Annual Financial Report
FIDELITY EMERGING MARKETS LIMITED
Final Results for the year ended 30 June 2023
Financial Highlights:
- The net asset value ("NAV") of the Company returned -2.6% for the year ended 30 June 2023, outperforming the reference index (MSCI Emerging Markets Index) which returned -2.8% over the year.
- The Board announces a dividend of 0.19 cents per Participating Preference Share.
- The Portfolio managers' outlook for the region is optimistic given attractive valuations and an increasingly positive fundamental backdrop for companies.
- Transition metals, nearshoring, and demographics provide tailwinds for the asset class.
Contacts
For further information, please contact:
Nira Mistry
Company Secretary
07778 345 517
FIL Investments International
Chairman's Statement
I am pleased to present your Company's 34th annual report, my first as Chairman and covering the first full year under its new name and mandate as Fidelity Emerging Markets Limited. Against a continued difficult global economic and geopolitical backdrop, net asset value (`NAV') total return performance for the year ended 30 June 2023 has been slightly negative, but has outperformed the Company's benchmark, the MSCI Emerging Markets Total Return Index (`the Index'). This is particularly encouraging during a period in which high inflation and tightening monetary policy in the West and disappointing data following China's hotly anticipated post-Covid reopening have unsettled investors worldwide.
Overview
During the 12 month period to 30 June 2023, the NAV of the Company fell by 2.6% in GBP terms, compared with a 2.8% decline in the benchmark index. The share price fell by 5.2% as the discount to NAV widened slightly during the year, from 12.0% to 14.6% (all performance figures stated on a total return basis).
You will find more detail on the contributors to absolute and relative performance in the Portfolio Managers' Review on the following pages. However, your Board believes that Fidelity's unique investment process, with its ability to hold short as well as long positions - thereby investing in the disruptors that can drive growth, and also making money from identifying the disrupted - is a key differentiating factor that is starting to feed into positive performance for the Company. It is worth noting that the open-ended FAST Emerging Markets Fund, which is run using the same approach, has outperformed the Index in seven of the last 10 discrete years to 30 June, in most cases significantly. As well as having a full investment toolkit, your Company also benefits from Fidelity's large and experienced team of portfolio managers and analysts, the majority of whom are based in the markets they cover, giving them an invaluable advantage in terms of identifying new investment opportunities.
At Board level, your Directors and I have been working hard to ensure that current and prospective investors are fully informed about the changes to the Company and the benefits they bring. This is beginning to be reflected in our shareholder register, where we are identifying more self-directed retail investors buying shares through the major investment platforms. This is a great start to our objective to increase our investor base of retail investors, and we hope that the recent improvements in relative performance, combined with our own efforts, can help to drive this forward. We believe a key attraction for fee-conscious investors is our cost efficiency, underpinned by our competitive ongoing charges ratio, which is one of the lowest in the AIC peer group. In our view this represents competitive value for a truly actively managed emerging markets portfolio with an extended set of tools with which to generate returns.
Outlook
On a historical basis, emerging markets themselves offer attractive relative valuations as well as compelling fundamentals. While the Western world struggles with the challenges of over a decade of ultra-loose monetary policy and the fallout from Covid stimulus packages, leading to the highest levels of inflation and interest rates in nearly a generation, in most emerging markets the picture is completely different. The structural case for investing in developing economies remains extremely strong: attractive demographics, a burgeoning middle class providing new markets for goods and services, and economies that can grow more rapidly than those in the West. Many emerging economies have already experienced the pain of higher interest rates and prices that are facing the developed world, and now have greater monetary policy flexibility as well as declining inflation. In recent years the US stock market has dominated an enormous amount of the rest of the world's liquidity, but outflows from emerging markets funds have begun to slow and even reverse as investors once more get on board with the long-term growth story, buoyed by relatively attractive valuations and in many cases decent dividend yields. In our view, the year ahead may infuse emerging markets with more momentum in terms of performance versus the rest of the world. We believe that your Company's unique approach, top-class management team and cost-efficient structure mean it is in an ideal position to make the most of this improving environment, and we look forward to your Portfolio Managers employing their full range of investment tools to benefit from it.
