Annual Financial Report

Annual Financial Report

Genesis Emerging Markets Fund Ld

GENESIS EMERGING MARKETS FUND LIMITED
(the “Company”; the “Fund”)
(Registration Number: 20790)(Registration Number: 20790)

STOCK EXCHANGE ANNOUNCEMENT

ANNUAL FINANCIAL REPORT

The Company has today, in accordance with Disclosure and Transparency Rules (“DTR”) 6.3.5, released its Annual Financial Report for the year ending 30th June 2010 (the “Report”). The Report will be available from the Company’s website www.giml.co.uk and will shortly be available for inspection on the National Storage Mechanism, which is located at http://hemscott.com/nsm.do where users can access the regulated information provided by listed entities.

The Directors of Genesis Emerging Markets Fund Limited announce the following results for the year ended 30th June 2010:

    30th June 2010

US$

  30th June 2009

US$

Total net assets
974,358,807 734,260,089
Net assets per Participating Share*
7.22 5.44
Total income/(deficit) per Participating
Share* 1.78 (1.93)

* Adjusted for the November 2009 ten for one share split

CHAIRMAN’S STATEMENT

Performance

Emerging markets have generated strong returns over the Fund’s financial year, with the Fund’s net asset value (‘‘NAV’’) per share rising 46%, from £3.32 to £4.87 over the period. The majority of these returns were in the second half of 2009, when the Fund’s NAV increased by 38%, followed by a more difficult six months during which the Fund’s return was 7% as concerns about global economic growth caused investors to become more nervous.

The Fund’s performance was ahead of that of the MSCI Emerging Markets Index, which gained 36% over the financial year.

I refer shareholders to the Report of the Manager on the following pages which comments on the factors driving these returns, as well as describing the economic environment and some of the changes to the Fund’s holdings over the year.

Clearly these short-term returns are gratifying, but it is also important to consider the long-term trends when assessing whether the Fund has been successful in meeting the expectations of shareholders. In this context, the Directors believe the Manager is indeed performing well for the Fund’s holders, with an average return per annum of 18.8% over the last five years and 15.3% over the last ten years, and the Board’s view is – especially given the consistency of the Manager’s approach to investment in emerging markets, and the stability of its personnel – that shareholders’ interests will continue to be well served by the ongoing appointment of the Manager.

Recent Restructuring of the Fund

A vote to restructure the Fund took place in October last year, and, approval having been granted, this was implemented in November. The impact of the restructuring was to have the Fund quoted in Sterling rather than US dollars, and to split the shares tenfold so that the price was ‘smaller’ by a factor of ten.

In my half-yearly report six months ago, I noted that the initial impact of the changes appeared to be positive, and it has been pleasing to see that over the period since that report the Fund’s trading volumes have remained higher than previously, with the discount to NAV staying somewhat narrower (over the year under review, the Fund’s discount to NAV has averaged 8.8%, closing June at 6.0%).

The shareholder base of the Fund also seems to have widened somewhat, with a number of new institutional shareholders becoming known to us, and we hope to see this trend continuing. The Fund has additionally become eligible for, and has been included in, the FTSE 250.

The Board

We announced ten months ago that Dr. John Llewellyn had been appointed to the Board, noting his distinguished career as an international economist. Dr. Llewellyn has already made a significant contribution to the Board since his appointment, and I thoroughly endorse his full election by shareholders at the forthcoming Annual General Meeting.

Two other Directors, in accordance with either the Articles of Association or regulatory requirements, also offer themselves for re-election at the Annual General Meeting. The Hon. John Train has been an extremely valuable member of the Board during his time as a Director, and I have no hesitation in recommending to shareholders that he continue to serve on the Board.

I will also be standing for re-election at the Meeting, and I hope that shareholders will also feel able to vote in favour of my re-election and allow me to continue to serve them as Chairman of the Board of Directors.

Christian Baillet has completed his full term as a Director and will retire from the Board of the Fund, effective from the forthcoming Annual General Meeting. On behalf of the Board I would like to express my appreciation to Mr. Baillet for his contribution to the Fund and wish him well.

As always, we will be holding an Information Meeting in London which will take place on 4th November. At which we hope to see as many shareholders as possible.

Outlook

We feel it is necessary to strike a note of caution following a period when returns have been as strong as they have been over the last year, notwithstanding the retrenchment in markets that we saw in the final months of the financial year. It seems unlikely that the Fund’s returns over the next year will be as impressive.

