Annual Financial Report
Barings Emerging EMEA Opportunities PLC
(formerly Baring Emerging Europe PLC)
LEI: 213800HLE2UOSVAP2Y69
Annual Report & Audited Financial Statements for the year ended 30 September 2020
The Directors present the Annual Financial Report of Barings Emerging EMEA Opportunities PLC (the “Company”) for the year ended 30 September 2020. The full Annual Report and Accounts can be accessed via the Company’s website, www.bemoplc.com or by contacting the Company Secretary on 01392 477571.
COMPANY SUMMARY
Baring Emerging Europe PLC changed its name to Barings Emerging EMEA Opportunities PLC (the “Company”) on 15 November 2020. The ticker has changed to BEMO. The Company was incorporated on 11 October 2002 as a public limited company and is an investment company in accordance with the provisions of Section 833 of the Companies Act 2006 (the “Act”). It is a member of the Association of Investment Companies (the “AIC”).
As an investment trust, the Company has appointed an Alternative Investment Fund Manager, Baring Fund Managers Limited (the “AIFM”), to manage its investments. The AIFM is authorised and regulated by the Financial Conduct Authority (the “FCA”).
The AIFM has delegated responsibility for the investment management of the portfolio to Baring Asset Management Limited (the “Investment Manager” or “Manager”). Further information on the Investment Manager, their investment philosophy and management of the Investment Portfolio can be found below.
MANAGEMENT FEE
With effect from 13 November 2020, the AIFM agreed to a reduction in the investment management fee from the previous level of 0.80% of the net asset value (“NAV”) of the Company to 0.75% of the NAV of the Company per annum. This is paid monthly in arrears based on the level of net assets at the end of the month.
NEW INVESTMENT OBJECTIVE, POLICY AND BENCHMARK
On 13 November 2020, the Company announced it had received Shareholder approval to broaden its investment mandate to focus on investing in emerging equity securities listed or traded on Emerging European, Middle Eastern and African (EMEA) markets (the “New Investment Policy”). To reflect this new investment universe, the Company changed its performance comparator to the MSCI Emerging Markets EMEA Index (the “New Benchmark”).
The Company’s previous investment objective was to achieve long-term capital growth, principally through investment in securities listed or traded on an EMEA market. The Company’s previous comparator benchmark was the MSCI Emerging Europe 10/40 Index (the “Benchmark”).
The Company’s previous investment policy, objective and Benchmark operated throughout the financial year, and applies to this Report.
Please refer below for a full comparison of the Company’s old and new policies.
Key Performance Indicators
as at 30 September 2020
| KEY PERFORMANCE INDICATORS | ||
| Annualised NAV Total Return*# | Dividend per Ordinary Share# | Average Discount %*# |
| -22.30% (2019:17.8%) | 25p (2019:35p) | 11.0% (2019:11.5%) |
Highlights
for the year ended 30 September 2020
| FINANCIAL HIGHLIGHTS | 2020 | 2019 |
| NAV per Ordinary Share* | 694.70p | 930.81p |
| Share price* | 587.00p | 846.00p |
| Ongoing Charges Ratio (based on average NAV)* # | 1.48% | 1.49% |
| Annualised Share Price Total Return | -27.49% | 24.32% |
| Annualised Benchmark movement* | -22.58% | 15.88% |
| Discount to NAV per Ordinary Share at the year end | 15.50% | 9.11% |
| RETURN (per ordinary share) | 30 September 2020 | 30 September 2019 | ||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| Return per Ordinary Share*# | 18.40p | -220.52p | -202.12p | 35.09p | 99.87p | 134.96p |
Revenue return (earnings) per Ordinary Share is based on the return for the year of £2,281,000 (2019: £4,482,000). Capital return per Ordinary Share is based on net capital loss for the financial year of £27,339,000 (2019: profit £12,754,000). These calculations are based on the weighted average of 12,397,456 (2019: 12,770,923) Ordinary Shares in issue during the year.
At 30 September 2020, there were 12,276,025 Ordinary Shares of 10 pence each in issue (2019: 12,439,297) which excludes 3,318,207 Ordinary Shares held in treasury (2019: 3,318,207). The shares held in treasury are not included when calculating the weighted average of Ordinary Shares in issue during the year. All shares repurchased during the year have been cancelled.
*see Glossary of Terms below for definitions
#Alternative Performance Measures (“APMs”).
For APMs, please see below.
‡ % based on dividend declared for the full year.
Chairman’s Statement
“The Board believes the New Investment Policy will allow the Company to achieve capital growth whilst maintaining an attractive level of income. By allowing access to markets with appealing yields and reducing dependency on dividends from fossil fuel energy producers, the Company can remain a true source of income diversification for Shareholders.”
This statement covers the year from 1 October 2019 to 30 September 2020.
The obvious word that springs to mind for the year under review is “rollercoaster”. A strong first four months saw record NAV performance with NAV per share hitting an all-time high of 1026.22 pence on 20 January 2020. However, the market reaction to the COVID-19 pandemic led to a significant decline in value, with NAV per share slumping to a low of 573.29 pence, a level last seen in March 2016. By the end of the financial year, the value had recovered to 694.70 pence (2019: 930.81 pence), still a profoundly disappointing outcome, but reflective of the continuing global uncertainty over COVID-19 and governments’ reactions to it.
The Board and Investment Manager have spent much time over the last year deliberating over the long-term strategic options for the Company. On 5 October 2020, we were pleased to announce that we had met the four-year discount and relative performance management targets set in 2016 and that, accordingly, a tender offer for up to 25% of the Company’s issued Ordinary Share capital would not take place. This was followed, on 19 October 2020, with the announcement of proposals to broaden the investment policy of the Company to focus on the whole of Emerging Europe, the Middle East and Africa (“EMEA”), as well as a change of name to Barings Emerging EMEA Opportunities PLC, a reduction of Barings’ management fee and revised discount management targets. The proposals were approved by Shareholders at the General Meeting held on 13 November 2020.
Further details, and the rationale for the change in investment policy, are set out below and in the Investment Manager’s Report. The change means that the Company is the only emerging market Investment Trust focused on the EMEA region. We hope it will broaden the Company’s appeal to a wider investor group, as country and sector concentrations will be reduced, without compromising our focus on capital growth or dividend yield, which have always been our priorities for our Shareholders. This should help increase demand for the Company’s shares, improve liquidity and stabilise the discount.
Performance
The annualised NAV total return over the year was -22.30% compared to the Benchmark of -22.58%. By contrast the total return from Developed Europe was -0.7% and from Global Emerging Markets +10.6%1. The performance of our region relative to broader Emerging markets and their developed peers is largely a reflection of specific COVID-19 impacts.
1 As defined by the MSCI Europe (Developed Europe) and MSCI Emerging Markets (Global Emerging Markets) indices.
The single most important of these has been the fall in oil prices caused by sharply reduced global demand. Our region has also been less well positioned than broader emerging markets to benefit from the more rapid economic re-opening seen in China and certain other Asian countries, while countries in our region cannot emulate the extraordinary monetary and fiscal stimulus that has buoyed developed markets. The Company’s annualised NAV total return over three and five years was -3.8% and +9.8%, compared with the Benchmark of -3.0% and +7.1% respectively.
Russia, by far the largest component of your portfolio, declined in absolute terms over the year but outperformed the broader MSCI Emerging Europe index. The portfolio’s stock selection here was the dominant driver of relative returns, with investments across numerous sectors, such as consumer, financials and technology all contributing to outperformance. This, in our view, highlights the significant potential of certain Russian companies, away from traditional sectors such as energy.
In Central Europe, Polish equities underperformed over the period and lagged the broader region. This was caused in part by rising political uncertainty over the period, stemming from parliamentary elections held in October and presidential elections in June. Despite this challenging backdrop, the portfolio’s stock selection meant that the market contributed positively to relative performance over the period. Elsewhere in the region, stock exchanges in Hungary and Czechia both underperformed, driven by concerns related to the impact of the COVID-19 on their respective economies. Similarly, Greek equities were notably weak as investors assess the potential implications of an economic downturn on company balance sheets.
In Turkey, equity markets registered significant declines and underperformed the region by a sizable margin. Currency weakness played a significant role, caused in part by a rapid credit expansion that exceeded demand, leading to capital outflows and a significant increase in the country’s current account deficit. Against this extremely challenging backdrop, the portfolio’s allocation to Turkish equities detracted from relative performance over the year.
Against our peers, over the 12-month period covered by this statement and defined by the Morningstar Emerging Europe Universe2, your Company sits within the third quartile. However, owing to strong historical performance, your Company continues to rank just outside of the second quartile over three years, and firmly within the first quartile over five years.
2 Quartile ranking is based on Morningstar Category - Emerging Europe Equity, customised to include the Company. Morningstar fractional weighting methodology applied.
This has not been an easy time to be an investment manager and, in particular, I would like to pay tribute to the team at Barings who have risen to the challenge of reacting to short-term volatility whilst remaining focused on investing in efficiently managed companies with solid underlying balance sheets and strong long term growth prospects. When we set potential tender trigger targets in 2016, we could not have imagined the Investment Manager would be battling a global financial crisis and stock market volatility of such magnitude in 2020. The fact the Company’s discount control targets were met is a huge achievement. I would also like to thank Barings for their hard work, enthusiasm and specialist insight leading up to the change in investment policy.
Change in Investment Policy
In 2016, Shareholders approved an increase in the Company’s scope of permitted investment in countries outside Emerging Europe from 5% to 15% of the Company’s gross assets. Given the continued expansion of capital markets in both Africa and the Middle East, the Board has determined that these regions present strong opportunities to the Company’s investment strategy. The change in investment policy will further expand the Company’s scope to invest in Africa and the Middle East and thus broaden the Company’s investment remit to the whole EMEA region, adopting the MSCI Emerging Markets EMEA Index (net) as a new comparator benchmark (the “New Benchmark”) to reflect this expanded scope.
The Board believes that the New Investment Policy will deliver a wide range of benefits to Shareholders. The expanded investment remit will provide an opportunity to diversify the portfolio by reducing concentration risk and helping lower the portfolio’s political and country based risk. In addition, the enlarged mandate will allow diversification away from hydrocarbons, which represent a significant portion of the Emerging Europe investment universe. By way of comparison, energy sector stocks make up approximately one-third of the Emerging Europe comparator Benchmark, but represent approximately 15% in the New Benchmark. Further, the expanding middle class and increasing internet penetration rates across EMEA, combined with historically low levels of e-commerce and the shift by consumers from offline to online consumption, support growth across a number of sectors. The Board thus believes that expanding the Company’s investment universe away from its current focus on the energy sector will bring greater opportunities for growth.
In the Board’s view, EMEA is under-researched when compared to other emerging and developed markets. However, in investing in these regions, the Investment Manager will have access to the in-depth, fundamental bottom-up research and experience of the Barings EMEA investment team, who already have extensive investments in companies in these regions and profit from their ongoing relationships and dialogue with the management teams of those companies, and analysis of their competitors.
The Board is confident that the Investment Manager has the investment expertise to deliver strong returns to Shareholders, as has been evidenced by its consistent track record of outperforming the Benchmark. The Barings EMEA investment team, headed by Matthias Siller, manages approximately £1.2 billion of assets across EMEA, with in-depth coverage of over 170 companies that fit the criteria for potential inclusion in the portfolio under the New Investment Policy. The Board believes this existing expertise will enable the Company to take advantage of market inefficiencies to deliver outperformance relative to the New Benchmark while investing in these regions.
The Board thus believes the New Investment Policy will allow the Company to achieve capital growth whilst maintaining an attractive level of income. By allowing access to markets with appealing yields and reducing dependency on dividends from fossil fuel energy producers, the Company can remain a true source of income diversification for Shareholders.
Change to the Management Fee
The Company has agreed with Barings a reduction in its investment management fee from the previous level of 0.80% of the NAV of the Company to 0.75% of the NAV of the Company per annum, with effect from 13 November 2020. A reduction in the investment management fee reduces the costs borne by Shareholders and therefore assists growth in net asset value per share. Although following the introduction of the New Investment Policy the Company has no direct peers as an EMEA focused, UK-listed investment trust, it is noted that the revised investment management fee is one of the lowest in both the Association of Investment Companies’ Global Emerging Markets sector and its Country Specialist: Europe – ex UK sector, and offers Shareholders access to a unique investment strategy at an attractive fee level.
Discount Management
At the year end, the discount to NAV at which the Company’s Ordinary Shares traded was 15.5% compared with 9.1% at the end of the prior year. The average discount during the year was 11.0% (2019: 11.5%). During the year, 163,272 Ordinary Shares were bought back and cancelled at an average price of £6.74 per Ordinary Share. The share buybacks added approximately 1.17 pence per Ordinary Share to NAV, accounting for just under 0.2% of the total return to Shareholders.
Under our new discount management mechanism, the Board will provide Shareholders with a tender offer for up to 25% of the Company’s issued ordinary share capital if:
• the average daily discount to NAV (‘cum-income’) exceeds 12% as calculated with reference to the trading of the Ordinary Shares over the five years to 30 September 2025; or
• the performance of the Company’s NAV per share on a total return basis does not exceed the return on the New Benchmark by an average of 50 basis points per annum over the five years to 30 September 2025.
Shareholders are thus offered the security of a capital return at close to asset value if the Company does not meet its performance or discount targets under these tender offer triggers.
Gearing
As mentioned in our Interim Report, gearing detracted from NAV performance in the early days of the pandemic so the Investment Manager realised sufficient holdings such that gearing net of cash was nil at 31 March 2020. The decision was taken by the Board to repay the loan facility on its renewal date of 7 April 2020. The Company currently has no loan facilities, but may use gearing in the future where the Investment Manager believes it will enhance performance.
Environmental, Social and Governance
The Investment Manager incorporates Environmental, Social and Governance (“ESG”) parameters in their company analysis in order to account for the improving or deteriorating corporate standards affecting a company’s value. This enhancement to their investment process is supported fully by the Board and our shared belief that ESG can have a profound impact on an investment’s risks and returns over time.
Further details can be found in the Investment Manager’s Report below.
Dividends
In respect of the six-month period to 31 March 2020, the Company paid a dividend of 15 pence per Ordinary Share (2019: 15 pence per Ordinary Share). For the year under review, the Board recommends a final dividend of 10 pence per Ordinary Share (2019: 20 pence per Ordinary Share). This amounts to a total for the year of 25 pence per Ordinary Share (2019: 35 pence per Ordinary Share), equivalent to a yield of around 4.3% on the year end share price of 587 pence per share. This payment is not fully covered in total by the income account, which produced a net revenue per share of 18.40 pence per Ordinary Share (2018/19: 35.09 pence).
It is disappointing that net revenue per Ordinary Share fell in comparison with last year. However, the prior year’s performance was exceptional and the current year is more in line with previous trends. Also, some of the shortfall related to Sberbank, our largest and most cash generative holding, which, in line with local regulatory recommendations related to COVID-19, deferred a dividend which would normally have been paid within our financial year but this year was paid shortly after our year end. Had this been paid within the normal timeframe, 4.8 pence per Ordinary Share would have been added to the above net revenue figure for the year.
Annual General Meeting
The Annual General Meeting (“AGM”) will be held on 21 January 2021 at 2.00pm. The Board is mindful of the need to ensure that the meeting will be held in compliance with the UK Government’s guidelines concerning arrangements for such meetings and is aware that restrictions may remain in place in relation to the COVID-19 crisis at the date of the AGM. The AGM will therefore be held as a closed meeting. I encourage you to vote on the resolutions, but you will not be able to attend in person. In the meantime, if you have any questions regarding the business of the meeting or should you wish to get in touch with me please do so by emailing me at BEMOChairman@linkgroup.co.uk.
After the AGM, at 3.00pm, the Investment Manager will give a presentation, via webinar, on the outlook for the year ahead further to the change of investment policy. The webinar will have the functionality for Shareholders to ask questions during, and after, the presentation.
A separate Notice of AGM is being sent to Shareholders, together with this Report and Accounts.