Board composition
The Company's Board has seen significant changes during the period ended 30 June 2023, with former Chairman Hélène Ploix and Director Sujit Banerji retiring at the 2022 AGM in December and Audit and Risk Committee Chairman and Senior Independent Director, Russell Edey also retiring in May 2023. I joined the Board in May 2022 and became Chair upon Hélène's retirement. Julian Healy was appointed to the Board at the 2022 AGM and took over Russell's role as Chair of the Audit and Risk Committee in May 2023. Torsten Koster, a Director since 2020, is now the Senior Independent Director. Now with five Directors, the longest-serving of whom, Katherine Tsang, has been in post for six years, we do not foresee any further changes to the Board in the near term. We feel the board now has a strong diversity of both background and specialist knowledge and competency.
Discount management
While we have seen some movement in the discount to NAV during the year, it has been within a small range. We began both the first and second half of the Company's financial year with the discount at 12.0%, and ended the year at 14.6%. At the time of writing, the discount had narrowed again to 14.3%. This year we have focused hard on building the Company's profile in the market and the media, alongside investor platforms. We expect this to have a positive effect, over time, on both the shareholder register and the discount. We also retain the ability, to buy back up to 14.99% of our Participating Preference Shares each year in order to manage the a discount. We have confidence that your Investment Manager has the tools and the expertise to continue to build on the recent trend of improved relative performance. Your Board is constantly working closely with the Manager on all these matters and has the goal to reduce the discount as a key priority.
Dividend
A resolution to declare a final dividend of 0.19 cents per share will be proposed at the AGM of the shareholders of the Company that will be held on Thursday, 7 December 2023. Subject to shareholder approval, the final dividend will be paid on 15 December 2023 to shareholders on the Register of Members on 17 November 2023. The ex-dividend date is 16 November 2023.
Annual General Meeting
This year's AGM will be held on Thursday, 7 December 2023 at 8:30 a.m. at the registered office of the Company, Level 3, Mill Court La Charroterie, St Peter Port, Guernsey GY1 1EJ.
Notice of the AGM, containing full details of the business to be conducted at the meeting, is set out in the Annual Financial Report.
Your attention is also drawn to the Directors' Report in the Annual Report, where resolutions relating to special business are explained.
Electronic proxy voting is now available and shareholders are encouraged to submit voting instructions using the web-based voting facility at www.eproxyappointment.com and for institutional shareholders via the CREST system, CREST messages must be received by the issuer's agent (ID number 3RA50) not later than 8.30 am on 5 December 2023. In order to use electronic proxy voting, shareholders will require their shareholder registration number, control number and pin. If you do not have access to these details please contact the Company's Registrar, Computershare, their contact details can be found in the Annual Financial Report.
Heather Manners
Chairman
12 October 2023
Portfolio Managers' Review
Question
How has the investment company performed in the year to 30th June 2023?
Answer
Nick:
We have seen performance continue to stabilise and improve over the year. It's been a volatile period for markets, as we've seen the ramifications of elevated inflation, cost of living pressures, and tightening monetary policy. A pivotal moment was China's emergence from Covid lockdowns last autumn and the easing of its regulatory stance towards the internet and property sectors. Over the year the portfolio declined on an absolute basis (NAV returns of -2.6% in sterling terms) but marginally outperformed the index (which returned -2.8%). After a challenging initial period in 2022, performance began to stabilise from September, and has continued to improve into 2023.
When I look at some of the top performers over the year, several of the holdings in the financials sector stand out. This includes core long-term positions like India's HDFC Bank, but also some of the mid-cap names like the Greek lender Piraeus Financial Holdings, Brazilian digital challenger bank Nu Holdings, and Kazakhstan's ecommerce and payments platform Kaspi. The Taiwan and South Korean technology names also did well over the period as a whole (despite a difficult 2022) after these stocks rallied following China's reopening and growing hype around artificial intelligence. We have trimmed many of these positions on strength and I think it's important to point out that we are disciplined in taking profits following bouts of strong performance.
The Chinese consumer names we hold have been the main headwind to performance. We are marginally underweight China, but names such as sportwear company Li Ning, dairy producer China Mengniu Dairy and Hong Kong-listed AIA Group have all lagged the market. The moves have largely been multiple driven, although there has also been a slight decline in earnings expectations for some of the companies. The good news is we are seeing many of these companies behave in an increasingly shareholder friendly manner (which I discuss later) and valuations now appear very attractive.
So, overall, a mixed period for markets, but one where we have seen portfolio returns stabilise as we emerge from a difficult 2022 into a year where many of the high-conviction positions have executed well and have underpinned the portfolio's relative performance.
Question
With the conflict in Ukraine ongoing, geopolitical tensions remain at the forefront of investors' minds. How are you seeking to mitigate this risk?