That said, we feel the outlook for emerging markets, and the potential for continued steady returns from the asset class remain very positive. The many long-term attractions of emerging markets investing and the prospects for corporate success remain in place, and the Manager remains confident that the companies in the Fund’s portfolio of holdings remain attractively-priced, given their growth opportunities.

The Board accordingly continues to believe that the Fund is well-positioned to generate attractive returns for shareholders over the medium to long term.

Coen Teulings
ChairmanChairman
September 2010September 2010

DIRECTORS’ REPORT

RESULTS

The total profit for the year for the Fund amounted to $240,098,718 compared to a total loss of $(259,944,847) in the previous year. The Directors do not recommend the payment of a dividend in respect of the year ended 30th June 2010 (2009: Nil).

CAPITAL VALUES

At 30th June 2010, the value of Equity Shareholders’ Funds was $974,358,807 (2009: $734,260,089), the Equity per Participating Preference Share was $7.22 (2009: $5.44).

RISK MANAGEMENT

The investment objective of the Fund is to achieve capital growth over the medium to long term, primarily through investment in equity securities quoted on emerging markets. The main risks to the value of its assets arising from the Fund’s investment in financial instruments are unanticipated adverse changes in market prices and foreign currency exchange rates and an absence of liquidity. The Board reviews and agrees with the Manager policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the period to which these financial statements relate.

The economies, the currencies and the financial markets of a number of developing countries in which the Fund invests may be extremely volatile. To manage the risks posed by adverse price fluctuations the Fund’s investments are geographically diversified, and will continue to be so. The Fund will not normally invest more than 25% of its assets (at the time the investment is made) in any one country. Further, the exposure to any one company or group (other than an investment company, unit trust or mutual fund) is unlikely to exceed 5% of the Fund’s net assets at the time the investment is made.

The Fund’s assets will be invested in securities of companies in various countries and income will be received by the Fund in a variety of currencies. However, the Fund will compute its net asset value and make any distributions in dollars. The value of the assets of the Fund as measured in dollars may be affected favourably or unfavourably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies.

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stock markets of the developed world. This lower level of liquidity exaggerates the fluctuations in the value of investments described previously. The restrictions on concentration and the diversification requirements detailed above also serve normally to protect the overall value of the Fund from the risks created by the lower level of liquidity in the markets in which the Fund operates.

MANAGER

In the opinion of the Directors, in order to achieve the investment objective of the Fund, and having taken into consideration the performance of the Fund, the continuing appointment of the Manager is in the interests of the shareholders as a whole.

A more detailed commentary of important events that have occurred during the year and their impact on these accounts and a description of the principal risks and uncertainties is contained in the Manager’s Review.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the financial statements for each financial year so that they give a true and fair view, in accordance with applicable Guernsey Law and International Financial Reporting Standards, of the state of affairs of the Fund and of the profit or loss of the Fund for that year.

In the preparation of these financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgments and estimates that are reasonable and prudent;
  • ensure the financial statements are prepared on a going concern basis unless it is inappropriate to presume that the Fund will continue in business; and
  • state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements.

The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for ensuring that the Fund keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and enable them to ensure that the financial statements comply with The Guernsey Companies Law, 2008. They are also responsible for ensuring the safeguarding of the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on the website www.giml.co.uk, which is maintained by the Fund's Investment Adviser. The maintenance and integrity of the website is, so far as relates to the Fund, the responsibility of the Investment Adviser. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

AUDITORS AND DISCLOSURE OF INFORMATION TO AUDITORS

In the case of each of the persons who are Directors at the time when the report is approved, the following applies:

  • so far as the Director is aware, there is no relevant audit information of which the Fund's auditors are unaware; and
  • they have taken all steps that ought to have been taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Fund's auditors are aware of that information.

DIRECTORS' INTERESTS

The Directors (except Jeremy Paulson-Ellis who resigned 30th October 2009 and Dr. John Llewellyn who was appointed on 30th October 2009) served throughout the year under review. The following (who were Directors during the financial year) had a beneficial interest in the share capital of the Fund at 30th June 2010:

Directors   Participating Preference Shares
Coen Teulings 40,000
Jeremy Paulson-Ellis (including family interests) 119,460
The Hon. John Train (including family interests) 20,510

MANAGER’S REVIEW

The Fund’s net asset value rose by 46% over the year to 30th June 2010 (in sterling terms), even though the final quarter was a somewhat nervous one. Markets had risen particularly strongly in the second half of 2009 as post-crisis market sentiment improved, and profitability – and earnings outlook – for emerging market companies remained resilient.