Any shareholder wishing to submit questions to the Board, or the Investment Manager in advance of the meeting is encouraged to do so by emailing BEMOChairman@linkgroup.co.uk. Answers to these questions, grouped together where the themes overlap will be published on the Company’s website prior to the AGM.
Outlook
The economic shock of COVID-19 will continue to haunt the global economy for some time, but we remain confident that the underlying potential of Emerging EMEA economies remains intact. This situation presents opportunities for skillful stock picking, since there will be winners and losers from COVID-19, as well as the continued development of longer term trends such as lessening reliance on fossil fuels and the increasing importance of ESG.
The opportunity is all the stronger as this growth potential has been obscured by the region’s specific relative vulnerabilities to the pandemic crisis. The broadening of the investment mandate will assist in this process by increasing the opportunity set as well as diversifying the portfolio by reducing concentration risk, and lowering country and political risk whilst still providing an attractive level of income for our Shareholders.
We continue to believe that potential within the energy sector remains limited, particularly against a backdrop of lower oil prices stemming from reduced global demand for fossil fuels. However, there are many interesting alternative options across various sectors elsewhere in the investment universe, such as technology and consumer names.
Regional economies in the Middle East continue to diversify away from hydrocarbons, whilst improvements in market liquidity and transparency have helped strengthen the investment case. In South Africa, appealing demographics and continued structural reform should help increase the country’s economic potential and provide exciting investment opportunities for the portfolio.
The Board continues to take note of improving ESG standards across the EMEA region and welcomes the increased role our Company can play in influencing corporate decision-making and promoting positive change via engagement with the companies in which we invest.
Whilst in the near term market volatility is likely to remain heightened, a combination of improving earnings growth and receding risk should help to improve the outlook for the EMEA region moving forward, helping to deliver superior risk adjusted returns to our Shareholders.
Frances Daley
Chairman
9 December 2020
Business Model and Strategy
Business Model and Strategy
The Company has no employees and the Board is comprised of Non-Executive Directors. The day-to-day operations and functions of the Company have been delegated to third-party service providers, which are subject to the ongoing oversight of the Board. In line with the stated investment philosophy, the Manager takes a bottom-up approach, founded on research carried out using the Manager’s own internal resources. This research, which has a strong focus on environmental, social and governance issues, enables the Manager to identify what it believes to be the most attractive stocks in EMEA markets. Further information can be found below.
The Company’s Investment Objective and Policy was changed on 13 November 2020, following approval from Shareholders in a general meeting. Further details can be found below.
Purpose, Values and Strategy
The Company’s primary purpose is to meet its investment objective to deliver capital growth, principally through investment in emerging and frontier equity securities listed or traded on EMEA markets. To achieve this, the Board uses its breadth of skills, experience and knowledge to oversee and work with the Investment Manager, to ensure that it has the appropriate capability, resources and controls in place to actively manage the Company’s assets to meet its investment objective. The Board also select and engage reputable and competent organisations to provide other services on behalf of the Company.
The Company’s values focus on transparency, clarity and constructive challenge. The Directors recognise the importance of sustaining a culture that contributes to achieving the purpose of the Company that is consistent with its values and strategy. Further detail on culture can be found below.
Discount Control Mechanism
On 15 December 2016, as part of its ongoing approach to discount management, the Company announced the implementation of a policy whereby it would make a discount and performance-based conditional tender offer for up to 25% of the Company’s issued Ordinary Share capital over the four year period from 1 October 2016 to 30 September
2020. On 5 October 2020, the Board confirmed that the tender offer would not take place as the tender conditions were not triggered.
The Board is aware of Shareholders’ continued desire for a strong discount control mechanism, though also mindful of the need to provide Barings the opportunity to achieve its goal of outperforming its new Benchmark.
With effect from 1 October 2020, the Board approved a new tender offer trigger mechanism to provide Shareholders with a tender offer for up to 25% of the Company’s issued ordinary share capital if:
i) the average daily discount of the Company’s market share capital to its net asset value (‘cum-income’) exceeds 12%, as calculated with reference to the trading of the Company’s shares over the period between 1 October 2020 and 30 September 2025; after 2025; or
ii) the performance of the Company’s net asset value per share on a total return basis does not exceed the return on the MSCI Emerging Markets EMEA Index (net) by an average of 50 basis points per annum over the Calculation Period.
Please refer to the shareholder circular dated 19 October 2020 for further details.
In addition, and in order to reduce the discount, the Board authorises the Company’s shares to be brought on the market, from timetotime, where the share price is quoted at a discount to NAV.
Borrowings and Gearing
The Company may arrange a loan facility to take advantage of investment opportunities. However, it is intended that the Company would only be geared when the Directors, advised by the Investment Manager, have a high level of confidence that gearing would add significant value to the portfolio. The Investment Manager has discretion to operate with an overall exposure of the portfolio to the market of between 90% and 110%, to include the effect of any derivative positions. The Company may use derivative instruments for the purpose of efficient portfolio management (which includes hedging) and for any investment purposes that are consistent with the investment objective and polices of the Company.
Investment Strategy
Please find below a comparison of the investment policy that was adopted throughout the period of the Annual Report and the new investment policy adopted from 13 November 2020.
| Investment Objective to 12 November 2020 | New Investment Objective from 13 November 2020 |
| The investment objective was to achieve long-term capital growth, principally through investment in securities listed or traded on an Emerging European securities market. The Company could also have invested in securities of companies listed or traded elsewhere, whose revenues and/or profits were, or were expected to be, derived from activities in Emerging Europe. | The Company’s new investment objective is to achieve capital growth, principally through investment in emerging and frontier equity securities listed or traded on Eastern European, Middle Eastern and African (EMEA) securities markets. The Company may also invest in securities in which the majority of underlying assets, revenues and/or profits are, or are expected to be, derived from activities in EMEA but are listed or traded elsewhere (EMEA Universe). |
| Investment Policy to 12 November 2020 | New Investment Policy from 13 November 2020 |
| The policy of the Directors is that, in normal market conditions, the portfolio of the Company could consist primarily of diversified securities listed or traded on Emerging European securities markets (including over the counter markets). Equity securities for this purpose included equity-related instruments such as preference shares, convertible securities, options, warrants and other rights to subscribe for or acquire, or relating to, equity securities. The Company may also have invested in debt instruments such as bonds, bills, notes, certificates of deposit and other debt instruments issued by private and public sector entities in Emerging Europe. In addition, Emerging European exposure may have been obtained by indirect means. Investments may, for example, be made in securities of companies listed on securities markets outside Emerging Europe that derive, or are expected by the Directors to derive, the majority of their revenues and/or profits and/or growth from activities in Emerging Europe. The Company may also have invested in other funds in order to gain exposure to Emerging Europe where, for example, such funds afford one of the few practicable means of access to a particular market, or where such a fund represents an attractive investment in its own right. The Company could not invest more than 15% of its gross assets in other UK listed investment companies (including investment trusts). The Company may have from time-to-time invested in unquoted securities, but the amount of such investment was not expected to be material. Furthermore, the Board had agreed that the maximum exposure to unquoted securities should be restricted to 5% of the Company’s gross assets. At the year-end there was one unquoted investment valued at nil in the portfolio. For the purposes of this investment policy the Board had defined Emerging Europe as the successor countries of the former Soviet Union, Poland, Hungary, the Czechia, Slovakia, Turkey, the States of former Yugoslavia, Romania, Bulgaria, Albania and Greece. There was no restriction on the proportion that may had be invested in these countries. In addition, the Board had agreed that up to 15% of the gross assets may be invested in other countries provided that any investments made are companies listed on a regulated stock exchange. The Board had agreed that the maximum value of any one investment should not have exceed 12% of the Company’s gross assets save with the prior written consent of the Board. Where excess occurred due to market movement the manager would notify the Board of this and would have reduced the holding to below 12% within six months. In addition to the above restriction on investment in a single company the Board sought to achieve a spread of risk in the portfolio through monitoring the country and sector weightings of the portfolio. There could be a minimum of 30 stocks in the portfolio. |
The Company intends to invest for the most part in emerging and frontier equity listed or traded on EMEA securities markets or in securities in which the majority of underlying assets, revenues and/or profits are, or are expected to be, derived from activities in EMEA but are listed or traded elsewhere. To achieve the Company’s investment objective, the Company selects investments through a process of bottom-up fundamental analysis, seeking long-term appreciation through investment in mispriced companies. Where possible, investments will generally be made directly into public listed or traded equity securities including equity-related instruments such as preference shares, convertible securities, options, warrants and other rights to subscribe or acquire equity securities, or rights relating to equity securities. It is intended that the Company will generally be invested in equity securities; however, the Company may invest in bonds or other fixed-income securities, including high risk debt securities. These securities may be below investment grade. The number of investments in the portfolio will normally range between 20 and 65. The Company may invest in unquoted securities, but the amount of such investment is not expected to be material. The maximum exposure to unquoted securities should be restricted to 5% of the Company’s gross assets, at the time of investment, in normal circumstances. The Company may also invest in other investment funds in order to gain exposure to EMEA countries or gain access to a particular market, or where such a fund represents an attractive investment in its own right. The Company will not invest more than 10% of its gross assets in other UK listed closed-ended investment funds, save that, where such UK listed closed-ended investment funds have themselves published investment policies to invest no more than 15% of their total assets in other listed closed-ended investment funds, the Company will invest not more than 15% of its gross assets in such UK listed closed-ended investment funds. Whilst there are no specific limits placed on exposure to any one sector or country, the Company seeks to achieve a spread of risk through continual monitoring of the sector and country weightings of the portfolio. The Company’s maximum limit for any single investment at the time of purchase is the higher of 15% of gross assets or the weight of the investment in the comparator benchmark plus 5%, with an upper maximum limit of 20% of gross assets (excluding for cash management purposes). Relative guidelines will be based on the Morgan Stanley Capital International “MSCI” Emerging Markets EMEA Index (net), which will be the index used as the benchmark. The Company may use borrowed funds to take advantage of investment opportunities. However, it is intended that the Company would only be geared when the Directors, advised by the Investment Manager, have a high level of confidence that gearing would add significant value to the portfolio. The Investment Manager has discretion to operate with an overall exposure of the portfolio to the market of between 90% and 110%, to include the effect of any derivative positions. The Company may use derivative instruments for the purpose of efficient portfolio management (which includes hedging) and for any investment purposes that are consistent with the investment objective and polices of the Company. |
| Benchmark to 12 November 2020 | New Benchmark from 13 November 2020 |
| The Company’s comparator benchmark was the MSCI Emerging Europe 10/40 Index (the “Benchmark”). | The Company’s new comparator benchmark (the “New Benchmark”) is the MSCI Emerging Markets EMEA Index (net dividends reinvested). |
Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties. The Board, through delegation to the Audit Committee, has undertaken an assessment and review of the principal risks facing the Company, together with a review of any new risks which may have arisen during the year, including those risks which would threaten the Company’s business model, future performance, solvency or liquidity.
The Audit Committee regularly (on a six-monthly basis) reviews the risks facing the Company by maintaining a detailed record of the identified risks against an assessment of the likelihood of such risks occurring and the severity of the potential impact of such risks. This enables the Board to take action and develop strategies in order to mitigate the effect of such risks to the extent possible. An analysis of financial risks can be found in note 14 to the Financial Statements below.
Information about the Company’s internal control and risk management procedures can be found in the Audit Committee Report below. The principal financial risks and the Company’s policies for managing these risks and the policy and practice with regard to financial instruments are summarised in note 14 to the Financial Statements.
The Board has identified the following as being the principal risks and uncertainties facing the Company:
| Risk | Mitigation |
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Investment and strategy
There can be no guarantee that the investment objective will be achieved. |
The Investment Manager has in place a dedicated investment process which is designed to maximise the changes of the investment objective being achieved. The Board reviews regular investment reports from the Investment Manager to monitor performance against its stated objective and regularly reviews that strategy. All of the Company’s investments are listed on recognised stock exchanges and the liquidity of individual investments is monitored by the Investment Manager and the Board. |
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Adverse market conditions
Emerging markets can be subject to volatile geopolitical and socioeconomic movements as well as the possible imposition of selective sanctions. This may have an impact on the liquidity of individual investments. Events such as health pandemics or outbreaks of disease may lead to increased short-term market volatility and may have adverse long-term effects on world economies and markets generally. For example, beginning in late 2019, an outbreak of a highly contagious form of coronavirus disease, COVID-19, spread to numerous countries, prompting precautionary government-imposed closures and restrictions of certain travel and businesses in many countries. |
It can be argued that the most effective method of protecting the Company from the effects of country specific or individual stock risks is to hold a geographically diversified portfolio spread across a diversified portfolio of stocks. As at the date of the Report, the Company holds 37 stocks in 7 countries and the Investment Manager has the ability, where necessary, to diversify the portfolio into other regions. The Investment Manager has a clear investment strategy as set out above. Whilst recognising there will be periods when this strategy underperforms the Benchmark and peer group, the Board monitors performance at each Board meeting and reviews the investment process throughout the year. The Investment Manager’s own internal compliance functions provide robust checks that the Investment Manager complies with the investment mandate. |
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S
ize of the Company
The size of the Company could become sub optimal as share buy-backs reduce the Company’s market capital. |
The Investment Manager discusses and agrees with the Board prior to making any buybacks. The Manager and Corporate Broker are in regular contact with major institutional investors and report their views to the Board on a regular basis. |
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Share price volatility and liquidity/marketability risk
The shares of the Company are traded freely and are therefore subject to the influences of supply and demand and investors’ perception of the markets the Company invests in. The share price is therefore subject to fluctuations and like all Investment Trusts may trade at a discount to the NAV. Market shocks, such as those related to COVID-19, could further have a negative impact on the share price. |
The Board seeks to narrow the discount by undertaking measured buybacks of the Company’s shares. The Company and Investment Manager works with the Corporate Broker to seek to increase demand for the Company’s shares. The Board has committed to an increased focus on dividend yield to further enhance the appeal of investing in the Company to increase demand for shares. In addition, as set out above, the Company has renewed the performance triggers, which may provide Shareholders with the opportunity to realise their investment in the Company at NAV less costs should the Company not meet targets relating to average discount or performance over a five year period. |
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Loss of assets
The portfolio includes investments held in a number of jurisdictions and there is a risk of a loss of assets. |
The Investment Manager and Administrator have systems in place for executing and settling transactions and for ensuring assets are safe. In addition, the Company uses an internationally recognised Custodian and sub-Custodians and receives regular reports of assets held, which the Administrator reconciles. The operation of the Custodian is overseen and reviewed by the Depositary which reports regularly to the Board. |
|
Engagement of third
-
party
service providers
The Company outsources all of its operations to third parties and is therefore reliant on those third parties maintaining robust controls to prevent the Company suffering financial loss or reputational damage. Further, the emergence of health pandemics, such as COVID-19, may have an impact on the operational robustness of third-party service providers and their ability to conduct business as usual. |
The Company operates through a series of contractual relationships with its service providers. In the instance an epidemic and/or pandemic develops internationally, the Investment Manager is able to take proactive steps to address the potential impacts on its people, clients, communities and any other stakeholders they come in contact with, directly or through its premises. This includes suspending all international business and domestic travel. Further, the Investment Manager has performed stress-testing on systems and processes, and is able to operate under a 100% remote working model globally without a degradation in their responsibilities. The Board reviews the performance of all service providers both in Board meetings and in the Management Engagement Committee meeting, where the terms on which the service providers are engaged are also reviewed. The Audit Committee also receives internal controls reports from key service providers. The Board assesses whether relevant controls have been operating effectively throughout the period. |
In addition to the principal risks outlined above, the Board has considered a number of issues that it views as emerging risks. This included a discussion around the ongoing impact of COVID-19, the upcoming implications of the United Kingdom’s withdrawal from the European Union and the longer-term impact of issues such as climate change.
Any emerging risks considered to be of immediate significance will be evaluated, and their potential implications integrated into the above principal risks, as was the case for COVID-19.
The Board and Audit Committee routinely review both the principal and emerging risks, and update as necessary. The principal risks, emerging risks and the monitoring system are subject to a robust assessment at least annually.