Answer
Nick:
One of the most important ways that we look to assess geopolitical risk is by calling on external experts. Over the year we have sought to bring more voices to the table, for example geopolitical experts and external strategists, including those from a military or security service background. Although no one has a crystal ball, we focus on staying fully engaged and speaking to people with a range of different perspectives. Fidelity is launching a series of internal talks on geopolitics this year, with the aim to bring in more external speakers who have expertise on governance and security, particularly in areas such as the post-Soviet era, but also on China-Taiwan relations, which we are closely monitoring in the run-up to the Taiwan elections in January.
We continue to look at country positioning closely and run through exposures on a weekly basis. Although the portfolio's active share remains high, the country bets are more muted than they have been historically. While this is likely not a permanent move, it does feel more appropriate in the current environment. This broadening of the portfolio's country exposure has taken the stock count higher, reflecting the unpredictability we see in markets. We also examine stock level beta more closely, which has informed the portfolio's China positioning.
The final element is the role that our research trips play (which Chris talks about in more detail later). The end of Covid lockdowns means we've been able to resume overseas trips, which form a crucial part of our due diligence process. I've visited Brazil, Mexico, Indonesia, and India, among other places, over the past year, and our entire Asia investment team spent a week in China this summer. Speaking to local experts on their home turf is a vital input and allows us to assess all manner of opportunities and, of course, risks.
Question
The rising cost of living continues to pressure consumers across emerging and developed markets. What is your outlook for inflation and interest rates?
Answer
Nick:
Elevated inflation and higher interest rates have clearly been a headwind for both consumers and companies across the world over the past year. However, despite some sticky inflation prints in the UK, there is an improving picture in the US and emerging markets, and I do expect that we will see a near-term fall-off in inflation.
The outlook for emerging markets is particularly positive because central banks across the region have been some of the most proactive in the world and have largely managed to bring inflation under control. That means there are high real rates in many emerging economies, with Brazil being the poster child of this trend. Brazil's short-term policy rate is 13.75%, while consumer price inflation in the country stands at 3%, and its central bank has indicated that it could cut rates as early as August. As Brazil and other emerging market countries start to ease monetary policy, we should see a positive tailwind for demand.
Notwithstanding this, over the medium-term, inflation will likely remain stubbornly high, as deglobalisation, underinvestment in the energy and commodity complex and the shift to green energy all drive prices higher. Although inflation won't remain as elevated as it has been, it could settle at 3-4% in many economies over the next 5-10 years. This will have implications for both emerging and developed markets and emphasises the importance of having a measure of value in a portfolio, whether that be through exposure to financials, for example, or energy companies.
Top 5 Positions
| As at 30 June 2023 | Sector | Portfolio (%) | Index (%) | Relative (%) |
| Taiwan Semiconductor Manufacturing | Information Technology | 10.4 | 6.8 | 3.6 |
| HDFC Bank | Financials | 6.3 | - | 6.3 |
| Naspers | Consumer Discretionary | 4.7 | 0.5 | 4.2 |
| Samsung Electronics | Information Technology | 4.4 | 4.5 | -0.1 |
| Kaspi.KZ | Financials | 4.2 | - | 4.2 |
Question
Turmoil among developed market banks has dominated headlines this year. Does this impact your view of financials in emerging markets?
Answer
Chris:
The collapse of Silicon Valley Bank (`SVB') and Credit Suisse earlier this year ignited fears that there could be a spillover effect to emerging markets. We think that the risk of any contagion is low. The problems we saw at US banks were down to overly concentrated deposits and a mismatch between assets and liabilities, and we see a much more stable backdrop in emerging markets, where banks by and large are better capitalised and more tightly regulated. Because we focus on high quality, deposit-taking franchises, with well diversified deposit bases and closely matched assets and liabilities, the banks we hold in the portfolio are not exposed to the sort of deposit-flight risk that we saw at SVB.
Where the banking crisis has had an impact is on our outlook for interest rate rises, which is much more muted than it was before (and indeed, many emerging market central banks should start cutting rates this year, as Nick spoke about earlier). That means the boost banks have had from rising net interest margins has largely played out and we are limiting the portfolio's exposure to the more rate-sensitive banks, focusing on those that benefit from structural drivers.
These structural stories include Indian banks, which operate in an environment where the ratio of credit to GDP could grow to three times the level it is today, boosting demand for credit cards, savings accounts, and insurance products. We also see strong structural drivers in the Greek banking market, where a decade of very low loan growth has resulted in excellent asset quality and the prevalence of many high-quality, deposit-taking banks that we expect should start returning cash to shareholders.
