total
cents |
| Earnings per share |
|
|
|
|
|
|
| Calculated on weighted average number of ordinary shares |
15.84 |
135.11 |
150.95 |
7.50 |
111.31 |
118.81 |
| Calculated on actual number of ordinary shares in issue at the year end |
15.84 |
135.11 |
150.95 |
7.53 |
111.81 |
119.34 |
|
-------- |
-------- |
-------- |
-------- |
-------- |
-------- |
| Net asset value per share |
|
|
574.75 |
|
|
431.28 |
| Ordinary share price* |
|
|
549.64 |
|
|
378.06 |
|
======== |
======== |
======== |
======== |
======== |
======== |
* The Company’s ordinary share price is quoted in sterling and the above represents the US dollar equivalent using an exchange rate of 1.4221 to £1 (2017: 1.2581 to £1).
8. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
|
2018
US$’000 |
2017
US$’000 |
| Valuation of overseas listed investments at 31 January |
206,683 |
157,134 |
|
-------- |
-------- |
| Valuation brought forward |
157,134 |
118,313 |
| Investment and derivative holding losses |
3,706 |
42,232 |
|
-------- |
-------- |
| Opening cost of investments and derivatives |
160,840 |
160,545 |
| Additions at cost |
127,851 |
74,210 |
| Disposals at cost |
(116,791) |
(73,915) |
|
-------- |
-------- |
| Cost carried forward |
171,900 |
160,840 |
| Closing investment holding gains/(losses) |
34,783 |
(3,706) |
|
-------- |
-------- |
| Closing valuation of investments and derivatives |
206,683 |
157,134 |
|
======== |
======== |
During the year, the Company incurred purchase transaction costs of US$222,000 (2017: US$150,000) and sale transaction costs of US$160,000 (2017: US$98,000). All transaction costs have been included within capital reserve.
Gains on investments held at fair value through profit or loss
|
2018
US$’000 |
2017
US$’000 |
| Realised gains on sales |
11,061 |
2,071 |
| Decreases in investment holding losses |
38,489 |
38,526 |
|
-------- |
-------- |
|
49,550 |
40,597 |
|
======== |
======== |
9. DEBTORS
|
2018
US$’000 |
2017
US$’000 |
| Sales for future settlement |
6,721 |
145 |
| Prepayments and accrued income |
39 |
229 |
| Taxation recoverable |
240 |
13 |
|
-------- |
-------- |
|
7,000 |
387 |
|
======== |
======== |
10. CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR
|
2018
US$’000 |
2017
US$’000 |
| Purchases for future settlement |
968 |
495 |
| Accrued expenditure |
1,374 |
632 |
|
-------- |
-------- |
|
2,342 |
1,127 |
|
======== |
======== |
11. CREDITORS – AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Non–equity share capital |
2018
US$’000 |
2017
US$’000 |
| Allotted, issued and one quarter paid: |
19 |
19 |
|
-------- |
-------- |
| Shares in issue at 31 January 2018 and 31 January 2017, 50,000 preference shares of £1.00 each |
19 |
19 |
|
======== |
======== |
The preference shares confer no right to receive notice of or attend or vote at any general meeting of the Company except upon any resolution to vary the rights attached to the preference shares. They carry the right to receive a fixed dividend of US$0.01 per preference share per annum, payable on demand. On a winding up or return of capital, the preference shares confer the right to be paid, out of the assets of the Company available for distribution, the capital paid up on such shares pari passu with and in proportion to any amounts of capital paid to ordinary shareholders, but do not confer any right to participate in the surplus assets of the Company. In the year to 31 January 2018 and the previous year, the preference shareholders waived their rights to any preference dividend.
12. SHARE CAPITAL
|
Ordinary
shares
number |
Treasury
shares
number |
Total
shares
number |
Nominal
value
US$’000 |
| Allotted, called up and fully paid share capital comprised: |
|
|
|
|
| Ordinary shares of 10 cents each: |
|
|
|
|
| At 31 January 2017 |
35,927,828 |
5,400,000 |
41,327,828 |
4,133 |
|
-------- |
-------- |
-------- |
-------- |
| Shares purchased and cancelled |
(11,800) |
– |
(11,800) |
(1) |
|
-------- |
-------- |
-------- |
-------- |
| Treasury shares cancelled |
– |
(400,000) |
(400,000) |
(40) |
|
-------- |
-------- |
-------- |
-------- |
| At 31 January 2018 |
35,916,028 |
5,000,000 |
40,916,028 |
4,092 |
|
======== |
======== |
======== |
======== |
During the year, 11,800 ordinary shares were repurchased and cancelled (2017: 289,100) for a total consideration of US$46,000 (2017: US$969,000). Additionally 400,000 treasury shares were cancelled during the year (2017: nil). The number of ordinary shares in issue at the year end was 40,916,028 (2017: 41,327,828) of which, 5,000,000 were held in treasury (2017: 5,400,000).