Investment Manager
Management Arrangements and Fees
Baring Fund Managers Limited acts as the AIFM of the Company under an agreement terminable by either party giving not less than six months written notice. During the year under review, and under this agreement, the AIFM received a fee calculated monthly and payable at an annual rate of 0.80% of the NAV of the Company, together with any applicable VAT thereon and any out of pocket expenses incurred by the AIFM. With effect from 13 November, this fee was reduced to 0.75% of the NAV of the Company.
There is no performance fee for the AIFM.
The AIFM has delegated the investment management of the portfolio to Baring Asset Management Limited (the “Investment Manager”).
Details of the Investment Manager
The Investment Manager has a team of fund managers who are responsible for the management of the investment portfolio. Matthias Siller, Head of Europe, Middle East and Africa (“EMEA”) at the Investment Manager, is the lead manager and Maria Szczesna and Adnan El-Araby as co-backup managers. Matthias is supported by the wider EMEA Equity Team, which comprises seven experienced investment professionals all of whom have research responsibilities as well as the broader emerging equity professionals based in London, Hong Kong and Taiwan, utilising their diverse local knowledge and experience. The team also draws further support from the rest of the broader equity platform at the Investment Manager, especially the knowledge, expertise and coverage of our three global sector teams: Healthcare, Resources and Technology.
Matthias joined the Investment Manager in 2006 and was appointed Head of EMEA Equities Team in 2016. Matthias is also lead manager for the Company. He began his career in fund management at Raiffeisen Zentralbank Austria in 1997 as a Market Maker/Proprietary Trader in Central & Eastern European Equities and Derivatives. He joined Bawag – PSK Invest as an EMEA equity portfolio manager in 2001 and moved to Raiffeisen Capital Management in 2003, where he was a portfolio manager for Central & Eastern European Equities. Matthias has a Masters degree from Vienna University in Economics & Business Administration. Matthias was awarded the CFA designation in 2006 and speaks fluent German.
Maria is an Investment Manager in the EMEA Equity Team. She is responsible for Financials and Consumer Staples in the region. Maria joined Barings in 2006 from the Polish Embassy in London, where she worked for three years as an economist. Prior to this, Maria worked in corporate finance at Ernst & Young and BRE Corporate Finance (part of Commerzbank Group) in Warsaw. She holds an MA in Economics from the Warsaw School of Economics and was awarded the CFA designation in 2008. Maria is fluent in Polish.
Adnan is an Investment Manager in the EMEA Equity Team. He is responsible for the entire Resource Space, Healthcare & Pharmaceuticals, Tech & Media and Autos within the EMEA region. Adnan joined Barings in 2010 from Legg Mason Capital Management, where he was also an investment analyst. He holds a Bachelor of Commerce degree from St. Mary’s University, Canada and was awarded the CFA designation in 2006. Adnan is fluent in Arabic.
Report of the Investment Manager
Highlights
Our investment philosophy is based on the belief that equity markets are inefficient. We believe these inefficiencies are greatest at the stock level and that over the long-term stock selection can add value in all equity asset classes. Our disciplined bottom-up stock selection process incorporating ESG analysis, macro considerations and a risk aware
portfolio construction process enables us to manage stock specific risks and mitigate volatility inherent in equity markets.
| Key Differentiators | |
| Depth of resource | We have a large and experienced team of emerging markets investment professionals producing proprietary and differentiated company research which drives our stock selection. |
| Five year research horizon | Our research horizon is five years, where we believe market inefficiency is more pronounced, allowing us to readily identify companies with unrecognised growth potential. |
| Incorporation of top-down macro considerations into a bottom-up process | We capture macro risks within our investment process via our unique Cost of Equity, incorporating these risks into our valuation of equities and setting of price targets. |
| Integration of ESG and Active Engagement | ESG analysis helps us to identify risks that are not typically captured through traditional financial analysis. As a result, we have fully embedded ESG into our investment process and, by doing so, ESG influences both our qualitative assessment and cost of equity used to value companies. |
| Proprietary portfolio construction tools | We believe the key to delivering high risk-adjusted returns is through company stock selection and robust risk management. We achieve this through the use of our proprietary in-house portfolio construction tools. |
Market Summary
Your portfolio’s performance over the last year, while often volatile, has been the product of two contrasting halves of market performance. In what was initially viewed as a temporary demand and supply shock for China, the rapid spread of COVID-19 fractured global demand and dramatically impacted economic activity and corporate earnings universally in the first half of this year. This shift brought an abrupt halt to what had previously been a steady climb to new record highs for your Company’s NAV.
As the pandemic spread in March 2020, global markets succumbed to selling pressure, with Emerging European exchanges faring no differently. In a pattern familiar to most equity markets around the world, the initial sharp sell-off was broadly based across all sectors, leaving no company within your portfolio immune to the effects. However, the subsequent recovery proved to be much narrower, with opportunities found in companies that had balance sheet strength and viable business models that were able to adapt to the recessionary environment.
The severity of the COVID-19 shock to the region drove the 22.30% decline in the Company’s NAV which, owing to the diversification of your portfolio, nevertheless outperformed the Benchmark by 0.3%.
COVID-19
Overall, high standards in medical infrastructure combined with the implementation of social distancing measures across Emerging Europe helped countries within the region deal with the immediate medical threat to public health. Economically, unemployment across the region remains a challenge, with numbers expected to rise as government support measures are eventually reduced and corporate stresses become increasingly apparent. In addition, the fiscal and monetary toolbox at the disposal of most emerging market policy makers remains far more limited compared to their developed peers, where markets are more willing to tolerate large budget deficits.
The impact on individual countries remains disparate, and largely dependent on economic drivers. Notwithstanding the negative effects of COVID-19 on global commodity demand and the trade and tourism sectors, several key investment regions in Emerging Europe stand to benefit from the specific circumstances discussed below. This serves to highlight the increasing resilience of the region, and we believe it will ultimately lead to a continuation of its strong economic performance relative to Western European peers.
The ability of the new EU member states of Poland, Czechia, Hungary and Romania to access financing at lower rates stands out in an emerging market context when considering the institutional framework of the European Union. In addition, the financial firepower provided by the European Recovery Fund will strengthen the fiscal effort to jumpstart growth and should spur investment into Emerging European member states, especially within environmental and infrastructure projects.
Away from the new EU member states, Russia’s longstanding commitment to prudent budget planning, a flexible exchange rate regime and an orthodox monetary policy has equipped the authorities to counter the effects of both COVID-19 and the impact of low oil prices on the world’s largest energy exporter. It is our belief that the Russian National Wealth Fund’s ample reserves will provide the government with the financial means required for a broad roll out of support measures. In Turkey, the situation appears more financially constrained, whilst local policy decisions have so far increased the risks of systemic stress. In an effort to bridge the sharp drop in the country’s export revenues, caused predominantly by a weakened tourism sector, the government has sponsored high levels of lending.
This has occurred primarily via state owned banks, which have fueled local household consumption via debt, leading to rising imports and a larger current account deficit. While headline sovereign debt levels remain comparably low, Turkey’s lack of foreign exchange reserves and its dependence on short term external debt allows little margin for error. This reduces investor confidence below the levels that would otherwise be consistent with the country’s long-term growth potential.
Dividends
One of the main differentiating factors for Emerging European equities has been the resilience of dividend payments, exemplified by Russian companies, which make up a substantial proportion of your portfolio. We have regularly highlighted their improvements in corporate governance standards, a development that contributed substantially to the strong performance of the Russian market in our view. Considering the significant negative impact COVID-19 had on companies’ earnings, it is nothing short of remarkable to see Russian companies remaining committed to dividend payments, often substantially increasing payout ratios to counterbalance sharp drops in profits. The Russian share of the Company’s overall revenue has grown steadily over the years, and more broadly, dividend receipts across most markets have increased, contributing to a steady growth in income for the Company. Whilst over the past year this trend has been interrupted, with Russian dividend revenues falling by roughly 10% (in USD terms), comparatively, most countries globally have experienced a much more pronounced decline. This has largely been due to the sharp economic realities of falling cash flows or regulatory intervention, seen most prevalently within the banking industry. An example of this resilience within your portfolio is Sberbank, which became one of the very few European banks to distribute a dividend from 2019 profits (translating into an 8%+ yield).
Gearing
The use of gearing has been a highly successful strategy employed by the Company over recent years, serving to support both growth and income for our Shareholders. However, following the significant market correction experienced in March 2020, the Board agreed with our recommendation to remove the gearing facility on 7 April 2020. This change in approach followed the rise in volatility in your portfolio, which was amplified by the use of gearing. Over
the period, we observed correlations between assets significantly increase in reaction to heightened market volatility, lowering our ability to diversify risk away and mitigate market impacts. Whilst the environment continues to remain fluid, we believe removing the gearing will support capital preservation of the Company. We continue to evaluate market conditions and, in line with the strategy of the Company, will look to utilise leverage to enhance returns where we recognise value to do so.
Russia
The Russian equity market, by far the largest regional component of your portfolio, highlighted better than any other market the inherent potential of Emerging European stocks. Here we continue to recognise flexible business models led by strong and diverse management teams, which have successfully adapted amid the effects of COVID-19. We note that whilst the overall Russian index registered a negative return in US dollar terms, this remains concentrated within the energy sector.
Away from energy, the portfolio benefitted from the strong performance of a diverse range of holdings across numerous sectors, such as consumer, metals and mining, telecommunication and the internet sectors, which offered a welcome haven for your Company’s capital. Yandex, Russia’s largest internet search engine and Mail.Ru, which owns Russia’s largest social media and gaming platform, have been amongst the strongest relative performers. This, in our view, is a reflection of the long-term structural growth opportunities that exist for both companies, as consumers and businesses embrace new technologies and behaviour continues to evolve from offline to online. Within telecommunications, MTS, one of Russia’s leading telecoms providers also benefitted from increasing demand for digitalisation and data consumption.
Within financials, Russian online bank Tinkoff was one of the best performers, helped by an impressive set of quarterly earnings that further highlighted the strong growth prospects for the company’s innovative business model. Within metals and mining, Russian gold miner Polyus also outperformed as the market environment saw gold respond strongly, whilst the company’s position as a low cost producer alongside its high quality assets made this a best in class offering.
Economic and Political Background
In a market that has historically been influenced by its often-turbulent international relations, Russia proved to be a relatively stable investment environment over the period. Whilst political risks persist, we believe that the opportunities found within Russia’s equity market, shaped by the country’s solid balance sheet and commercial attitude in key sectors, continue to set it apart within the context of global emerging markets.
This year’s dramatic events across energy markets that culminated in a sharp downward fall in prices, threw many oil exporting countries into economic and political turmoil. Russia, as one of the largest global energy exporters, has long since prepared for a low oil price environment. Through a substantial build-up of its currency reserves and the implementation of a counter cyclical fiscal policy, Russia is able to support budget spending during periods of lower prices, while saving extra revenues when prices are higher. Despite the trough in energy demand over the period, the country was able to deliver a marginal trade surplus while enabling the government to make use of valuable fiscal firepower. In support of economic activity, the Russian government has remarkably championed the private sector whilst avoiding traditional support mechanisms such as infrastructure spending. By taking this approach, the government looks to stimulate both direct and indirect employment, boost consumption and foster further development and ultimately higher growth. This initiative also looks to take aim at the entrenchment of low inflation in Russia and its potential negative impact on wages.
In what we recognise as a positive development, President Putin’s decision to promote the able bureaucrat Mikhail Mishustin to Prime Minister was an indication that the country continues to pursue a path of increased efficiency and fiscal prudence. Having earlier succeeded in digitalising Russia’s tax system, thereby substantially reducing tax avoidance and boosting budget revenues, the technophile Prime Minister’s influence can be seen on the implementation of a tax holiday for the technology sector, aimed at increasing investment. In addition, the overall tax burden for the mining and energy sectors increased, with tax privileges revoked from January 2021 for older and more
heavily polluting oil fields. In an environment of depressed demand and the real possibility of carbon taxes attributed to Russia’s main export markets, we believe it was a prudent decision to promote the low cost, low carbon production in recently developed fields rather than granting tax incentives to less efficient and higher CO2 emitting oil fields.
Investment Strategy
Over the year Russian oil stocks have consistently outperformed their global peers, driven by efficiency gains, improving corporate governance and rising dividend payments. As we look ahead, we are increasingly of the opinion that further improvements will be limited in nature. Without idiosyncratic developments driving these companies, the sector’s overall performance has become increasingly correlated to global energy markets, diluting the sector’s very distinct investment case. In response, we reduced our exposure by selling positions in the Russian oil company Lukoil, the state-controlled gas behemoth Gazprom and LNG producer Novatek.
Within the telecommunication sector, we rotated out of our position in Russia’s largest mobile operator, MTS, into parent holding company Sistema. Sistema has grown to occupy a dominant market position in Russian multi-format e-commerce, alongside the success of another of its subsidiaries Ozon, which is often recognised as the “the Amazon of Russia”. Amongst retailers, we added the Russian supermarket chain Magnit to our portfolio, while trimming our exposure to rival X5. This followed the successful implementation of Magnit’s turnaround plan, through which it has been able to expand margins by streamlining the business, release working capital and accelerate store rollouts.
The stellar performance of gold prices in recent months, a reaction to expectations of lower interest rates, has sent Russian mining shares higher. Within your portfolio, this has substantially increased the weight of our holding in Russia’s largest gold producer, Polyus. We believe that the company’s unique growth profile via its Sukhoi Log exploration project in the Irkutsk region in Russia’s Far East provides further potential for share price appreciation, independent of gold price increases.
Turkey
In Turkey, a combination of credit-induced growth, unorthodox Central Bank policy and an expansionary fiscal stance kept the Turkish Lira under constant pressure. The currency declined 36% versus the US Dollar over the period, which in turn undermined stock performance and limited the positive effects that the sharp drop in energy prices would have otherwise had on inflation expectations.
Turkey is a major Mediterranean tourist destination, and this increases its economy’s vulnerability to COVID-19. Despite this, Turkish companies have demonstrated remarkable resilience and flexibility in the face of adverse economic conditions, a trait that should bode well for the country’s economy over the medium term.
Against this challenging backdrop, the portfolio’s exposure to Turkish equities detracted from relative performance over the period. Turkish banks were notably weak, as the sector struggled in the face of macroeconomic headwinds and, as a result, our positions in Garanti and Yapi Kredi both underperformed. In contrast, the automotive manufacturer Tofas was one of the better performers over the period, driven by an increase in demand post lockdown.
Economic and Political Background
The country’s current account deficit remains at the core of its economic challenges and is the most accurate indication of policy shortcomings. Whilst the significant drop in energy prices benefits Turkey as one of the largest importers globally, sharply falling tourism revenues and expansionary fiscal policy via state owned banks have led to sustained pressure on the currency and a fall in foreign exchange reserves. The persistent current account deficit despite a 30% devaluation of the Turkish lira in the year to date indicates that even now the currency remains overvalued. The selling pressure we have seen from investors across Turkish equity and bond markets is a reflection of this view.
At first glance, Turkey’s economic performance this year looks to be resilient. Credit expansion helped stabilise economic activity when most needed, resulting in only a very small economic contraction over the year so far. However, we remain concerned that improvements in economic activity going forward will rely on increased consumer credit, suggesting a return to the boom-bust cycle that is now common for the Turkish economy.
Additionally, difficulties in attracting foreign direct investment have been compounded by the country’s involvement in various geopolitical events across the region. The decision taken this year by Volkswagen to shelve its planned investment into Turkish production facilities is symbolic of the increasingly distracting nature Turkish politics has on the country’s economic potential.
Despite these challenges, it is our belief that the country’s flexible companies, gifted entrepreneurs and favourable demographics provide Turkey with a strong platform for future economic growth. At the same time, its position as a net energy importer allows the country to benefit from sustainably low energy prices.