Question
China's reopening from Covid lockdowns has had a significant impact on emerging market performance this year. How do you feel about China and the economic recovery?
Answer
Nick:
We have seen the initial exuberance of the China reopening trade unwind as the market realises that the recovery in China will not follow the same rapid trajectory as it did across developed markets. The recovery in China this year has certainly been weaker than I expected. The country had an incredibly strict and prolonged lockdown experience, during which households saved an additional $1.5-2 trillion of their income. Given savings rates were already high, there was every expectation there would be a strong consumption recovery.
Why has this disappointed? This is firstly due to weakness in the property sector. There's no doubt that property won't be the strong driver of GDP growth that it has been in the past. Because Chinese consumers typically invest much of their wealth in property, weakness in the market has a knock-on effect on consumer confidence. The second factor is government regulation and particularly that towards the internet sector. Although this has eased, the regulatory crackdown over the past few years has dampened spirits. Internet companies were big employers of graduates, and the regulatory intervention has contributed to elevated levels of youth unemployment.
This all means a tougher backdrop for consumption. I do believe that over the medium-term consumption will recover, given the excess savings among households. Savings rates in China are the highest of any major economy and have been consistently elevated over the past decade. We will likely see government stimulus, which is already happening at the local level. It is probable that the recovery will be k-shaped, however, given that these excess savings are not evenly distributed throughout the country.
Where I see more encouraging signals is the increasingly shareholder-friendly approach of companies in China, where there are many businesses returning capital and buying back shares. The days of investing in China solely for growth are likely over, and the acid test now is really whether companies are buying back shares or paying out dividends. Internet platforms NetEase, Alibaba Group Holding and Tencent are all good examples of companies that have progressive buyback policies, but which are trading on very attractive valuations given weak sentiment towards the Chinese market.
Question
Emerging markets are a diverse region. Looking beyond China, where do you currently see the best opportunities?
Answer
Chris:
One of the areas I am most excited about is the `transition metals' that will power the low carbon economy. Clean energy technologies are commodity intensive, with, for example, electric vehicles requiring six times the amount of minerals that a conventional car does. Looking specifically at copper, the anticipated uptick in demand is combined with a significant shortfall in supply, due to a decade of underinvestment in the commodity complex and limited projects in the pipeline. With the market only set to get tighter, we have a positive outlook over the medium term for copper miners and companies producing other transition metals. We hold copper producers based in Mexico and Peru, and own several other copper, zinc, lead, cobalt, and tin miners with assets across Latin America, eastern Europe, and Africa.
Another area of opportunity is demographics. India is one example of a market benefiting from several long-term drivers, with the economy offering considerable scope for growth given its low level of GDP per capita and expanding working-age population. We expect growing consumption and demand for everything from consumer goods to financial products and IT services. The portfolio's exposure to the Indian market is predominantly via financials, where we see several opportunities to take advantage of the growing penetration of consumer finance in the country.
One other interesting driver for some emerging economies is that of deglobalisation and nearshoring. This will predominantly benefit Mexico, where we anticipate considerable growth as the US looks to shift its supply chains away from China and closer to its own borders. I visited Mexico earlier in the year and saw first-hand the positive impetus that nearshoring is set to have on the country. Our meetings during the trip indicated that this is set to be a real tailwind as companies build factories and support employment growth in the region. Currently Mexico exports just under US$400 billion a year to the US and some estimates suggest that nearshoring could add an incremental USD$100-150 billion to this.
Question
Emerging markets have clearly had a difficult few years. Looking ahead, what is your outlook for emerging markets?
Answer
Nick:
July marks my 14-year anniversary managing a global emerging markets portfolio. That creates a good opportunity to reflect on market performance over the period. A look back to 2009 shows that emerging markets have been broadly flat over the last 14 years. The index is as cheap as it has ever been and is trading at multi-decade lows relative to developed markets.
So, emerging markets are clearly deeply out of favour. The relative performance of emerging markets used to follow the commodity cycle, but the relationship has decoupled of late. Weakness in China and concerns around geopolitics explain part of this, but I do think the extent of the discount is at odds with the improving fundamental picture - not least because inflation has seemingly peaked, interest rates are set to start coming down, and we are seeing more and more companies in emerging markets return capital to shareholders.