13. RESERVES
|
Share
premium
account
US$’000 |
Capital
redemption
reserve
US$’000 |
Capital
reserve
(arising on
investments
sold)*
US$’000 |
Capital
reserve
(arising on
revaluation of
investments
held)*
US$’000 |
Revenue
reserve *
US$’000 |
| At 31 January 2017 |
41,684 |
5,889 |
118,405 |
(3,637) |
(11,523) |
|
|
|
|
|
|
| Movement during the year: |
|
|
|
|
|
| Shares repurchased and cancelled |
– |
41 |
(46) |
– |
– |
| Gains on realisation of investments |
– |
– |
11,061 |
– |
– |
| Change in investment holdings gains |
– |
– |
– |
38,489 |
– |
| Gains on foreign currency transactions |
– |
– |
24 |
2 |
– |
| Gains/(losses)on contracts for difference |
– |
– |
194 |
(173) |
– |
| Finance costs and expenses charged to capital |
– |
– |
(1,071) |
– |
– |
| Net profit for the year |
– |
– |
– |
– |
5,690 |
| Dividend paid during the year |
– |
– |
– |
– |
(2,694) |
|
-------- |
-------- |
-------- |
-------- |
-------- |
| At 31 January 2018 |
41,684 |
5,930 |
128,567 |
34,681 |
(8,527) |
|
======== |
======== |
======== |
======== |
======== |
* Represents the Company’s distributable reserves.
14. Valuation of financial instruments
Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value (investments) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash and cash equivalents and overdrafts). Section 11 of FRS 102 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note on page 50 of the Company's Annual Report and Financial Statements.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. These include exchange traded derivatives. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs.
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as over-the-counter derivatives, include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
Level 3 – Valuation techniques using significant unobservable inputs.
This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager.
Contracts for difference have been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the underlying quoted securities to which these contracts expose the Company.
The table below sets out fair value measurements using the FRS102 fair value hierarchy.
Financial assets/(liabilities)at fair value through profit or loss at 31 January 2018 |
Level 1
US$’000 |
Level 2
US$’000 |
Level 3
US$’000 |
Total
US$’000 |
| Assets: |
|
|
|
|
| Equity investments |
206,683 |
– |
– |
206,683 |
|
-------- |
-------- |
-------- |
-------- |
| Liabilities: |
|
|
|
|
|
-------- |
-------- |
-------- |
-------- |
| Contracts for difference (gross exposure) |
– |
(3,476) |
– |
(3,476) |
|
-------- |
-------- |
-------- |
-------- |
|
206,683 |
(3,476) |
– |
203,207 |
|
======== |
======== |
======== |
======== |
Financial assets at fair value through profit or loss at 31 January 2017 |
Level 1
US$’000 |
Level 2
US$’000 |
Level 3
US$’000 |
Total
US$’000 |
| Assets: |
|
|
|
|
| Equity investments |
157,134 |
– |
– |
157,134 |
|
-------- |
-------- |
-------- |
-------- |
| Contracts for difference (gross exposure) |
– |
2,680 |
– |
2,680 |
|
-------- |
-------- |
-------- |
-------- |
|
157,134 |
2,680 |
– |
159,814 |
|
======== |
======== |
======== |
======== |
There were no transfers between levels for financial assets and financial liabilities during the period recorded at fair value as at 31 January 2018 and 31 January 2017.
The Company did not hold any level 3 securities throughout the financial year or as at 31 January 2018 (2017: nil).
15. TRANSACTION WITH MANAGER AND INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in Note 4.
The investment management fee due to BFM for the year ended 31 January 2018 amounted to US$1,402,000 (2017: US$1,122,000). At the year end, US$1,053,000 was outstanding in respect of the management fee (2017: US$258,000).
In addition to the above services, BlackRock has provided the Company with marketing services. The total fees paid or payable for these services for the year ended 31 January 2018 amounted to US$45,000 excluding VAT (2017: US$27,000). Marketing fees of US$47,000 (2017: US$29,000) were outstanding at 31 January 2018.
16. RELATED PARTIES DISCLOSURES AND TRANSACTIONS WITH DIRECTORS
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report on pages 28 to 30 of the Company's Annual Report and Financial Statements . At 31 January 2018, an amount of US$17,000 (2017: US$ nil) was outstanding in respect of Directors’ fees.
17. CONTINGENT LIABILITIES AND ASSETS
There were no contingent liabilities or assets at 31 January 2018 (2017: nil).
18. PUBLICATION OF NON-STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The 2018 annual report and financial statements will be filed with the Registrar of Companies shortly.
The report of the Auditors for the year ended 31 January 2018 contains no qualification or statement under Section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock Emerging Europe plc for the year ended 31 January 2017, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditors on those financial statements contained no qualification or statement under Section 498 of the Companies Act.
This announcement was approved by the Board of Directors on 23 March 2018.
19. ANNUAL REPORT
Copies of the annual report will be sent to members shortly and will also be available from the registered office, c/o The Company Secretary, BlackRock Emerging Europe plc, 12 Throgmorton Avenue, London EC2N 2DL.
20. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 20 June 2018 at 12:00 noon.
ENDS
The Annual Report will also be available on the BlackRock Investment Management website at http://www.blackrock.co.uk/beep. Neither the contents of the Investment Manager’s website nor the contents of any website accessible from hyperlinks on the Investment Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
For further information, please contact:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 5284
Press Enquiries:
Lucy Horne, Lansons Communications – Tel: 020 7294 3689
E-mail: lucyh@lansons.com
23 March 2018
12 Throgmorton Avenue
London EC2N 2DL