Investment Strategy
Turnover of the portfolio’s holdings in Turkey was somewhat higher than elsewhere, reflecting the greater volatility of the underlying market. Turkcell was a good example of this; we added to our position in March 2020 to reduce our exposure to the banking sector, in favour of the superior risk-return profile of Turkey’s leading mobile phone operator. By June 2020, the company had announced a radical overhaul of its shareholder structure via the sale of Telia’s minority stake to the Turkish Sovereign Wealth Fund. The stock reacted positively and rapidly appreciated to our target price, which prompted us to sell the position.
Amongst the portfolio’s consumer names, we sold out of Turkish hard discounter BIM, after the stock outperformed in response to management’s near perfect execution of their business plan. We also decided to exit our position in white goods manufacturer Arcelik (producer of the Beko-branded household appliances) in favour of an investment in its parent holding company, Koc Holding. Koc, widely regarded as Turkey’s best run conglomerate, possesses an exciting portfolio of industry leading businesses with strong balance sheets and compelling growth prospects. Market volatility over the period saw the company’s share price deviate substantially from the value of its underlying portfolio, which created an attractive entry point to purchase the stock.
In the financials sector, we sold Vakifbank in favour of Garanti, which we believe to be better positioned to withstand any rise in non-performing loans as a result of a tougher economic backdrop.
Poland
The divergence between the underwhelming performance of the Polish stock market and the country’s robust economy, while disappointing, remains partly a result of its political make-up. The ruling conservative PiS party’s preference for a “big state” approach favours substantial and growing political influence in support of key sectors and rising corporate taxation, often at the expense of the private sector. Whilst COVID-19 has exacerbated these trends, the underlying agility of private sector companies paired with the overall critical mass of the economy and stock market liquidity remain substantial positive factors. These, in our view, will eventually translate into superior earnings
growth and increased investor attention.
In Poland, stock selection contributed positively to relative returns over the year, driven predominantly by our holding in game developer CD Projekt. The company outperformed following a record-breaking set of quarterly results and was further helped by investors reacting to the eagerly anticipated launch of new gaming franchise Cyberpunk 2077. In contrast, Polish financial names were weaker, owing predominantly to falling interest rates, as a result, our position in insurance group PZU detracted.
Economic and Political Background
Over the past year, the Polish political landscape has been dominated by parliamentary elections held in October and presidential elections in June. Parliamentary elections resulted in the ruling Law and Justice Party (PiS) retaining its majority in the Sejm, the lower chamber of the Polish parliament, but the Senate (upper chamber) was lost to the opposition, somewhat surprisingly. This fuelled hopes amongst the opposition that the presidential election would provide an opportunity to counterbalance PiS’s dominance in Polish politics. Whilst the COVID-19 outbreak led to a postponement of the elections from May to June 2020, it allowed for the emergence of a credible opposition contestant in the form of the popular Warsaw mayor Rafal Trzaskowski. The highly emotional contest laid bare the country’s stark polarisation and partisan politics present in society. Ultimately, the incumbent President, Andrzej Duda managed to eke out a slim majority in the second round of elections.
Economically, Poland has been a picture-perfect success story for years, benefitting from a vibrant entrepreneurial base, a domestic economy of critical size and generous EU grants supporting various infrastructure developments. This has helped rapidly increase living standards and household income at a time when salaries have stagnated across most parts of Europe. The resulting increase in consumption and investment has helped to soften the blow to the Polish economy from the effects of COVID-19. Furthermore, as an EU member Poland benefits from the European Union’s position as a backstop to liquidity risks whilst, at a sector level, the Green Deal proposed by the European Commission will provide a framework to re-engage on Poland’s energy policy, creating opportunities for jobs and investment.
Investment Strategy
We adjusted our exposure to the financials sector over the period, selling out of Santander Bank Polska on concerns related to their exposure to the SME segment.
In the communications services sector, we sold our holding in Polish mobile network operator Play, after the share price rallied considerably on news that French telecoms operator Iliad had made an offer to acquire the company at a substantial premium to market value. Amongst the portfolio’s consumer names, we sold Polish shoe retailer CCC on concerns that sustained economic lockdowns would materially alter the company’s business outlook.
Other Regional Markets
Stock exchanges in Hungary and Czechia both underperformed the wider region over the period, driven by concerns related to the impact of the COVID-19 on their respective economies. Against this backdrop, the portfolio’s underweight exposure to Hungary helped contribute to relative performance over the period.
Similarly, Greek equity markets underperformed and ended the period as one of the worst performers across the region. This was despite the proactive approach taken by the government in announcing measures to support the economy and tackle the spread of COVID-19. The banking sector was amongst the hardest hit, as markets attempted to price in the rise in non-performing loans as a result of the economic disruption.
In contrast, Romanian equities did remarkably well over the last year, outperforming most markets in the region to end flat in USD terms. Our position in BRD, one of the largest Romanian banks, performed strongly over the period, owing in part to these improvements in investor sentiment related to the country’s future economic growth prospects.
Economic and Political Background
In our view, the underperformance of Hungarian equities exemplifies the limitations of the smaller markets in Europe. Notwithstanding the often-criticized domestic political backdrop, the government’s business friendly approach has benefitted the stock market, but has not resulted in the flotation of domestically oriented companies on the exchange. This has resulted in a number of Hungarian blue chips that are now largely dependent on sectoral trends and often operate in structurally challenged industries.
In contrast, Romanian equities performed strongly despite suffering the same economic effects of COVID-19 as their Central European peers. We believe this reflects the market’s expectation of a pivot to a more transparent, pro-business policy in the upcoming parliamentary elections, which enabled investors to take an increasingly optimistic view on the country’s economy over the medium term.
Investment Strategy
We adjusted our exposure to the financials sector over the period, selling out of Hungarian based OTP at the start of the year following a period of share price appreciation. We also initiated a position in Czech bank Komercni, based on the company’s attractive valuation and healthy capitalisation levels that should help provide for substantial dividend returns going forward. We also reduced our exposure to Greek banks Alpha and NBG on asset quality concerns.
In the energy sector, we exited our position in Budapest-listed MOL, Central Europe’s largest refiner and oil product retailer. In our view, the positive dynamics in non-fuel sales have largely been reflected in the share price, whilst softening refining margins might lower earnings expectations.
Elsewhere, we initiated a position in Greek hypermarket Jumbo, a company with a strong balance sheet and management team that have been able to deliver steady growth via a business model that has proven to be resilient against macroeconomic challenges.
Outlook
Managing the COVID-19 pandemic and protecting public health will be the defining moments for society in the near future. The ability to overcome the economically scarring effects remain crucial in reviving economic activity and restoring confidence across households and businesses alike.
The social and economic fallout from COVID-19 has further highlighted a number of global deficiencies, such as increasing social inequality, environmental pollution, armed conflicts and the polarisation of public opinion. Here, we welcome the increased responsibility the investment community is taking concerning the environmental, social and governance implications of company decision making. At Barings, we continue to follow our established investment process, which incorporates in-depth ESG analysis into our overall valuation process, whilst engaging with companies to effect positive behavioural change and increase overall standards.
At an individual stock level, we have witnessed extreme divergences in performance between high growth companies and their mature counterparts. Specifically, we continue to highlight the limited potential we see in the energy sector, especially as we deem the positive effects of improving transparency and corporate governance standards to
be largely exhausted. The new broader investment focus will enable the Company to reduce the portfolio’s exposure to hydrocarbons and access exciting growth opportunities in financial, consumer and technology sectors in particular. It will increase the potential for bottom-up stock selection to drive returns and create a wider global investment universe in some of the world’s most dynamic markets.
We are, therefore, delighted that Shareholders approved the Board’s recommendation to broaden the scope of your Company and move to an all-encompassing Emerging EMEA stock market strategy.
The investment case for EMEA remains strong. Underlying dividends have been impacted less by COVID-19 than within developed Europe. EMEA countries generally have low debt at government, corporate and household levels and are therefore less correlated with global currency and interest rate movements. Their economies are also predominantly domestically focused and relatively uncorrelated with each other.
We believe that the larger market of Emerging Europe, the Middle East and Africa will provide a greater investment opportunity set and positive diversification effects that will contribute to superior risk adjusted returns going forward.
Middle Eastern stock markets registered good relative returns over the period, despite the sharp drop in oil prices. In Saudi Arabia, the inclusion in 2019 of the country’s equity market into MSCI benchmark indices, combined with reform and liberalisation of the Saudi stock exchange, remain key positive drivers, helping to increase retail sector participation and institutional interest. Looking ahead, we view the positive performance of the Middle East as a vote of confidence in policy makers as they attempt to diversify regional economies and reduce their dependence on hydrocarbons. Additionally, increased participation of local investors highlights the potential of retail savings against a backdrop of falling interest rates. We believe that the resulting liquidity effect will help further increase the appeal of the region and widen the opportunity set.
In South Africa, the country’s young demographics combined with the ongoing IMF led drive for structural reforms, anti-corruption measures and budget consolidation, will help raise the country’s inherent economic growth potential and increase transparency for investors. Further, the successful mandate of the South African Reserve Bank has anchored inflation expectations, increased confidence in the Rand and lowered the cost of capital, helping to support stock market valuations.
Whilst in the short-term, markets globally are likely to remain volatile, we believe that the underlying potential of Emerging European, African and Middle Eastern economies remains intact and offer attractive investment opportunities across various sectors and geographies.
The broadening of the investment mandate will provide an opportunity to diversify the portfolio by reducing concentration risk and lowering political and country-based risk, whilst maintaining an attractive level of income. Further, the expanding middle class and increasing internet penetration rates across EMEA, combined with historically low levels of e-commerce and the shift by consumers from offline to online consumption, provide exciting growth opportunities for your portfolio across a number of sectors.
While the effects of COVID-19 are tough to bear for societies, and business models remain challenged, over the medium term, a combination of improving earnings, receding risk and attractive valuations should create a positive backdrop for Emerging European, Middle Eastern and African equity markets. We are confident that, in this environment, your portfolio will continue to deliver superior risk-adjusted returns whilst providing an attractive level of income to Shareholders.
Review of Top Ten Investments
at 30 September 2020
| Investee Company | Sector |
Market value £000 |
% of investment portfolio |
% of
relative to Benchmark |
Company comment |
| Sberbank | Financials | 8,474 | 9.9 | 2.0 | Russia’s largest bank, successful implementation of modernisation strategy offers scope for further improvement of profitability. |
| Lukoil Holdings | Energy | 6,006 | 7.0 | -1.0 | High yielding Russian oil stock with potential for further dividend growth. |
| Gazprom | Energy | 5,201 | 6.1 | -2.5 | Russia’s largest oil and gas producer, offering substantial dividend distribution. |
| Norilisk Nickel | Materials | 5,051 | 5.9 | 1.6 | Russia’s largest metals and mining stock and one of the biggest global palladium producers. |
| Polyus | Materials | 3,798 | 4.5 | 1.8 | One of the largest producers of gold globally, boasting a vast, easily accessible resource base. |
| CD Projekt | Consumer Services | 3,768 | 4.4 | 1.7 | One of the world’s most successful computer game producers with the ability to expand and diversify its current franchises to become a multi title producer. |
| Yandex | Technology | 3,751 | 4.4 | -3.1 | Russia’s largest internet search engine, using its dominant market position to expand to capture advertising spend whilst expanding into areas such as ride hailing. |
| Mail.RU | Technology | 3,700 | 4.3 | 4.4 | Russia’s largest internet business, evolving e-commerce, leading Russian social networks and instant messaging services. |
| AO Taftnet | Energy | 3,505 | 4.1 | 1.0 | A high yielding Russian energy company which is positioned to benefit from increasing output form its assets. |
| Novatek | Energy | 3,281 | 3.9 | -0.6 | Largest independent gas producer in Russia. Liquefied Natural Gas strategy provides significant growth potential. |
Investment Portfolio
at 30 September 2020
|
Investee company |
Primary country of listing or investment |
Market value £000 |
% of investment portfolio |
|
| 1 | Sberbank | Russia | 8,474 | 9.94 |
| 2 | Lukoil Holdings | Russia | 6,006 | 7.04 |
| 3 | Gazprom | Russia | 5,201 | 6.10 |
| 4 | Norilsk Nickel | Russia | 5,051 | 5.92 |
| 5 | Polyus | Russia | 3,798 | 4.45 |
| 6 | CD Project | Poland | 3,768 | 4.42 |
| 7 | Yandex | Russia | 3,751 | 4.40 |
| 8 | Mail.RU | Russia | 3,700 | 4.34 |
| 9 | AO Taftnet | Russia | 3,505 | 4.11 |
| 10 | Novatek | Russia | 3,281 | 3.85 |
| 11 | PZU | Poland | 3,203 | 3.76 |
| 12 | XF Retail Group | Russia | 3,187 | 3.74 |
| 13 | Magnit | Russia | 3,042 | 3.57 |
| 14 | PKO Bank Polski | Poland | 2,631 | 3.09 |
| 15 | AFK Sistema | Russia | 2,238 | 2.61 |
| 16 | Mobile Telesystems | Russia | 2,049 | 2.40 |
| 17 | Turkiye Garanti Bankasia | Turkey | 2,011 | 2.36 |
| 18 | TCS | Russia | 1,961 | 2.30 |
| 19 | Moscow Exchange | Russia | 1,799 | 2.11 |
| 20 | Komercni Banka | Czechia | 1,380 | 1.62 |
| 21 | Koc Holding | Turkey | 1,304 | 1.53 |
| 22 | Taftnet | Russia | 1,105 | 1.30 |
| 23 | Globaltrans | Russia | 1,069 | 1.25 |
| 24 | National Bank of Greece | Greece | 1,044 | 1.22 |
| 25 | Ulker Biskuvi Sanayi | Turkey | 1,028 | 1.20 |
| 26 | Detsky Mir | Russia | 1,001 | 1.17 |
| 27 | Tofas Turk Otomobil Fabri | Turkey | 989 | 1.16 |
| 28 | KGHM Polska Miedz | Poland | 818 | 0.96 |
| 29 | Turkiye Petrol Rafinerileri | Turkey | 786 | 0.92 |
| 30 | EN+ Group International | Russia | 782 | 0.92 |
| 31 | Human Soft | Kuwait | 755 | 0.89 |
| 32 | Yapi Kredi | Turkey | 740 | 0.87 |
| 33 | BRD-Groupe Societe General | Romania | 622 | 0.73 |
| 34 | Alpha Bank | Greece | 516 | 0.60 |
| 35 | Jumbo | Greece | 511 | 0.60 |
| 36 | GMK Norilskiy Nikel | Russia | 437 | 0.51 |
| 37 | Allegro.EU | Poland | 29 | 0.03 |
| Total investments | 83,572 | 97.99% | ||
| Net current assets | 1,710 | 2.01% | ||
| Net assets | 85,282 | 100.00% |
Investment Process
We believe that equity markets are inefficient and that consistently applied fundamental bottom-up company analysis can identify mispriced opportunities. Fundamental research is the cornerstone of our approach in which we identify mispriced investment opportunities which possess Growth at a Reasonable Price (“GARP”) characteristics. GARP investing incorporates elements of growth and value investing, focusing on companies which have sustainable growth potential but do not demand a high valuation premium.
To each company we research, we apply a consistent, analytical and qualitative framework applied through our Company Scorecard (see below) which focuses on three factors: Growth, Valuation and Quality. By applying a consistent research approach, we can evaluate companies and determine relative attractiveness across countries and sectors within the region.
Fundamental Research – Consistent Company Scorecard
A consistent research approach helps evaluate companies and determine attractiveness by country and sector
| Key Inputs | Company meetings |
| Sector/Industry/Macro Dynamics | |
| Five Year Proprietary Financial Forecasts | |
| ESG Considerations |
| GROWTH | QUALITY | VALUATION |
| • Historical – last three-years’ earnings growth | • Franchise – competitive advantage, efficiency, stability | • Barings Valuation Approach – five-years discounted by our Cost of Equity (“COE”) to set price target and determine upside |
| • Near-term – next 12-months’ earnings growth | • Management – competence, commitment and alignment with shareholder interest | |
| • Long-term – next five-years’ forecast earnings growth | • Balance Sheet – cash flow, working capital, capital structure analysis |
| COMPANY SCORE [1-5] |
| Each of the above nine factors are scored 1-5 and equally weighted |
Each company is rated on a scale of 1-5, with a 1 score being the most favourable and a 5 score, the least attractive.