So yes, when I look ahead, I am broadly optimistic. Emerging markets are by their very nature volatile, which is not surprising given they are the factory of the world. But I do think that over the next decade we should see decent returns, particularly relative to regions such as the US, which will struggle with elevated levels of government debt and an ageing population. Given that emerging market equities have underperformed over more than a decade now, valuations are very attractive and appear out of sync with what I think is an increasingly positive fundamental backdrop for many companies.
Question
The portfolio has an extensive investment toolkit and can use derivatives as outlined in the investment policy. How have you looked to take advantage of this enhanced toolkit over the past year?
Answer
Chris:
One of the tools we have at our disposal is the ability to take out short positions. This allows us to profit not only from the winning businesses in each industry, but also from the losers. One of the ways we do this is by looking for companies that have a deteriorating fundamental outlook, or red flags such as a broken balance sheet, bad corporate governance, poor relations with regulators, or a shareholder that is acting to the detriment of minority investors.
A good example of this is Americanas, a Brazilian retailer that was struggling to compete with peers and was losing market share. Because of this, it resorted to fraud and hiding its debts off balance sheet. We spotted these red flags and took out a short position in Americanas. The company subsequently went bankrupt, and we closed the position at a profit earlier this year.
We also take out `pair trades' in companies, where a long position in what we see as a winning business is matched with a short position in what we deem to be the loser in the industry. An example is the portfolio's positioning in the South African food retail space, where elevated inflation has created a very competitive operating environment. We have a long position in a company called Shoprite, which has consistently gained market share over the years due to its strong value proposition and cost control. We have matched this with a short position in a competitor of Shoprite that is struggling to keep up and is losing market share.
Another example of a pair trade is the portfolio's exposure to the Chinese real estate market, where state-owned enterprises have rapidly gained market share since 2017 and are benefiting as many private developers go bankrupt. We have a long position in state-owned company China Resources Land, which is matched with several short positions in indebted private developers.
An important aspect of the toolkit I would also highlight is the ability we have to increase the portfolio's gross exposure to the companies we have the most conviction in. This is a nice feature of the investment company, with its closed-end nature allowing us to take out leveraged long positions, making the money we invest work even harder for shareholders. And finally, we also use options overwriting in the portfolio, both to generate additional income and to control risk.
Question
Another aspect of the company's broad toolkit is the ability to invest in smaller companies. Can you outline some of the most exciting opportunities you are seeing in this space?
Answer
Chris:
As I said earlier, one of the key benefits of the investment company structure is its closed-ended nature. This means we can take a longer investment horizon and move further down the market cap spectrum. These might be into smaller companies that are less well known by investors and are often poorly covered by the sell side. We're currently seeing lots of exciting opportunities among mid-cap companies and there is a concerted effort within the team to look for the smaller names that can really differentiate the investment company. Recently, a lot of the negative sentiment we've seen around emerging markets has led to some of these smaller businesses being overlooked, which has thrown up some exciting opportunities from a valuation perspective.
There are a couple of examples of this in the Mexican market, and we added several names to the portfolio following our trip to the country earlier this year. One of these is Gentera, a lender to female entrepreneur clubs. We have seen the company continue to penetrate what is an uncontested market, with an estimated 34 million women working in the informal sector in Mexico and Peru. It is trading on very low multiples, and we see scope for considerable upside, given that non-performing loan formation is under control and should allow for sustained loan growth. Railroad operator Grupo Mexico Transportes is another example of a mid-cap company that is trading on depressed multiples, but which should benefit enormously from the trend of nearshoring, with political change in Mexico also a catalyst for a potential rerating of its share price.
Question
Finally, how does Fidelity actively and efficiently manage the portfolio, given the extensive universe of companies to choose from in emerging markets?
Answer
Chris:
Fidelity's extensive emerging market research team is one of the key mechanisms that lets us effectively manage the portfolio. We are incredibly lucky to have more than 50 analysts across the globe looking only at emerging market companies, which means we can develop a deep, unrivalled view of their dynamics, and explore the opportunities in the small and mid-cap space that I mentioned earlier. There is excellent collaboration between all our analysts across regions and sectors, with those focused on global sectors like oil and gas, metals and mining, and technology helping us piece together what is going on in emerging markets with developments in the US, Japan, and Europe.
I joined Fidelity 12 years ago as a research analyst, working across the metals and mining sector and then on shorting opportunities, so I know first-hand how effective this research resource is. Our research team really allows us to have `boots on the ground' across emerging markets. For example, this year I have travelled to several countries, including Mexico and Poland and spent time meeting with companies, their competitors, and their suppliers, seeing the assets and operations of companies first hand. There's really no substitute for this sort of on the ground presence, and Fidelity research analysts carry out around 16,000 company meetings a year, which really emphasises how wide our research coverage is.