The out performance of the Fund relative to the MSCI EM Index over the year was led by the strong appreciation of a number of consumer-orientated stocks in the BRIC markets, notably retailers X5 and Magnit in Russia, food distributor China Resources Enterprise, Asian Paints in India, and the Brazilian clothes retailer Lojas Renner. A number of the Fund’s holdings in the Financials sector also performed particularly well, including Sberbank in Russia, Turkish banks Yapi Kredi and Garanti, Bank Rakyat in Indonesia, and Indian finance company Shriram Transport. For many of these firms, the strong stock price returns have marked a return to more normal valuations, having been trading at significantly depressed levels at the end of 2008 and the beginning of 2009.

The Fund’s turnover over the past year was 21%, a little lower than in the preceding two years. Of the changes to the make-up of the portfolio, perhaps the most notable were the increases to the weightings of the Consumer Staples and Financials sectors, largely due to share price movement rather than portfolio action. As we have noted before, banks in emerging markets are traditional, domestically-focused, and highly profitable businesses, which offer an attractive way of gaining exposure to the growing middle class in developing countries. Amongst the new holdings were Banco Santander Brazil, the subsidiary of the Spanish bank, which is able to draw upon its parent’s knowledge and systems to improve its operating efficiency, and China Merchants Bank, which as a bank outside China’s “Big Four” is free from explicit policy interference and therefore able to target more genuinely commercial activities.

From a country perspective the largest portfolio positioning shift was in Brazil, where the weighting increased by 3% to 8.5%. Along with the aforementioned Banco Santander, new holdings there were CSN (a steel producer) and OGX (an independent oil exploration and production company) while the holding in Ultrapar was also increased. Elsewhere, there were additions in China to Anhui Conch Cement and China Mobile, while Almarai became the Fund’s first Saudi Arabian holding. The Fund was very active in India: Bajaj Auto and Axis Bank were purchased following sales of Bank of Baroda, HDFC Bank and Infosys. Further notable sales were in China Shenhua Energy, Bank Rakyat Indonesia and the long-held Israeli position, Teva Pharmaceuticals, which was sold from the portfolio.

Looking at the current environment, a number of developing countries have recently taken measures designed to partly withdraw from the expansionary fiscal and monetary policies of last year. In March, the Reserve Bank in India raised its benchmark interest rate for the first time in over two years (with a further rise in April), while rates in Brazil rose in April and June. In China, although interest rates have yet to rise and fiscal policy has not changed, companies have understood the government’s signals and moderated their mood and activity accordingly. Banks have been reporting weaker loan demand, and some of the more cyclical companies have seen a decline in prices and increased pressure on margins.

Markets have been fairly circumspect in recent months, as investor confidence in global growth has taken something of a knock given concerns about European deleveraging and its impact on global demand. Fundamentally though, consumer demand in our markets remains robust and the companies we talk to are still positive about the outlook for their businesses.

Clearly, it is unlikely that the return the Fund achieved during the last year will be repeated over the next twelve months. But despite the sharp increases the asset class has seen (and in spite of our strong valuation focus), we are comfortable with current valuation levels. We believe that the Fund’s portfolio offers investors attractive returns from current price levels, and that over the medium to long term the high-quality companies in which it invests will continue to capitalise on the positive factors – urbanisation, better physical infrastructure, improving capital markets and banking systems – driving emerging markets growth.

Genesis Asset Managers, LLP
September 2010September 2010

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 30as at 30th June 2010

      2010   2009
$ $
 
ASSETS
Current Assets
Financial assets at fair value through profit or loss 960,328,412 721,944,912
Amounts due from brokers 131,002 -
Dividends receivable 1,895,408 1,957,186
Other receivables and prepayments 155,295 165,392
Cash and cash equivalents 13,689,031 12,291,308
   
TOTAL ASSETS 976,199,148 736,358,798
 
LIABILITIES
Current Liabilities
Amounts due to brokers 257,983 850,498
Payables and accrued expenses 1,582,356 1,248,086
Bank overdraft 2 125
   
TOTAL LIABILITIES 1,840,341 2,098,709
 
TOTAL NET ASSETS 974,358,807 734,260,089
 
EQUITY
Share capital - 270,633
Share premium 135,509,473 135,238,840
Capital reserve 804,245,831 559,694,846
Revenue account 35,764,003 40,216,270
Purchase of own shares (1,160,500) (1,160,500)
 