Source: Barings
Whilst our investment process is focused on company analysis, also factors in the effects of macro influences such as the economic outlook and political change as well as Environmental, Social and Governance (“ESG”) issues. We integrate these considerations through our unique Cost of Equity when we value companies.
Integrating Macro - Cost of Equity Used in Equity Valuation
A company’s equity value is discounted by a company-specific cost of equity to determine a price target and upside from current market prices
| “SYSTEMATIC RISK” | “IDIOSYNCRATIC RISK” | |||
| Risk inherent to the entire market | Risk that is particular to a company | |||
| Cost of Equity (Discount Rate) = | Risk Free Rate + | Equity Risk Premium + | Stock Specific Risk + | ESG |
| Reflecting: | Reflecting: | Reflecting: | Reflecting: | |
| • Country economic factors | • Economic classification | • Sector risk | • Our assessment of ESG | |
| • Political risk | • Regulatory risk | Can add ( -1% to 2% to COE)* | ||
| • Social risk | • Business model cyclicality | |||
| • Credit risk | • Earnings volatility and visibility | |||
| • Balance sheet structure | ||||
| Can add (0 to 2% to COE)* | ||||
Allows price target comparisons across sectors and geographies
We consider ESG factors among some of the most important variables that can impact an investment’s risks and returns over time. As part of our overall commitment to delivering attractive returns, we endeavour to construct portfolios that meet our clients’ risk-return requirements and this includes incorporating ESG criteria into our investment process. At Barings, ESG considerations influence both the company score we allocate to the companies we research and the cost of equity in order to capture the specific risks and inherent attractions highlighted by the company’s own ESG approach. As part of our initial and ongoing analysis, our investment professionals meet with management teams, visit operational facilities and analyse industry competitors to better understand potential risks, including ESG-related issues. This analysis assists in the formation of our own assessments where we look for signs of improvement or deterioration, relying on our own research, rather than taking static recommendations from “ESG Specialists”. Our assessment is based on the evaluation of nine key topics in order to arrive at a view on a company. The final rating is based on how a company performs across each of these areas.
Additionally, we believe in engaging with companies, rather than blanket exclusions of entire sectors. Through this approach we not only believe we have a greater chance of successfully effecting change, but also a greater chance to enhance the performance of our investments, for the benefit of our clients.
Barings has been a signatory to the United Nations Principles for Responsible Investment (PRI) initiative since January 2014. As a signatory, we have publicly committed to adopt and implement the UN PRI’s six aspirational Principles for incorporating ESG issues into investment practice. In the UN PRI’s 2020 Assessment Report our equity business scored an A+ for ESG integration and A for our approach to active engagement.
Incorporating ESG as part of our fundamental research due diligence
A dynamic assessment of ESG is integrated in all aspects of our fundamental research process
| ESG is important | ESG analysis uncovers risks not apparent from traditional fundamental analysis Highlights more sustainable business practices and investment opportunities |
Nine Key Topics | ||
| Our dynamic approach | We look for signs of improving or deteriorating ESG Standards | Sustainability of the Business Model (Franchise) |
• Employee Satisfaction | |
| Proprietary assessment | ESG due diligence is based on our company knowledge and regular management interaction Each company is evaluated on nine key ESG topics scored from “Unfavourable” to “Exemplary” Our assessment impacts the Barings COE valuation and Company Scorecore We engage with companies on material ESG issues. |
• Resource Intensity | ||
| • Traceability/ Security in Supply Chain | ||||
| Corporate Governance Credibility (Management) |
• Effectiveness of Supervisory/ Management Boards | |||
| • Credibility of Auditing Arrangements | ||||
| • Transparency & Accountability of Management | ||||
| Hidden Risks on the Balance Sheet (Balance Sheet) |
• Environmental Footprint | |||
| • Societal Impact of Products/Services | ||||
| • Business Ethics |
| UNFAVOURABLE | NOT IMPROVING | IMPROVING | EXEMPLARY |
| ESG factors are rated based on how the company is refining their focus on the above factors, and given a score which impacts Cost of Equity | |||
We take the ideas generated through our research processes to construct a portfolio which targets superior risk- adjusted returns. Risk management is central to our investment process and is part of our portfolio construction and risk management process. We employ a range of proprietary tools and models to fully identify all risks within the portfolio.
We take a multi-layered approach to fully understand how each position contributes to the stock specific and factor risk within the portfolio. This begins with our fundamental bottom-up research to identify all potential risks associated with each individual company. In addition our proprietary COE aims to capture not only stock specific risk, including ESG, but also systematic risk to ensure that the expected return fully compensates for any potential risks.
In considering ideas for potential inclusion into our portfolios, we consider two key questions:
1. How does the investment decision impact the portfolio’s expected return?
2. How does the investment decision impact the portfolio’s risk characteristics?
The assessment of the risk and return profile of the fund is aided by the use of our proprietary portfolio construction tools. This approach assists in pre-trade analysis to identify which companies have the greatest scope to improve the risk and return characteristics of the portfolio while additionally aiding position sizing. Furthermore, these tools also empower our portfolio managers to minimise unintended factor risk while maximising the stock specific risk contribution to ensure that our bottom-up ideas drive investment performance. Once invested, our investment professionals continue to monitor each company to ensure that our conviction remains intact and that an investment’s risk and return profile remains attractive relative to other opportunities available in the market.
Baring Asset Management Limited
9 December 2020
Corporate Review
The Strategic Report above and the Audited Financial Statements has been prepared in accordance with the requirements of Section 414 of the Companies Act 2006 and best practice. Its purpose is to provide information to the shareholders of the Company and help them to assess how the Directors have performed their duty to promote the success of the Company, in accordance with Section 172 of the Companies Act 2006.
Company and Status
The principal activity of the Company is to carry on business as an investment trust. The Company intends at all times to conduct its affairs so as to enable it to qualify as an investment trust for the purposes of Sections 1158/1159 of the Corporation Tax Act 2010 (“S1158/1159”). The Directors do not envisage any change in this activity in the foreseeable future.
The Company is quoted on the London Stock Exchange under the ticker code BEMO. As an investment trust, the Company has appointed an Alternative Investment Fund Manager, Baring Fund Managers Limited (the “AIFM”), to manage its investments. It has also appointed third-party service providers to manage the day-to-day operations of the Company, whose performance is monitored and challenged by a Board of independent Non-Executive Directors.
The Directors are of the opinion that the Company continues to conduct its affairs so as to be able to continue to qualify as an investment trust.
Dividend Policy
The Company seeks to generate an attractive level of income for Shareholders, and will pay income from capital of up to 1% per annum of NAV when considered appropriate by the Board. The Board believes that this is a sustainable policy that should improve the Company’s appeal amongst investors.
Dividends
An interim dividend of 15 pence per Ordinary Share was declared on 26 May 2020 and paid on 26 June 2020.
The Board recommends a final dividend of 10 pence per Ordinary Share. Subject to Shareholder approval at the AGM, the recommended final dividend will be paid on 5 February 2021 to Shareholders on the register at the close of business on 18 December 2020. The Ordinary Shares will be marked ex-dividend on 17 December 2020.
Buyback Programme
During the year under review, the average discount to NAV at which the Company’s Ordinary Shares traded at was 11.04% (2019: 11.54%) and 163,272 Ordinary Shares were repurchased at a cost of £1,101,000 (2019: 695,747 Ordinary Shares at a cost of £5,293,000). All Ordinary Shares repurchased during the year have been cancelled.
Section 172 Statement
Stakeholders
The Board seeks to understand the needs and priorities of the Company’s stakeholders and these are taken into account during discussions and as part of its decision-making. During the year under review, the Board discussed which parties should be considered as primary stakeholders of the Company and concluded that, as the Company is an externally managed investment trust and does not have any employees or customers in the traditional sense, its key stakeholders comprise its Shareholders, its Investment Manager and Service Providers including; Corporate Broker, Company Secretary, Registrar, Custodian, Auditor and Administrator and, its Investee Companies. But they also take account of the Company’s responsibilities to the environment and the wider community. The section below discusses the actions taken by the Company to ensure that the interests of stakeholders are taken into account.
Shareholders
Continued shareholder support and engagement are important to the existence of the Company and to the delivery of long-term strategy. The Board is committed to maintaining open channels of communication and to engage with Shareholders in a manner which they find most helpful, in order to gain an understanding of the views of Shareholders. These include:
- Annual General Meeting – The Company welcomes and encourages attendance and participation from Shareholders at AGMs. Shareholders have the opportunity to meet the Directors and the Investment Manager and to address questions to them directly. There are presentations on the Company’s performance and the future outlook;
The Board is disappointed that it will not be able to meet Shareholders in person at the forthcoming AGM in January 2021 due to current restrictions on public gatherings to prevent the spread of the COVID-19 virus. The Board is pleased to confirm that it has made arrangements for a presentation from the Investment Manager to be made to Shareholders via a webinar after the AGM. During, and after, this presentation, Shareholders will be able to put questions to the Investment Manager.
Shareholders will also be able to raise questions regarding the business to be considered at the AGM by emailing the Chairman on BEMOChairman@linkgroup.co.uk. Answers to common themes identified will be published on the Company’s website.
- Publications – The Annual Report and Half-Year results are made available on the Company’s website and are circulated to those Shareholders requesting hard copies. These reports provide Shareholders with detailed information on the Company’s portfolio and financial position. This information is supplemented by a quarterly factsheet which is released via the stock exchange.
- Shareholder Feedback – The Board values the feedback and questions that it receives from Shareholders and takes note of individual Shareholders’ views in arriving at decisions which are taken in the best interests of the Company.
The Chairman or the Senior Independent Director can be contacted via either the Company Secretary or the Corporate Broker, both of which are independent of the Investment Manager.
- Investor Relations updates – at every Board meeting, the Directors receive updates from the Corporate Broker on share trading activity, share price performance, the Company’s share register and any Shareholders’ feedback. The Board also review PR activity and analyst’s comments or research reports on the Company.
The Investment Manager
Maintaining a close and constructive working relationship with the Investment Manager is essential for the Board. The Investment Manager aims to achieve capital growth in line with the Company’s investment objective. The Board has a critical role in monitoring the Investment Manager. The Board meets with the Investment Manager at least every quarter, and adopts a tone of constructive challenge.
Further details on the Management arrangements can be found above.
Third-Party Service Providers
The Board maintains regular contact with its key external providers and receives regular reporting from them, both through Board and committee meetings, as well as on an adhoc basis outside of meetings. Their advice and views are routinely taken into account. The Management Engagement Committee formally assesses their performance, fees and continuing appointment annually to ensure that the key service providers continue to function at an acceptable level and are appropriately remunerated to deliver the expected level of service. The Audit Committee also reviews and evaluates the financial reporting control environments in place at the key service provider.
Investee Companies
The Investment Manager engages with the management of these companies on a periodic basis and reports its impressions on the prospects of the companies to the Board. The Directors recognise that the Investment Manager can influence an investee company’s approach to ESG matters, and this forms part of the investment process as detailed above.
The above mechanisms for engaging with stakeholders are kept under review by the Directors and are discussed on a regular basis at Board meetings to ensure that they remain effective.
Board Activities During the Year
Regular items at Board meetings include the review of the Company’s portfolio, performance and the market; investor relations, research and promotions; key risks, operational matters and governance; and compliance with the AIC Code.
Decision Making
Specific Board decisions that have been made during the year included the following:
New Investment Policy
A key strategic decision made by the Board was the change of the Company’s investment objective and investment policy. At the Board’s strategy day, the Board considered and engaged in detailed discussion on the strategy of the Company and how the Company could broaden its appeal to a wider range of investors. The Board sought guidance from its Corporate Broker and Investment Manager. It also sought the views of its largest shareholder on the new investment policy. Proposals were circulated to Shareholders in October 2020 on a change to the investment policy, which was approved by Shareholders at a General Meeting held on 13 November 2020.
New Discount Control Mechanism
In conjunction with feedback from its largest shareholder and the Corporate Broker, the Board, mindful of Shareholders’ continued desire for a strong discount control mechanism, agreed new tender offer trigger mechanisms for the five year period commencing 1 October 2020.
Positioning, Messaging and Secondary Market Liquidity
The Board has engaged Warhorse Partners to undertake research into the Company’s position in the market and its engagement with Shareholders. The Board, with assistance from Warhorse Partners, a specialist consultancy, has approved a marketing proposal to generate further interest in the Company’s shares and improve liquidity.
Compliance with the New AIC Code
In conjunction with the Company Secretary, the Board also reviewed the status of the Company’s compliance with the additional requirements of the AIC Code of Corporate Governance that was implemented in February 2019.
The Board recognises the importance of engaging with its core stakeholders, and of taking account of their interests when taking decisions.
Culture
The Board believes that establishing and maintaining a healthy corporate culture, based on integrity, good governance and openness will support the delivery of its purpose and strategy and is essential both to the reputation of the Company and to its success.
The Company seeks to comply both with the relevant code of corporate governance and with corporate governance best practice. It has a number of policies and procedures in place to assist with maintaining a culture of good governance including those relating to diversity, Directors’ conflicts of interest and Directors’ dealings in the Company’s shares. The Board assesses and monitors compliance with these policies and reviews progress during the annual evaluation process which is undertaken by each Director (for more information see the full Annual Report).
The Board seeks to appoint competent and diligent providers and evaluates their performance on a regular basis as described in the full Annual Report. The Board considers the culture of the Manager and other service providers, including their practices and behaviour, through regular reporting from these stakeholders and in particular during the annual review of the performance and continuing appointment of all service providers.
Continuing Appointment of the Alternative Investment Fund Manager
The Board keeps the performance of the AIFM under continual review. The Management Engagement Committee conducts an annual appraisal of the AIFM’s performance and makes a recommendation to the Board about the continuing appointment of the AIFM. As the AIFM has delegated the portfolio management function to the Investment Manager, the performance of the Investment Manager is also regularly reviewed. The annual review of the performance of the Investment Manager includes consideration of:
- Overall performance and performance compared with the Benchmark and peer group;
- investment resources dedicated to the Company;
- investment management fee arrangements compared with the peer group; and
- marketing effort and resources provided to the Company.
It is the opinion of the Board that the continuing appointment of the AIFM, on the terms agreed, is in the best interests of Shareholders as a whole. The Board is of the view that the AIFM has managed the portfolio well in accordance with the Board’s expectations and has delivered good returns.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the “Going Concern” provision. The Board conducted this review for a period of three years, which was selected because it was considered to be a reasonable time horizon in the context of the Company’s investment portfolio and cost base. Additionally, it was felt that this period was appropriate due to limitations forecasting the longer term revenue generation of the portfolio, as companies across the region continue to face challenges paying dividends due to the impact of COVID-19.
The Directors have carried out an assessment of the Company’s principal and emerging risks, as well as its current position. The principal risks faced by the Company and the procedures in place to monitor and mitigate them are detailed above. Consideration has also been given to the impact of COVID-19, which is discussed both in the Chairman’s Statement and Investment Manager’s Report. The Company’s long term viability assessment is underpinned by the characteristics below:
- the Company has a long term investment strategy, implemented via a consistently applied investment process which is designed to maximise the chances of the investment objectives being met;
- the Company has a portfolio of shares which are listed on regulated markets, many of which are highly liquid, and can be readily realised to help meet liabilities as they fall due. It has been reported by the Investment Manager that the portfolio has sufficient liquidity to meet all requirements with approximately 95% of the portfolio able to be liquidated within five days;
- the Company has no long term debt, and restricts the level of short term borrowings. Please note that as at the year end the Company has repaid in full its loan facility with State Street Bank and Trust Company;
- underlying revenue generation of the portfolio is regularly reviewed and monitored. Whilst COVID-19 has had a significant impact on the ability of companies to pay dividends, it is reasonable to expect a return to underlying earnings growth and therefore revenue growth over the coming years; and
- the Company has recently announced proposals to broaden its investment policy to focus on the whole of Emerging Europe, the Middle East and Africa. This should help to increase the investment opportunity set whilst further diversifying the portfolio and reducing country and sector risk concentrations. It is also expected that the New Investment Policy will allow the Company to maintain an attractive level of income, enabling the Company to remain a true source of income diversification for Shareholders.