The way our global emerging markets investment team is structured also allows us to effectively cover different regions. The broader team manages three regional portfolios, each encompassing Latin America, emerging EMEA, and emerging Asia, which all feed ideas into our global emerging markets portfolio, and within this the investment company. This structure is an acknowledgement of the fact that the emerging market universe is vast and means we can apply multiple layers of due diligence to the stocks we invest in. It also allows information to be transmitted quickly as the regional specialists communicate their conclusions to us, enabling both of us to come to informed conclusions about the events occurring across what is clearly a vast and diverse investment universe.
Nick Price
Chris Tennant
Portfolio Managers
12 October 2023
Principal and Emerging Risks and Uncertainties, Risk Management
In accordance with the AIC Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the "Manager"), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit and Risk Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company's risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit and Risk Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.
The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its Corporate Governance obligations.
Key emerging issues that the Board has identified include; rising geopolitical tensions, including contagion of the Ukraine crisis or tensions between China and Taiwan into the wider region or an increase in tensions in the South China Sea; rising inflation and the so-called cost of living crisis impacting demand for UK-listed shares; and climate change, which is one of the most critical emerging issues confronting asset managers and their investors. The Board notes that the Manager monitors these issues, and has integrated macro and ESG considerations, including climate change, into the Company's investment process. Further details are in the Annual Financial Report. The Board will continue to monitor how this may impact the Company as a risk, the main risk being the impact on investment valuations.
The Board considers the following as the principal risks and uncertainties faced by the Company.
| Principal Risks | Risk Description and Impact | Risk Mitigation | Trend |
| Volatility of Emerging Markets and Market Risks |
|
| Increasing |
| Investment Performance Risk |
|
| Increasing |
| Changing Investor Sentiment |
|
| Stable |
| Cybercrime and Information Security Risks |
|
| Increasing |
| Discount to Net Asset Value ("NAV") Risk |
|
| Stable |
| Lack of Market Liquidity Risk |
|
| Stable |
| Business Continuity & Event Management Risks |
|
| Stable |
| Gearing Risk |
|
| Stable |
| Foreign Currency Exposure Risk |
|
| Stable |
| Environmental, Social and Governance (ESG) Risk |
|
| Stable |
| Key Person Risk |
|
| Stable |
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with the regulatory requirements of the Guernsey Financial Services Commission, UK listing rules, corporate governance requirements or local tax requirements that could result in loss of status as an Authorised Closed Ended Investment Scheme, becoming subject to additional tax charges or to exclusion from trading in particular markets.
The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.
Operational Risks
The Company relies on a number of third-party service providers, principally the Manager, Registrar and Custodian. It is dependent on the effective operation of the Manager's control systems and those of its service providers with regard to the security of the Company's assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements. The Registrar and Custodian are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers' own internal control reports are received by the Board on an annual basis and any concerns are investigated. Risks associated with these service providers is rated as low, but the financial consequences could be serious, including reputational damage to the Company.
Viability statement
In accordance with provision 35 of the 2019 AIC Code of Corporate Governance the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the "Going Concern" basis. The Company is an investment fund with the objective of achieving long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging market companies, both listed and unlisted. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period. In making an assessment on the viability of the Company, the Board has considered the following:
· The ongoing relevance of the investment objective in prevailing market conditions;
· The Company's NAV and share price performance;
· The principal and emerging risks and uncertainties facing the Company as set out above and their potential impact;
· The future demand for the Company's shares;
· The Company's share price discount to the NAV;
· The liquidity of the Company's portfolio;
· Consideration of the continuation vote in 2026;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company has assumed for the purposes of the viability statement that the continuation vote in 2026 would be passed.
The Company's performance for the five year reporting period to 30 June 2023 lagged the Benchmark Index, with a NAV total return of -5.3%, a share price total return of -7.3% compared to the Benchmark Index total return of +10.1%.
The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:
· The Investment Manager's compliance with the Company's investment objective and policy, its investment strategy and asset allocation;
· The fact that the portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary; and
· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company's total assets.
When considering the risk of under-performance, a series of stress tests were carried out including in particular the effects of any substantial future falls in investment value on the ability to maintain dividend payments and repay obligations as and when they arise.