TOTAL EQUITY 974,358,807 734,260,089
 
EQUITY PER PARTICIPATING
PREFERENCE SHARE* $7.22 $5.44

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2009: 134,963,060, adjusted for the November 2009 ten for one share split). Before the effect of the split, previously reported 30th June 2009 equity per Participating Preference Share was US$54.39 based on an average number of 13,496,306 Participating Preference Shares outstanding.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30for the year ended 30th June 2010

      2010   2009
$ $
INCOME
Net change in financial assets at fair value through profit or loss 245,000,942 (261,097,614)
Net exchange losses (449,957) (1,144,973)
Dividend income 15,755,331 16,964,626
Deposit interest 26,097 32,908
Miscellaneous income - 7,725
260,332,413 (245,237,328)
 
EXPENSES
Management fees (14,241,355) (9,675,175)
Custodian fees (1,262,244) (846,003)
Transaction costs (1,143,840) (1,211,600)
Directors' fees and expenses (294,992) (243,596)
Administration fees (160,763) (175,084)
Audit fees (36,680) (55,026)
Other expenses (317,390) (282,017)
TOTAL OPERATING EXPENSES (17,457,264) (12,488,501)
 
OPERATING PROFIT/(LOSS) 242,875,149 (257,725,829)
 
FINANCE COSTS
Bank charges (1,824) (3,543)
Interest expense (31,907) (69,942)
TOTAL FINANCE COSTS (33,731) (73,485)
Withholding taxes (2,742,700) (2,145,533)
   
PROFIT/(LOSS) FOR THE YEAR 240,098,718 (259,944,847)
 
RETURN/(DEFICIT) PER PARTICIPATING PREFERENCE SHARE* $1.78 $(1.93)

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2009: 134,963,060). Before the effect of the split, previously reported 30th June 2009 deficit per Participating Preference Share was US$(19.26) based on an average number of 13,496,306 Participating Preference Shares outstanding.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 30for the year ended 30th June 2010

    2010
         
Share Share Capital Revenue Purchase of
Capital * Premium * Reserve Account Own Shares Total
$ $ $ $ $ $
 
Net assets at the beginning of the year 270,633 135,238,840 559,694,846 40,216,270 (1,160,500) 734,260,089
 
Redenomination of shares* (270,633) 270,633 - - - -
 
Movement in the year - - 1244,550,985 2(4,452,267) - 240,098,718
           
Net assets at the end of the year - 135,509,473 804,245,831 35,764,003 (1,160,500) 974,358,807
 
 

2009

 
Share Share Capital Revenue Purchase of
Capital Premium Reserve Account Own Shares Total
$ $ $ $ $ $
 
Net assets at the beginning of the year 270,633 135,238,840 821,937,433 37,918,530 (1,160,500) 994,204,936
 
Movement in the year - - (262,242,587) 2,297,740 - (259,944,847)
           
Net assets at the end of the year 270,633 135,238,840 559,694,846 40,216,270 (1,160,500) 734,260,089

* At the Extraordinary General Meeting held at the end of October 2009 it was resolved to re-denominate the share capital so as to permit the shares to be quoted in Sterling rather than US dollars, and secondly a division of each existing share into ten, thereby reducing the market price of each share.

1 Represents the movement in capital reserve during the year, which is comprised of net changes in financial assets at fair value through profit and loss and net exchange losses.

2 Represents other income less expenses during the year.

CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 30for the year ended 30th June 2010

  2010   2009
$ $
OPERATING ACTIVITIES
Dividend received 15,814,306 17,538,992
Taxation paid (2,742,700) (2,145,533)
Purchase of investments (202,533,312) (206,073,332)
Proceeds from sale of investments 208,427,237 220,392,461
Interest received 28,900 37,256
Operating expenses paid (17,146,628) (12,894,570)
Foreign exchange loss (71) (4,214)
   
NET CASH INFLOW FROM OPERATING ACTIVITIES 1,847,732 16,851,060
 
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,847,732 16,851,060
Effect of exchange rate fluctuations on cash and cash equivalents (449,886) (1,140,759)
1,397,846 15,710,301
 
Net cash and cash equivalents at the beginning of the year 12,291,183 (3,419,118)
 
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 13,689,029 12,291,183
 
 
Comprising:
 
Cash and cash equivalents 13,689,031 12,291,308
Bank overdraft (2) (125)
   
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR 13,689,029 12,291,183

NOTES TO THE FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and interpretations by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board.