The Board have also considered the portfolio’s underlying revenue generation in the context of further market shocks, such as those resulting from the COVID-19 pandemic. In carrying out this assessment, the Board have considered the diversification of the Company’s portfolio, as well as the liquidity profile and dividend coverage of underlying investments. This analysis did not indicate any matters of significant concern.
Based on the above assessment, the Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the coming three years.
Environmental, Human Rights, Employee, Social and Community Issues
The Company does not have any employees and all of the Directors are non-executive and it has outsourced its functions to third-party service providers. As an investment trust, the Company has very limited direct impact on the community or the environment, and as such has no environmental, human rights, social or community policies. The Company has therefore not reported further in respect of these provisions.
The Company aims to conduct itself responsibility, ethically and fairly. ESG factors are considered by the Investment Manager as part of its investment process, where appropriate. Further information can be found in the Investment Manager’s Report above, which is supported by the Board. A key consideration in the decision to change the investment policy was the move away from hydrocarbons in the portfolio.
The Board supports the Investment Manager in its belief that good corporate governance will help deliver sustainable long-term shareholder value. It therefore follows that in pursuing shareholder value, the Investment Manager will implement its investment strategy through proxy voting and active engagement with management and Boards. Please see the full Annual Report for further information.
This Strategic Report has been approved by the Board and signed on its behalf by:
Frances Daley
Chairman
9 December 2020
Board of Directors
FRANCES DALEY FCA, MCSI – Chairman
VIVIEN GOULD – Non-Executive Director
CHRISTOPHER GRANVILLE – Non-Executive Director
CALUM THOMSON FCA – Non-Executive Director and Audit Committee Chairman
NADYA WELLS – Non-Executive Director and Senior Independent Director (“SID”)
EXTRACTS FROM THE DIRECTORS’ REPORT
Share Capital
As at 30 September 2020, the Company’s total issued share capital was 15,594,232 Ordinary Shares (30 September 2019: 15,757,504), of which the Company held 3,318,207 Ordinary Shares in treasury. The Ordinary Shares held in treasury are treated as not being in issue when calculating the weighted average of Ordinary Shares in issue during the year. All Ordinary Shares repurchased during the year have been cancelled. All of the Company’s Ordinary Shares in circulation are listed on the premium listing segment of the London Stock Exchange and each Ordinary Share carries one vote.
The rights attached to the Company’s Ordinary Shares are set out in the Company’s Articles. The Company’s Ordinary Shares are freely transferable. However, the Directors’ may refuse to register a transfer of Ordinary Shares which are not fully paid nor where the instrument of transfer is not duly stamped or shown to be exempt from stamp duty. The Directors may also decline to register a transfer of an uncertificated share in the circumstances set out in the uncertificated securities rules, and where the number of joint holders to whom the uncertificated shares is to be transferred exceeds four. There are no restrictions on the voting rights of the Company’s Ordinary Shares.
Amendments to the Company’s Articles and the granting of authority to issue or buy back the Company’s shares requires an appropriate resolution to be passed by Shareholders.
There are no restrictions on voting for the holders of Ordinary Shares, who are entitled to attend and vote at a Shareholders meeting.
Share Issues
At last year’s Annual General Meeting (“AGM”), the Directors were granted authority to allot Ordinary Shares up to an aggregate nominal amount of £62,107.72 (being 5% of the issued Ordinary Share Capital) as at the date of publication of the Notice.
This authority is due to expire at the Company’s AGM on 21 January 2021. The Company has not issued any Ordinary Shares under this authority. Proposals for the renewal of this authority are set out in the Notice of AGM.
Treasury Shares
Shares brought back by the Company may be held in treasury, from where they could be re-issued at a premium to NAV quickly and cost effectively. This provides the Company with additional flexibility in the management of its capital bases. No shares were purchased for treasury during the year or since the year end. The Company holds 3,318,207 ordinary shares in treasury.
Purchase of Own Shares
At last year’s AGM, the Directors were authorised to make market purchases of up to 14.99% of the Company’s ordinary shares in issue at that time, amounting to 1,861,989 shares. Since the AGM held on 23 January 2020 and the year end, the Company bought back 163,272 Ordinary Shares with a nominal value of 0.10 pence per Ordinary Shares, and at a total cost of £1,101,000 under this authority. As at 30 September 2020, the remaining authority for the purchase of own shares is 1,716,470 Ordinary Shares. A total of 3,318,207 Ordinary Shares are held in treasury, representing 21.32% of the issued share capital at 9 December 2020.
The authority will expire at the next AGM when a resolution for its renewal will be proposed. Please refer to the Notice of AGM.
Going Concern
The Directors believe that, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, the Company has adequate resources and an appropriate financial structure in place to continue in operational existence for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements.
The assets of the Company are well diversified and consist mainly of securities which are readily realisable. The Directors have also considered the risks and consequences of the COVID-19 pandemic and have concluded that the Company has the ability to continue in operation for the year ahead. For further details on the medium term viability of the Company please refer to the “Viability Statement” above.
For these reasons, the Directors consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.
Statement of Directors’ Responsibilities in Respect of the Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
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 UK Accounting Standards and applicable law, including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”.
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 and of the profit or loss of the Company for that period.
In preparing 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;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business; and
• prepare a Director’s report, a strategic report and Director’s remuneration report which comply with the requirements of the Companies Act 2006.
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 its financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for Shareholders to assess the company’s performance, business model and strategy.
Website publication
The Financial Statements are published on the Company’s website: www.bemoplc.com, which is maintained by the Investment Manager. The maintenance and integrity of the website maintained by the Investment Manager is, so far as it relates to the Company, the responsibility of the Investment Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ responsibilities pursuant to DTR4
The Directors confirm to the best of their knowledge:
• the financial statements have been prepared in accordance with applicable UK Accounting Standards and give a true and fair view of the assets, liabilities, financial position and profit and loss of the company; and
• the annual report includes a fair review of the development and performance of the business and the financial position of the company, together with a description of the principal risks and uncertainties that they face.
For and on behalf of the Board
Frances Daley
Chairman
9 December 2020
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company’s statutory accounts for the year ended 30 September 2020 but is derived from those accounts. Statutory accounts for the year ended 30 September 2020 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors’ report can be found in the Company’s full Annual Report and Accounts on the Company’s website at www.bemoplc.com.
Income Statement
for the year ended 30 September 2020
| For the year to 30 September 2020 | For the year to 30 September 2019 | ||||||
| Revenue return | Capital Return | Total | Revenue | Capital | Total | ||
| Notes | £000 | £000 | £000 | £000 | £000 | £000 | |
| (Losses)/gains on Investments held at fair value through profit or loss | 9 | - | (26,316) | (26,316) | - | 14,126 | 14,126 |
| Foreign exchange losses | - | (382) | (382) | - | (371) | (371) | |
| Income | 2 | 3,506 | 116 | 3,622 | 6,315 | - | 6,315 |
| Investment management fee | 3 | (156) | (623) | (779) | (173) | (693) | (866) |
| Other expenses | 4 | (770) | - | (770) | (765) | - | (765) |
| Return on ordinary activities | 2,580 | (27,205) | (24,625) | 5,377 | 13,062 | 18,439 | |
| Finance costs | 5 | (33) | (134) | (167) | (77) | (308) | (385) |
| Return on ordinary activities before taxation | 2,547 | (27,339) | (24,792) | 5,300 | 12,754 | 18,054 | |
| Taxation | 6 | (266) | - | (266) | (818) | - | (818) |
| Return for the year | 8 | 2,281 | (27,339) | (25,058) | 4,482 | 12,754 | 17,236 |
| Earnings per ordinary share | 8 | 18.40p | (220.52)p | (202.12)p | 35.09p | 99.87p | 134.96p |
The total column of this statement is the income statement of the Company.
The supplementary revenue and capital columns are both prepared under the guidance published by the AIC.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
There is no other comprehensive income and therefore the return for the year is also the total comprehensive income for the year.
The notes below form part of these accounts.
Statement of Financial Position
as at 30 September 2020
| At 30 September 2020 | At 30 September 2019 | ||
| Notes | £000 | £000 | |
| Non-current assets | |||
| Investments at fair value through profit or loss | 9 | 83,572 | 122,091 |
| Current assets | |||
| Debtors | 10 | 272 | 217 |
| Cash and cash equivalents | 1,825 | 3,532 | |
| 2,097 | 3,749 | ||
| Current liabilities | |||
| Creditors: amounts falling due within one year | 11 | (387) | (10,054) |
| (387) | (10,054) | ||
| Net current assets/(liabilities) | 1,710 | (6,305) | |
| Net assets | 85,282 | 115,786 | |
| Capital and reserves | |||
| Called-up share capital | 12 | 1,559 | 1,576 |
| Capital redemption reserve | 3,229 | 3,212 | |
| Share premium account | 1,411 | 1.411 | |
| Capital reserve | 76,718 | 105,158 | |
| Revenue reserve | 2,365 | 4,429 | |
| Total equity | 85,282 | 115,786 | |
| Net asset value per share | 13 | 694.70p | 930.81p |
The financial statements above were approved and authorised for issue by the Board of Barings Emerging EMEA Opportunities PLC on 9 December 2020 and were signed on its behalf by:
Frances Daley
Chairman
Company registration number 04560726
The annexed notes below form part of these accounts.
Statement of Changes in Equity
for the year ended 30 September 2020
| Called-up | Capital | Share | ||||
| share | redemption | premium | Capital | Revenue | ||
| capital | reserve | account | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| For the year ended 30 September 2020 | ||||||
| Opening balance as at 1 October 2019 | 1,576 | 3,212 | 1,411 | 105,158 | 4,429 | 115,786 |
| Return for the year | - | - | - | (27,339) | 2,281 | (25,058) |
| Contributions by and distributions to Shareholders: | ||||||
| Repurchase of Ordinary Shares | (17) | 17 | - | (1,101) | - | (1,101) |
| Dividends paid | - | - | - | - | (4,345) | (4,345) |
| Total contributions by and distributions to Shareholders: | (17) | 17 | - | (1,101) | (4,345) | (5,446) |
| Balance at 30 September 2020 | 1,559 | 3,229 | 1,411 | 76,718 | 2,365 | 85,282 |
| Called-up | Share | |||||
| share | premium | Redemption | Capital | Revenue | ||
| capital | account | reserve | reserve | reserve | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| For the year ended 30 September 2019 | ||||||
| Opening balance as at 1 October 2018 | 1,646 | 3,142 | 1,411 | 97,697 | 4,437 | 108,333 |
| Return for the year | - | - | - | 12,754 | 4,482 | 17,236 |
| Contributions by and distributions to Shareholders: | ||||||
| Repurchase of Ordinary Shares | (70) | 70 | - | (5,293) | - | (5,293) |
| Dividends paid | - | - | - | - | (4,490) | (4,490) |
| Total contributions by and distributions to Shareholders: | (70) | 70 | - | (5,293) | (4,490) | (9,783) |
| Balance at 30 September 2019 | 1,576 | 3,212 | 1,411 | 105,158 | 4,429 | 115,786 |
At 30 September 2020, the distributable reserves of the Company were £79,083,000 which comprise of the revenue reserve and capital reserve attributable to realised profits of £79,286,000, less capital reserve attributable to unrealised losses of £2,568,000. (2019: distributable reserves of £93,682,000 comprising of revenue reserve and capital reserve attributable to realised profits of £89,253,000).
All investments are held at fair value through profit or loss. When the Company revalues the investments still held during the period, any gains or losses arising are credited/charged to the capital reserve.
The notes below form part of these accounts.
Notes to the Financial Statements
for the year ended 30 September 2020
1. Accounting policies
Barings Emerging EMEA Opportunities PLC is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/159 of the Corporation Tax Act 2020 and its investment approach is detailed in the Strategic Report.
Basis of preparation
The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (‘UK GAAP’), including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and with the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (the ‘SORP’) issued by the Association of Investment Companies, October 2019.
The Company meets the requirements of section 7.1A of FRS 102 and therefore has elected not to present the Statement of Cash Flows for the year ended 30 September 2020.
The policies applied in these financial statements are consistent with those applied in the preceding year.
Going concern
The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.
The Directors have made an assessment of the Company’s ability to continue as a going concern and are satisfied that the Company has adequate resources to continue in operational existence for a period of at least 12 months from the date when these financial statements were approved.
In making the assessment, the Directors have considered the likely impacts of the current COVID-19 pandemic on the Company’s, operations and its investment portfolio.
The Directors noted that the Company’s current cash balance exceeds any short term liabilities, the Company holds a portfolio of liquid listed investments. The Directors are of the view that the Company is able to meet its obligations and when they fall due. The surplus cash enables the Company to meet any funding requirements and finance future additional investments. The Company is a closed-end fund, where assets are not required to be liquidated to meet day-to-day redemptions.
The Board has reviewed stress testing and scenario analysis prepared by the Investment Manager to assist them in assessing the impact of changes in market value and income with associated cash flows. In making this assessment, the Investment Manager have considered plausible downside scenarios. These tests included the possible further effects of the continuation of the COVID-19 pandemic but, as an arithmetic exercise, apply equally to any other set of circumstances in which asset value and income are significantly impaired. It was concluded that in a plausible downside scenario, the Company could continue to meet its liabilities. Whilst the economic future is uncertain, and the Directors believe that it is possible the Company could experience further reductions in income and/or market value, the opinion of the Directors is that this should not be to a add level which would threaten the Company’s ability to continue as a going concern.
The Investment Manager and the Company’s third-party service providers have contingency plans to ensure the continued operation of their business in the event of disruption, such as the impact of COVID-19. The Board was satisfied that there has been minimal impact to the services provided during the year and are confident that this will continue. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt on the Company’s ability to continue as a going concern, having taken into account the liquidity of the Company’s investment portfolio and the Company’s financial position in respect of its cash flows, borrowing facilities and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going concern basis.
Segmental reporting
The Directors are of the opinion that the Company is re-engaged in a single segment of business, being the investment business.
Significant accounting judgements and estimates
The preparation of the Company’s financial statements on occasion requires the Board to make judgements, estimates and assumptions that affect the reported amounts in the primary financial statements and the accompanying disclosures. These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on the circumstance. The Directors do not believe that any significant accounting judgements or estimates have been applied to this set of financial statements, that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
Investments
Upon initial recognition the investments held by the Company are classified ‘at fair value through profit or loss’. All gains and losses are allocated to the capital return within the Income Statement as ‘Gains on investments held at fair value through profit or loss’. Also included within this are transaction costs in relation to the purchase or sale of investments. When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date. Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments this is deemed to be bid market prices. Fair values for unquoted investments, or for investments for which the market is inactive, are established by the Directors after discussion with the AIFM using various valuation techniques in accordance with the International Private Equity and Venture Capital (the “IPEV”) guidelines.
Foreign Currency
The Company is required to identify its functional currency, being the currency of the primary economic environment in which the Company operates. The Board, having regard to the Company’s share capital and the predominant currency in which its Shareholders operate, has determined that Pounds Sterling is the functional currency. Pounds Sterling is also the currency in which the financial statements are presented.
Transactions denominated in currencies other than Pounds Sterling are recorded at the rates of exchange prevailing on the date of the transaction. Items that are denominated in foreign currencies are translated at the rates prevailing on the Balance Sheet date. Any gains or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is capital or revenue in nature.
Cash and Cash Equivalents
Cash comprises cash in hand and demand deposits.
Trade Receivables, Prepayments and Other debtors
Trade receivables, prepayments and other debtors are recognised at amortised cost or estimated fair value.
Trade Payables and Borrowings
Trade payables and short-term borrowings are measured at amortised cost.
Bank borrowings
The interest bearing bank loan is recognised at amortised cost and revalued for exchange rate movements.
Income
Dividends receivable from equity shares are included in revenue return on an ex-dividend basis except where, in the opinion of the Board, the dividend is capital in nature, in which case it is included in capital return.