In preparing the Financial Statements, the Directors have considered the impact of climate change, particularly in the context of the climate change risk identified within the ESG Risk in the Annual Financial Report . The Board has also considered the impact of regulatory changes and significant market events and how this may affect the Company. In addition, the Directors' assessment of the Company's ability to operate in the foreseeable future is included in the Going Concern Statement which is included in the Directors' Report in the Annual Financial Report.
Promoting the Success of the Company
Under Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company's suppliers, customers and others; the impact of the Company's operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the Company.
As an externally managed Investment Company, the Company has no employees or physical assets, and a number of the Company's functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodian, banking and audit services. The Board considers the Company's key stakeholders to be the existing and potential shareholders, the external appointed Manager and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company's objective of delivering long-term capital growth to investors, in line with the Company's stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this regularly. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Financial Report.
The Board places great importance on communication with shareholders and is committed to listening to their views. The primary medium through which the Company communicates with shareholders is through its Annual and Half Year Financial Reports. Monthly factsheets are also produced. Company related announcements are released via the Regulatory News Service (`RNS') to the London Stock Exchange. All of the aforementioned information is available on the Company's website www.fidelity.co.uk/emergingmarkets. Shareholders may also communicate with Board members at any time by writing to the Company Secretary at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or by email at investmenttrusts@fil.com. The Portfolio Managers meet with major shareholders, potential investors, stock market analysts, journalists and other commentators throughout the year. These communication opportunities help inform the Board in considering how best to promote the success of the Company over the long-term.
The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders' interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company's direct operations are limited, the Board recognises the importance of considering the impact of the Company's investment strategy on the wider community and environment. The Board believes that a proper consideration of ESG issues aligns with the Company's investment objective to deliver long-term growth in both capital and income, and the Board's review of the Manager includes an assessment of their ESG approach, which is set out in the Annual Financial Report .
In addition to ensuring that the Company's investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of this report, have included:
· Marketing & PR - Establishing a corporate identity for the Company
The Board has worked closely with the Manager in tandem with various public relations and communications firms to establish a new corporate identity for the Company since moving to the new Manager, Fidelity.
· Audit Tender
In adherence to the Competition and Market Authority Order 2014, FTSE 350 companies are required to retender their audit at least every ten years or more frequently. On this basis the Board decided to review its external audit arrangements for the year ending 30 June 2024 noting the incumbent KPMG Channel Islands Limited has been the Company's auditor since 2018. The thorough audit tender process resulted in the Board's recommendation to re-appoint KPMG Channel Islands Limited as the Company's independent auditor for the year ending 30 June 2024 and subsequent years.
· Company Secretarial Service
The Board regularly discusses its service providers with the Manager and in a review during the year the Board took the decision to appoint FIL Investments International Ltd as Company Secretary with effect from 15 May 2023. J.P. Morgan Administration Services (Guernsey) Limited remains the Company's Administrator and registered office.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Financial Report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union to meet the requirements of applicable law and regulations.
Under company law the Directors must not approve the financial statements unless they are satisfied that taken as a whole, they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
· assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
· use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The work carried out by the auditor does not include consideration of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts when they are presented on the website.
The Directors who hold office at the date of approval of this Directors' Report confirm that so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware, and that each Director has taken all the steps he/she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.
Responsibility statement of the Directors in respect of the Annual Report
The Directors confirm that to the best of their knowledge:
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· the Chairman's statement, Strategic Report and Portfolio Managers' Review includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal and emerging risks and uncertainties that the Company faces.
The Directors consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
There were no instances where the Company is required to make disclosures in respect of Listing Rule 9.8.4 during the financial period under review.