The consolidated financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit of loss.

In October 2009, the shareholders approved a ten for one Share Split as described in the Chairman's Statement. Any price that was expressed per share in the prior period has been restated to the ten for one subdivision.

The preparation of financial statements in conformity with IFRS may require management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions, relating to unlisted securities, are based on the historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

2. RECONCILIATION OF PUBLISHED NET ASSET VALUE ATTRIBUTABLE TO EQUITY SHAREHOLDERS TO THE IFRS EQUIVALENT

  2010   Per Participating
Total Preference Share
$ $
Published Net Asset Value 979,819,807 7.26
Change from mid market pricing to bid pricing for investments (5,461,000) (0.04)
   
Net Asset Value under IFRS 974,358,807 7.22
 
2009 Per Participating
Total Preference Share
$ $
Published Net Asset Value 737,694,747 5.47
Change from mid market pricing to bid pricing for investments (3,569,428) (0.03)
   
Net Asset Value under IFRS 734,125,319 5.44
 
Equity share capital 134,770
 
Equity shareholders' funds 734,260,089

3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES

MANAGER’S REMUNERATION AND TERMS OF APPOINTMENT

The Manager’s appointment is under a rolling contract which may be terminated by three months written notice given by the Fund and twelve months by the Manager.

Under the Management Agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly, equal to 1.5% per annum, calculated and accrued on the Net Asset Value of the Fund as at each Valuation Day (being the 15th day and last day of each month), except for investments in other funds, where the Manager will absorb the expenses of the management of other such funds to a maximum of 1% per annum of the value of the Fund’s holding in the relevant fund at the relevant time. The effective management fee on the average Net Assets of the Fund was 1.49% (2009: 1.48%). Where, in order to gain access to a particular market, investment is made in a vehicle directly managed by the Genesis group, no fee will be payable by the Fund on that proportion of its assets so invested, unless no management fee is charged to that vehicle.

ADMINISTRATION FEES

The Administrator, HSBC Securities Services (Guernsey) Limited, is entitled to receive a fee, payable monthly, based on time incurred. Administration fees were $160,763 (2009: $175,084) for the year.

CUSTODIAN FEE

Under the Custodian Agreement, HSBC Custody Services (Guernsey) Limited, as Custodian to the Fund, is entitled to receive a fee payable monthly, based on the Net Asset Value of the Fund. Under the agreement between the Custodian and the Sub-Custodian, JP Morgan Bank, the latter is also entitled to receive a fee calculated on the same basis as the Custodian’s fee. The Fund also reimburses the charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.13% (2009: 0.12%) per annum of the average Net Assets of the Fund.

DIRECTORS’ FEES AND EXPENSES

Included in Directors’ fees and expenses are Directors’ fees for the year of $141,333 in total (2009: $88,611). Also included are travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Fund.

RELATED PARTIES

The Genesis Indian Investment Company Limited and Genesis Smaller Companies SICAV were related parties of the Fund by virtue of Jeremy Paulson-Ellis having been a common Director for part of the year and also having a common Manager in Genesis Asset Managers, LLP. Subscriptions and redemptions during the year under review are detailed below. There were no other transactions between the Fund and such related parties during the year except as noted above and there are no outstanding balances at 30th June 2010. Directors’ related party interests are included within the Directors’ Report.

  2010
Subscriptions   Redemptions
$ $
Genesis Indian Investment Company Limited 14,594,207 14,335,255
Genesis Smaller Companies SICAV - 19,025,584
2009
Subscriptions Redemptions
$ $
Genesis Indian Investment Company Limited 5,792,108 21,645,127
Genesis Smaller Companies SICAV 8,097,282 9,557,058

EVENTS AFTER THE BALANCE SHEET DATE

There are no significant or material post balance sheet events that need to be disclosed.

These are not the full statutory accounts. The full Annual Report and Audited Financial Statements for the year ending 30th June 2010 will be sent to shareholders and will be for inspection at the registered office: Arnold House, St. Julian’s Avenue, St. Peter Port, Guernsey, GY1 3NF.

For Genesis Emerging Markets Fund Limited
HSBC Securities Services (Guernsey) Limited, SecretaryHSBC Securities Services (Guernsey) Limited, Secretary
September 2010September 2010

END

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