Overseas dividends are included gross of any withholding tax.
Special dividends are taken to the revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the sources of the dividend on a case-by case basis.
Expenses and finance costs
All expenses are accounted for on an accruals basis. On the basis of the Board’s expected long-term split of total returns in the form of capital and revenue and are charged as follows:
• the investment management fee is charged 20% to revenue and 80% to capital;
• any investment performance bonus payable to AIFM are charged wholly to capital;
• finance costs are charged 20% to revenue and 80% to capital;
• other expenses are charged wholly to revenue.
Taxation
Current tax is provided at the amounts expected to be paid or recovered.
Deferred tax is provided on all timing differences that have originated but not reversed by the balance sheet date. Deferred tax liabilities are recognised for all taxable timing differences but deferred tax assets are only recognised to the extent that it is more likely than not that taxable profits will be available against which those timing differences can be utilised.
Deferred tax is measured at the tax rate which is expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates that have been enacted or substantively enacted at the balance sheet date and is measured on an undiscounted basis.
Dividends payable to Shareholders
Dividends are not recognised in the accounts unless there is an obligation to pay or have been paid.
Capital redemption reserve
The capital redemption reserve represents non-distributable reserves that arise from the purchase and cancellation of Ordinary Shares.
Share premium
The share premium account represents the accumulated premium paid for shares issued in previous periods above their nominal value less issue expenses. This is a reserve forming part of the non-distributable reserves. The following items are taken to this reserve:
• costs associated with the issue of equity; and
• premium on the issue of shares.
Capital reserve
The following are taken to capital reserve through the capital column of the Income Statement:
Capital reserve – distributable reserves
• gains and losses on the disposal of investments;
• amortisation of issue of interest bearing bank loans; and
• exchange differences of a capital nature.
Capital reserve – non-distributable reserves
• increase and decrease in the valuation of investments held at the year end.
Revenue reserve
The revenue reserve represents the surplus of accumulated profits and is distributable by way of dividends.
2. Income
| 2020 | 2019 | |
| £000 | £000 | |
| Income from investments | ||
| Listed Investments* | 3,583 | 6,302 |
| Other income: | ||
| Bank interest | 1 | 13 |
| Exchange losses on receipt of income | (78) | - |
| Total income | 3,506 | 6,315 |
All income stated above is revenue in nature
* A dividend of £116,000 has been received during the year which is capital in nature (2019:£nil) and is included within the capital return for the year.
3. Investment Management Fee
Baring Fund Managers Limited has been appointed as the AIFM of the Company under an agreement terminable by either party giving not less than six months’ written notice. Under this agreement, the AIFM receives a basic fee (charged 20% to revenue (2019: 20%) and 80% to capital (2019: 80%)) which is calculated monthly and payable at an annual rate of 0.80% of the NAV of the Company. The Investment Manager has agreed to a reduction in the investment management fee from 0.80% of the NAV of the Company to 0.75% of the NAV of the Company per annum. This was effective from 13 November 2020.
The investment management fee comprises:
| Year ended 30 September 2020 | Year ended 30 September 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Investment management fee | 156 | 623 | 779 | 173 | 693 | 866 |
At 30 September 2020, £116,000 (30 September 2019: £76,000) of this fee remained outstanding.
4. Other Expenses
| 2020 | 2019 | |
| £000 | £000 | |
| Custody and administration expenses* | 596 | 608 |
| Auditor’s remuneration for: | ||
| – audit | 29 | 25 |
| Directors’ remuneration | 145 | 132 |
| Total expenses | 770 | 765 |
* Included within administration expenses is £13,600 (2019: £11,600) of employee’s National Insurance paid on Directors’ remuneration.
5. Finance Costs
| Year ended 30 September 2020 | Year ended 30 September 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Borrowings under bank loan facility | 33 | 134 | 167 | 77 | 308 | 385 |
6. Taxation
Current tax charge for the year:
| Year ended 30 September 2020 | Year ended 30 September 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Overseas tax not recoverable | 487 | - | 487 | 818 | - | 818 |
| Overseas tax recovered and deemed recoverable – previously expensed | (221) | - | (221) | - | - | - |
| 266 | - | 266 | 818 | - | 818 | |
Factors Affecting the Current Tax Charge for the Year
The taxation rate assessed for the year is different from the standard rate of corporation taxation in the UK. The differences are explained below:
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Return on ordinary activities before taxation | 2,547 | (27,339) | (24,792) | 5,300 | 12,754 | 18,054 |
| Return on ordinary activities multiplied by the standard rate of corporation tax of 19% (2019: 19%) | 484 | (5,194) | (4,710) | 1,007 | 2,423 | 3,430 |
| Effects of: | ||||||
| Overseas withholding tax | 487 | - | 487 | 814 | – | 814 |
| Overseas tax recovered and deemed recoverable – previously expensed | (221) | - | (221) | - | – | - |
| Prior year adjustment | - | - | - | 4 | – | 4 |
| Losses/(gains) on investments held at fair value through profit and loss not allowable | - | 5,000 | 5,000 | – | (2,613) | (2,613) |
| Foreign exchange gain not taxable | - | 72 | 72 | - | - | - |
| Overseas dividends not taxable | (666) | (21) | (687) | (1,197) | - | (1,197) |
| Management expenses not utilised | 176 | 118 | 294 | 178 | 131 | 309 |
| Non-trade loan relationship debts not utilised | 6 | 25 | 31 | 12 | 59 | 71 |
| Current tax charge for the year | 266 | - | 266 | 818 | – | 818 |
The Company is not liable to tax on capital gains due to its status as an investment trust.
The Company has an unrecognised deferred tax asset of £2,637,000 (2019: £2,605,000) based on the long term prospective corporation tax rate of 19.0% (2019: 17.0%). This asset has accumulated because deductible expenses have exceeded taxable income in past years. No asset has been recognised in the accounts because, all profits are non taxable in the UK due to the entity being an investment trust. It is not likely that this asset will be utilised in the foreseeable future.
7. Dividend on Ordinary Shares
| 2020 Revenue | 2019 Revenue | |
| £000 | £000 | |
| Amounts recognised as distributions to equity holder in the year: | ||
| Final dividend for the year ended 30 September 2019 of 20p (2018: 20p) per Ordinary Share | 2,484 | 2,591 |
| Interim dividend for the year ended 30 September 2020 of 15p (2019: 15p) per Ordinary Share | 1,861 | 1,899 |
| 4,345 | 4,490 |
Set out below are the interim and final dividends paid or proposed on Ordinary Shares in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered.
| 2020 Revenue | 2019 Revenue | |
| £000 | £000 | |
| Interim dividend for the year ended 30 September 2020 of 15p (2019: 15p) per Ordinary Shares | 1,861 | 1,899 |
| Proposed final dividend for the year ended 30 September 2020 of 10p (2019: 20p) per Ordinary Share | 1,224 | 2,484 |
| 3,085 | 4,383 |
All dividends paid and proposed in the year have been funded from the revenue reserve.
The dividend proposed in respect of the year ended 30 September 2020 is subject to shareholder approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 30 September 2021.
8. Return per Ordinary Share
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| Return per ordinary share | 18.40p | (220.52)p | (202.12)p | 35.09p | 99.87p | 134.96p |
Revenue return (earnings) per Ordinary Share is based on the net revenue on ordinary activities after taxation of £2,281,000 (2019: £4,482,000).
Capital return per Ordinary Share is based on net capital loss for the financial year of £27,339,000 (2019: gain £12,754,000).
These calculations are based on the weighted average of 12,397,456 (2019: 12,770,923) Ordinary Shares in issue during the year.
At 30 September 2020, there were 12,276,025 Ordinary Shares of 10 pence each in issue (2019: 12,439,297) which excludes 3,318,207 Ordinary Shares held in treasury (2019: 3,318,207). The shares held in treasury are treated as not being in issue when calculating the weighted average of Ordinary Shares in issue during the year.
9. Investments
| Quoted Overseas Total | Quoted Overseas Total | |
| 2020 | 2019 | |
| Financial assets held at fair value | £000 | £000 |
| Opening book cost | 104,087 | 103,995 |
| Opening investment holding gains | 18,004 | 10,830 |
| Opening fair value | 122,091 | 114,825 |
| Movements in year: | ||
| Purchases at cost | 38,847 | 54,954 |
| Sales proceeds | (51,050) | (61,814) |
| Realised (losses)/gains on equity sales | (7,767) | 6,952 |
| (Decrease)/increase in investment holding gains | (18,549) | 7,174 |
| Closing fair value | 83,572 | 122,091 |
| Closing book cost | 84,117 | 104,087 |
| Closing investment holding (losses)/gains | (545) | 18,004 |
| Closing fair value | 83,572 | 122,091 |
| Primary country of investment | ||
| Russia | 61,437 | 74,505 |
| Poland | 10,449 | 20,100 |
| Turkey | 6,858 | 14,207 |
| Greece | 2,071 | 3,883 |
| Czechia | 1,380 | 1,631 |
| Romania | 622 | 3,127 |
| Hungary | - | 2,637 |
| Other | 755 | 2,001 |
| Total | 83,572 | 122,091 |
The Company sold investments in the year at a total of £51,050,000 (2019: £61,814,000). The book cost of these investments when purchased was £58,817,000 (2019: £54,862,000). These investments have been revalued over time and until they were sold any unrealised gains or losses were included in the fair value of the investments.
Transaction costs on purchases for the year ended 30 September 2020 amounted to £33,000 (2019: £44,000) and on sales for the year they amounted to £46,000 (2019: £48,000).
10. Debtors
| 2020 | 2019 | |
| £000 | £000 | |
| Amounts due from brokers | - | - |
| Overseas tax recoverable | 201 | 31 |
| Prepayments and accrued income | 32 | 156 |
| VAT Recoverable | 39 | 30 |
| 272 | 217 |
11. Creditors
| 2020 | 2019 | |
| £000 | £000 | |
| Bank loan facility | - | 9,738 |
| Amounts due to brokers | 294 | - |
| Other creditors | 93 | 316 |
| 387 | 10,054 |
On 8 April 2020, the Company repaid the US$12 million loan facility with State Street Bank and Trust Company. (The amount outstanding at 30 September 2019 was US$12 million with interest charged at the rate of LIBOR plus 3.527%).
12. Called-up Share Capital
| 30 September 2020 | 30 September 2019 | |||
| Allotted, issued and fully paid up | number | £000 | number | £000 |
| Ordinary Shares of 10p each | 15,757,504 | 1,576 | 16,453,251 | 1,646 |
| Opening balance | (163,272) | (17) | (695,747) | (70) |
| Buyback of Ordinary Shares for cancellation | 15,594,232 | 1,559 | 15,757,504 | 1,576 |
| 30 September 2020 | 30 September 2019 | ||
| Treasury shares | number | number | |
| Treasury Shares held | 3,318,207 | 3,318,207 | |
| Total Ordinary Share capital excluding Treasury Shares | 12,276,025 | 12,439,297 |
During the year, 163,272 Ordinary Shares were repurchased for cancellation for £1,001,000 (2019, 695,747 Ordinary Shares were £5,293,000). During the year, no Ordinary Shares were repurchased to be held in treasury and no Ordinary Shares which were held in treasury were cancelled. The Company holds 3,318,207 Ordinary Shares in treasury which are treated as not being in issue when calculating the number of Ordinary Shares in issue during the year (2019: 3,318,207. Ordinary Shares held in treasury are non-voting and not eligible for receipt of dividends. Subsequent to the year end, a further 32,120 shares have been repurchased for cancellation.
13. Net Asset Value Per Share
The NAV per ordinary share and the NAV attributable at the year end were as follows:
| 2020 | 2019 | ||
| Total Shareholders’ funds (£000) | 85,282 | 115,786 | |
| Number of shares in issue* | 12,276,025 | 12,439,287 | |
| NAV (pence per share) (basic and dilutive) | 694.70 | 930.81 |
* Excludes 3,318,207 Ordinary Shares held in treasury (2019: 3,318,207).
The NAV per share is based on total Shareholders’ funds above, and on 12,276,025 Ordinary Shares in issue at the year end (2019: 12,439,297 Ordinary Shares in issue) which excludes 3,318,207 Ordinary Shares held in treasury (2019: 3,318,207 Ordinary Shares held in treasury). The Ordinary Shares held in treasury are treated as not being in issue when calculating the NAV per share.
14. Financial Instruments and Capital Disclosures
Investment Objective and Policy
As an investment trust, the Company invests in equities and other investments for the long-term so as to secure its investment objective stated above. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. With effect from 13 November 2020, the Company has changed its investment objective and policy. The New Objective and New Investment Policy are set out above.
Risks
The risks identified arising from the financial instruments are market risk (which comprises market price risk, interest rate risk, and currency risk), liquidity risk and credit and counterparty risk. The Board and AIFM consider and review the risks inherent in managing the Company’s assets which are detailed below.
The objectives, policies and processes for managing the risks, and the methods used to measure the risks, are set out below and have not changed from the previous accounting period.
The AIFM monitors the Company’s exposure to risk and reports to the Board on a regular basis.
Credit Risk
Credit risk is mitigated by diversifying the counterparties through which the AIFM conducts investment transactions. The credit standing of all counterparties is reviewed periodically with limits set on amounts due from any one counterparty.
Market Risk
Special considerations and risk factors associated with the Company’s investments are discussed above. Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss which the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Company’s AIFM assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.
Market Price Risk
Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.
The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with the objective of maximising overall returns to Shareholders. If the fair value of the Company’s investments at the year end increased or decreased by 20% then it would have an impact on the Company’s capital return and equity of £16,714,000 (2019: £24,418,000).
Currency Risk
The value of the Company’s assets and the total return earned by the Company’s Shareholders can be significantly affected by currency exchange rate movements as most of the Company’s assets are denominated in currencies other than Pounds Sterling, the currency in which the Company’s financial statements are prepared.
Income denominated in other currencies is converted to Pounds Sterling upon receipt. The Company does not use financial instruments to mitigate the currency exposure. The Company’s uninvested cash balances are usually held in US Dollars.
A 10% rise or decline of Pounds Sterling against currency denominated (i.e. non Pounds Sterling) assets and liabilities held at the year end would have increased/decreased the net asset value by £8,551,000 (2019: £11,588,000).
The currency exposure is as follows:
| RUB | PLN | TRY | EUR | CZK | RON | USD | GBP | Other | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||
| Other receivables | 173 | - | - | 28 | - | - | - | 71 | - | 272 | |
| Cash and cash equivalents | 1 | - | - | - | - | - | 1,744 | 80 | - | 1,825 | |
| Other payables | - | - | - | - | - | - | (387) | - | (387) | ||
| Investments held at fair value through profit or loss - equities | 61,437 | 10,449 | 6,858 | 2,071 | 1,380 | 622 | - | - | 755 | 83,572 | |
| Total net currency exposure | 61,611 | 10,449 | 6,858 | 2,099 | 1,380 | 622 | 1,744 | (236) | 755 | 85,282 | |
| RUB | PLN | TRY | EUR | CZK | RON | USD | GBP | Other | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |
| Other receivables | - | - | - | - | - | - | - | 217 | - | 217 |
| Cash and cash equivalents | - | - | - | - | - | - | 3,532 | - | - | 3,352 |
| Other payables | - | - | - | - | - | - | (316) | - | (316) | |
| Borrowings under bank loan facility | - | - | - | - | - | - | (9,738) | - | - | (9,738) |
| Investments held at fair value through profit or loss - equities | 74,505 | 20,100 | 14,207 | 3,883 | 1,631 | 3,127 | - | - | 4,638 | 122,091 |
| Total net currency exposure | 74,505 | 20,100 | 14,207 | 3,883 | 1,631 | 3,127 | (6,206) | (99) | 4,638 | 115,786 |
The currency values included of the location of the investee companies.
Interest Rate Risk
Interest rate movements may affect:
• the level of income receivable on cash deposits; and
• the interest payable on variable rate borrowings.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
The Company has been primarily exposed to interest rate risk through its bank loan facility.
At 30 September 2020, the Company’s exposure to interest rate movements in respect of its financial assets and financial liabilities is shown below:
| 2020 | 2019 | |
| Total | Total | |
| (within one year) | (within one year) | |
| £000 | £000 | |
| Exposure to floating interest rates: | ||
| Cash at bank | 1,825 | 3,532 |
| Creditors: | ||
| Borrowings under bank loan facility | - | (9,738) |
| 1,825 | (6,206) |
If the above level of cash was maintained for a year, a 1% increase in interest rates would increase the revenue return and net assets by £18,000 (2019: £35,000). The AIFM proactively manages cash balances. If there were a fall of 1% in interest rates, it would potentially impact the Company by turning positive interest to negative interest. The total effect would be a revenue reduction/cost increase of £18,000 (2019: £25,000). The bank loan facility was repaid during the year.
Liquidity Risk
The Company’s assets mainly comprise readily realisable securities which can be easily sold to meet funding commitments, if necessary. Unlisted investments, if any, in the portfolio are subject to liquidity risk. The risk is taken into account by the Board when arriving at its valuation of these items.
Liquidity risk is mitigated by the fact that the Company has £1,825,000 (2019: £3,532,000) cash at bank and the assets are readily realisable. The Company has repaid the bank loan facility and may consider further short-term borrowings. The Company is a closed-end fund, assets do not need to be liquidated to meet redemptions, and sufficient liquidity is maintained to meet obligations as they fall due.
Liquidity risk exposure
The remaining contractual payments on the Company’s financial liabilities at 30 September 2020, based on the earliest date on which payment can be required and current exchange rates at the Balance Sheet date, were as follows:
| 2020 | 2019 | |
| Total | Total | |
| (within one year) | (within one year) | |
| £000 | £000 | |
| Bank loan facility | - | 9,738 |
| Other creditors and accruals | 387 | 316 |
| 387 | 10,054 |
Credit Risk
Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.
The total credit exposure represents the carrying value of fixed-income investments, cash and receivable balances and totals £85,668,000 (2019: £125,840,000).
The Company’s listed investments are held on its behalf by State Street Bank & Trust Company Limited acting as the Company’s Custodian. Bankruptcy or insolvency may cause the Company’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Company’s risk by reviewing the Custodians internal control reports.
Credit risk is mitigated by diversifying the counterparties through which the AIFM conducts investment transactions. The credit standing of all counterparties is reviewed periodically, with limits set on amounts due from any one counterparty.
Fair Values of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments), or the balance sheet amount if it is a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals and cash balances).
Valuation of Financial Instruments
The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. 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 assets as follows:
Level 1 – valued using quoted prices unadjusted in active markets for identical assets or liabilities.
Level 2 – valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included within Level 1.
Level 3 – valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.
The tables below set out fair value measurements of financial assets and liabilities in accordance with the fair value hierarchy.
| Total | |||
| Level 1 | Level 2 | 2020 | |
| Financial assets at fair value through profit or loss at 30 September 2020: | £000 | £000 | £000 |
| Equity investments | 85,543 | 29 | 83,572 |
| 85,543 | 29 | 83,572 | |
| Total | |||
| Level 1 | 2019 | ||
| Financial assets at fair value through profit or loss at 30 September 2019: | £000 | £000 | |
| Equity investments | 122,091 | 122,091 | |
| 122,091 | 122,091 |
Capital Management Policies and Procedures
The structure of the Company’s capital is described above and details of the Company’s reserves are shown in the Statement of Changes in Equity below.
The Company’s capital management objectives are:
• to ensure that it will be able to continue as a going concern;
• to achieve capital growth through a focused portfolio of investments; and
• to maximise the return to Shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they fall due.
The Board, with the assistance of the AIFM, regularly monitors and reviews the broad structure of the Company’s capital on an ongoing basis. These reviews include:
• the level of gearing, which takes account of the Company’s position and the Investment Manager’s views on the market; and
• the extent to which revenue in excess of that which is required to be distributed, should be retained.
The Company’s objectives, policies and processes for managing capital are unchanged from last year.
The Company is subject to externally imposed capital requirements:
• as a public company, the Company is required to have a minimum share capital of £50,000; and
• in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company, as an investment company;
• is only able to make a dividend distribution to the extent that the assets of the Company are equal to at least one and a half times its liabilities after the dividend payment has been made; and
• is required to make a dividend distribution each year and to ensure after year that it does not retain more than 15% of the income that it derives from shares and securities.
These policies and procedures are unchanged since last year and the Company has complied with them at all times.
15. Related Party Disclosures and Transactions with the AlFM
Details of the investment management fee charged by the AIFM are set out in note 3. Investment management fees charged in the year were £779,000 (2019: £856,000) of which £116,000 (2019: £76,000) was outstanding at the year end.
The ultimate holding company of the AIFM is Massachusetts Mutual Life Insurance Company, 1295 State Street, Springfield, MA 01111-0001. Fees paid to the Directors and full details of Directors’ interests are disclosed in the Directors’ Remuneration Report in the full Annual Report and Accounts.
Nadya Wells is a member of the Supervisory Board, Chairman of the Audit Committee, Member of the Strategic Planning Committee and a Member of the Risk Management Committee of Sberbank of Russia (“Sberbank”), in which the Company was invested during the year. At 30 September 2020, the Company held 3,710,510 shares in Sberbank at a market value of £8,474,000, representing 9.94% of the Company’s net assets and a holding of 0.07% of Sberbank’s total issued shares.
During the year, the Company purchased 397,207 shares in Sberbank for £936,000 and sold 921,846 shares for £1,976,000. These transactions were completed through the open market.
Fees paid to the Company’s Directors are disclosed in the Director’s Remuneration Report in the full Annual Report and Accounts. At the year end, there were no outstanding fees payable to the Directors (2019: £nil).
16. Post Balance Sheet Events
On 5 October 2020, the Board confirmed that the discount and performance-based conditions to the four year tender offer announced on 15 December 2016, had not been triggered. Accordingly, a tender offer was not offered.
For the five-year period from 1 October 2020, the Board agreed to propose a new tender offer for up to 25% of the Company issued shares based on discount and performance based conditions. Please see above for details.
On 13 November 2020, Shareholders approved the New Investment Policy. The Investment Manager has agreed a transition plan with the Board to implement the changes to the investment portfolio. On 16 November 2020, the Company changed its name to Barings Emerging EMEA Opportunities PLC.
Since the year end, the Company has bought back for cancellation 32,120 Ordinary Shares with a nominal value of £3,212 at a total cost of £193,000.
Glossary of Terms
AIFM
The AIFM, or Alternative Investment Fund Manager, is Baring Fund Manager Limited, which manages the portfolio on behalf of the Company’s Shareholders.
Alternative performance measures (APM) are denoted by an (#) below:
An APM is a numerical measure of the Company’s current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework. In selecting these APMs, the Directors considered the key objectives and expectations of typical investors in an investment trust such as the Company.
Benchmark
The Benchmark is an index against which the performance of the Company may be compared. This is an indicative performance measure as the overall investment objectives of the Company differ to the index and the investments of the Company are not aligned to this index.
Old Benchmark
For the financial year ending 30 September 2020, the Company’s Benchmark was the MSCI Emerging Europe 10/40 Index. This index is designed to measure the performance of large and midcap companies across six Emerging Markets (EM) countries; Czechia, Greece, Hungary, Poland, Russia and Turkey) in Europe. The MSCI 10/40 equity indexes are designed and maintained on a daily basis to take into consideration the 10% and 40% concentration constraints on funds subject to the UCITS III Directive.
New Benchmark
The Company’s new Comparator Benchmark is the MSCI Emerging Markets EMEA Index. This index is designed to measure the performance of large and midcap companies across 11 Emerging Markets (EM) countries in Europe, the Middle East and Africa (EMEA).
This includes, the Czechia, Egypt, Greece, Hungary, Poland, Qatar, Russia, Saudi Arabia, South Africa, Turkey and United Arab Emirates.
Discount
If the share price of an investment trust is lower than the NAV per share, the shares are trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share.
| Discount calculation | 30 September 2020 | 30 September 2019 |
| Closing NAV per share (p) | 694.70 | 841.95 (a) |
| Closing Ordinary Share price (p) | 587.00 | 846.00 (b) |
| Discount (c-((b-a)/a)*100 (%) | 15.50 | 9.11 (c) |
Dividend Pay-out Ratio#
The ratio of the total amount of dividends paid out to Shareholders relative to the net income of the company. Calculated by the dividing the Dividends Paid by Net Income.
Dividend Reinvested Basis
Applicable to the calculation of return, this calculates the return by taking any dividends generated over the relevant period and reinvesting the proceeds to purchase new shares and compound returns.
Dividend Yield#
The annual dividend expressed as a percentage of the current market price. (see Chairman’s Statement above).
EMEA
The definition of EMEA is a shorthand designation meaning Europe, the Middle East and Africa. The acronym is used by institutions and governments, as well as in marketing and business when referring
to this region: it is a shorthand way of referencing the two continents (Africa and Europe) and the Middle Eastern sub-continent all at once. It is particularly common among North American companies, and it is mostly used when dividing a company’s operations by geography.
Emerging Markets
An emerging market economy is a developing nation that is becoming more engaged with global markets as it grows. Countries classified as emerging market economies are those with some, but not all, of the characteristics of a developed market.
Environmental, Social and Governance or ESG
ESG (environmental, social and governance) is a term used in capital markets and used by investors to evaluate corporate behaviour and to determine the future financial performance of companies.
ESG factors are a subset of non-financial performance indicators which include sustainable, ethical and corporate governance issues such as managing the company’s carbon footprint and ensuring there are systems in place to ensure accountability.
Frontier Markets
A Frontier market is a country that is more established than the least developed countries globally but still less established than the emerging markets because it economy is too small, carries too much inherent risk, or it markets are too illiquid to be considered an emerging market.
Gearing#
Gearing refers to the ratio of the Company’s debt to its equity capital. The Company may borrow money to invest in additional investments for its portfolio. If the Company assets grow, the Shareholders’ assets grow proportionately more because the debt remains the same. But if the value of the Company’s assets fall, the situation is reversed.
Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.
The Company repaid the bank loan facility during the year eliminating gearing at the year end. The gross gearing of nil% (2019: 11.4%) represents borrowings of £nil (2019: £9,738,000) expressed as a percentage of shareholder funds of £85,282,000 (2019: £115,786,000).
Net gearing, which accounts for cash balances is £nil (2019: 5.3%).
For the purposes of AIFMD, the Company is required to disclose the leverage. Leverage is any method which increases the Company’s exposure, including the borrowing of cash and use of derivatives. It is expressed as a ratio between the Company’s exposure and its net asset value and is calculated under the Gross and Commitment Methods in accordance with AIFMD.
Under the Gross Method, exposure represents the aggregate of all the Company’s exposures other than cash balances held in base currency and without any offsetting. Investments (A) divided by Total Shareholders’ Funds (B). This can be found above:
Gross method = 98% (A = £83,572,000/ B = £85,282,000) x 100.
The Commitment Method takes into account hedging and other netting arrangements designed to limit risk, offsetting them against the underlying exposure. Investments (A) plus current assets (C) divided by Total Shareholders’ funds (B). This can be found above: Commitment method = 100% (A = £83,572,000) + (C = Cash £1,825,000 + Debtor £ 272,000) / B = £85,282,000) x 100.
Gross Assets
Aggregate of all the Company’s exposures including Gearing.
Growth at a Reasonable Price (GARP) Investing
GARP investing incorporates elements of growth and value investing, focusing on companies which have sustainable growth potential but do not demand a high valuation premium.
Idiosyncratic Risk
Idiosyncratic or “Specific risk” is a risk that is particular to a company.
Net Asset Value (NAV)
The NAV is Shareholders’ funds expressed as an amount per individual Ordinary Share. Shareholders’ funds are the total value of all the Company’s assets, at current market value, having deducted all liabilities and prior charges at their fair value. The total NAV per Ordinary Share is calculated by dividing the Shareholders’ funds of £85,282,000 (2019: £115,786,000) by the number of Ordinary Shares in issue excluding Treasury Shares of 12,276,025 (2019:12,439,297).
Ongoing Charges Ratio (OCR) #
The OCR is an accurate measure of what it costs to invest in a fund. It is made up of the Annual Management Charge (AMC) and a variety of other operating costs. These charges cover the cost of running the fund.
Ongoing charges for the year = management fees of £779,000 + other operating expenses of £711,000 = £1,490,000 (see notes 3 and 4, above).
Average daily Shareholders’ fund for the year = £109,903,000 £1,490,000/£100,903,000 = 1.48%.
Return (per Ordinary Share) #
The return per Ordinary Share is based on revenue/capital earned during the year divided by the weighted average number of Ordinary Shares in issue during the year. The calculations are set out in Note 8.
Relative Returns
Relative return is the difference between investment return and the return of a benchmark.
Risk-adjusted Returns
Risk-adjusted return refines an investment’s return by measuring how much risk is involved in producing that return.
Return on Equity (ROE)
Return on equity (ROE) is a measure of financial performance calculated by dividing net income by Shareholders’ equity. Because Shareholders’ equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets. This measure is used to understand how effectively management is using a company’s assets to create profits.
Share Price
The price of a single share of a company. The share price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.
Systematic Risk
Systematic risk or “Market risk” is the risk inherent to the entire market or market segment, not just a stock or industry.
Total Assets
Total assets include investments, cash, current assets and all other assets. An asset is an economic resource, being anything tangible or intangible that can be owned or controlled to produce positive economic value. The total assets less all liabilities is equivalent to total Shareholders’ funds.
Total Assets less Current Liabilities
Total assets less current liabilities is used as the basis for the measurement of equity exposure (being total assets of £85,669,000 (2019: £125,840,000) less current liabilities of £387,000 (2019: 10,054,000)).
Total Return #
Total return statistics enable the investor to make performance comparisons between investment trusts with different dividend policies. The total return measures the combined effect of any dividends paid, together with the rise or fall in the share price or NAV. This is calculated by the movement in the NAV or share price plus dividend income reinvested by the Company at the prevailing NAV or share price.
NAV Total Return
NAV Total Return is calculated by assuming that dividends paid out are reinvested into the NAV on the ex-dividend date.
| 20 September 2020 | |
| Closing NAV per share (p) | 694.70 |
| Opening NAV per share (p) | 930.81 |
| Change in the year (%) | -25.37 |
| Impact of dividend reinvestments (%) | 3.07 |
| NAV total return (%) | -22.30 |
Share Price Total Return
Share price total return is calculated by assuming dividends paid out are reinvested into new shares on the ex-dividend date.
| 20 September 2020 | |
| Closing NAV per share (p) | 587.00 |
| Opening NAV per share (p) | 846.00 |
| Change in the year (%) | -30.61 |
| Impact of dividend reinvestments (%) | 3.12 |
| Share price total return (%) | -27.49 |
Directors and Officers
Directors
Frances Daley, Chairman
Vivien Gould
Christopher Granville
Calum Thomson
Nadya Wells
Registered Office
Beaufort House
51 New North Road
Exeter EX4 4EP
Company Secretary
Link Company Matters Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
Company number
4560726
Alternative Investment Fund Manager
Baring Fund Managers Limited
20 Old Bailey
London EC4M 7BF
Telephone: 020 7628 6000
Facsimile: 020 7638 7928
Auditor
BDO LLP
55 Baker St.
Marylebone
London W1U 7EU
Depositary
State Street Trustees Limited
20 Churchill Place
Canary Wharf
London E14 5HJ
Custodian
State Street Bank & Trust Company Limited
20 Churchill Place
Canary Wharf
London E14 5HJ
Administrator
Link Alternative Fund Administrators Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
Registrars
Link Group
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Broker
JP Morgan Cazenove
25 Bank Street
Floor 29
Canary Wharf
London E14 5JP
Website
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at:www.morningstar.co.uk/uk/nsm
LEI: 213800HLE2UOSVAP2Y69
ENDS
Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on the website (or any website) is incorporated into, or forms part of, this announcement.
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