For and on behalf of the Board
Heather Manners
Chairman
12 October 2023
Statement of Comprehensive Income
for the year ended 30 June 2023
|
|
| Year ended 30 June 2023 | Year ended 30 June 2022 | ||||
|
| Note | Revenue $'000 | Capital $'000 | Total $'000 | Revenue $'000 | Capital $'000 | Total $'000 |
| Revenue |
|
|
|
|
|
|
|
| Investment income | 3 | 22,272 | - | 22,272 | 24,399 | - | 24,399 |
| Derivative income | 3 | 17,709 | - | 17,709 | 10,849 | - | 10,849 |
| Other income | 3 | 620 | - | 620 | 137 | - | 137 |
| Total Income |
| 40,601 | - | 40,601 | 35,385 | - | 35,385 |
| Net gains/(losses) on financial assets at fair value through profit or loss1 | 10 | - | 36,553 | 36,553 | - | (535,032) | (535,032) |
| Net (losses)/gains on derivative instruments | 11 | - | (37,809) | (37,809) | - | 23,229 | 23,229 |
| Net foreign exchange losses |
| - | (933) | (933) | - | (2,707) | (2,707) |
| Total income and gains/(losses) |
| 40,601 | (2,189) | 38,412 | 35,385 | (514,510) | (479,125) |
| Expenses |
|
|
|
|
|
|
|
| Management fees | 4 | (923) | (3,690) | (4,613) | (927) | (3,709) | (4,636) |
| Other expenses1 | 5 | (1,619) | - | (1,619) | (2,451) | (1,318) | (3,769) |
| Profit/(loss) before finance costs and taxation |
| 38,059 | (5,879) | 32,180 | 32,007 | (519,537) | (487,530) |
| Finance costs | 6 | (15,653) | - | (15,653) | (13,946) | - | (13,946) |
| Profit/(loss) before taxation |
| 22,406 | (5,879) | 16,527 | 18,061 | (519,537) | (501,476) |
| Taxation | 7 | (2,622) | 644 | (1,978) | (2,954) | 6,948 | 3,994 |
| Profit/(loss) after taxation for the year attributable to Participating Preference Shares |
| 19,784 | (5,235) | 14,549 | 15,107 | (512,589) | (497,482) |
| Earnings/(loss) per Participating Preference Share (basic and diluted) | 8 | $0.22 | $(0.06) | $0.16 | $0.15 | $(5.11) | $(4.96) |
1 Transaction costs directly associated with purchases and sales of non-derivative securities changed presentation to be included under the `Net gains/(losses) on financial assets at fair value through profit or loss' line in the capital column of the Statement of Comprehensive Income. In the prior periods the transaction costs were included under `Other expenses'. The change in presentation is consistently applied for both for the current year and comparative reporting period. The change in presentation of transaction costs was applied in order to align with best market practice as relevant for investment companies.
The total column of this statement represents the Company's Statement of Other Comprehensive Income prepared in accordance with IFRS. The supplementary information on the allocation between the revenue account and the capital reserve is presented under guidance published by the AIC.
All the profit/(loss) and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.
The notes below form an integral part of these financial statements
Statement of Changes in Equity
for the year ended 30 June 2023
|
| Note | Share premium account $'000 | Capital reserve $'000 | Revenue reserve $'000 | Total equity $'000 |
| Total equity at 30 June 2022 |
| 6,291 | 741,095 | 49,375 | 796,761 |
| (Loss)/profit after taxation for the year |
| - | (5,235) | 19,784 | 14,549 |
| Dividend paid to shareholders | 9 | - | - | (14,576) | (14,576) |
| Total equity at 30 June 2023 |
| 6,291 | 735,860 | 54,583 | 796,734 |
|
| Note | Share premium account $'000 | Capital reserve $'000 | Revenue reserve $'000 | Total equity $'000 |
| Total equity at 30 June 2021 |
| 6,291 | 1,642,118 | 50,666 | 1,699,075 |
| (Loss)/profit after taxation for the year |
| - | (512,589) | 15,107 | (497,482) |
| Write off receivable for shares |
| - | (134) | - | (134) |
| Repurchase and cancellation of the Company's own shares | 14 | - | (388,300) | - | (388,300) |
| Dividend paid to shareholders | 9 | - | - | (16,398) | (16,398) |
| Total equity at 30 June 2022 |
| 6,291 | 741,095 | 49,375 | 796,761 |
The notes below form an integral part of these financial statements.
Statement of Financial Position
as at 30 June 2023
|
| Note | 30 June 2023 $'000 | 30 June 2022 $'000 |
| Non-current assets |
|
|
|
| Financial assets at fair value through profit or loss1 | 10 | 778,608 | 727,342 |
| Current assets |
|
|
|
| Derivative assets | 11 | 9,468 | 20,515 |
| Amounts held at futures clearing houses and brokers |
| 18,210 | 11,901 |
| Other receivables | 12 | 6,480 | 30,419 |
| Cash at bank |
| 18,057 | 34,418 |
|
|
| 52,215 | 97,253 |
| Current liabilities |
|
|
|
| Derivative liabilities | 11 | 12,847 | 14,408 |
| Other payables | 13 | 21,242 | 13,426 |
|
|
| 34,089 | 27,834 |
| Net current assets |
| 18,126 | 69,419 |
|
|
|
|
|
| Net assets |
| 796,734 | 796,761 |
| Equity |
|
|
|
| Share premium account | 15 | 6,291 | 6,291 |
| Capital reserve | 15 | 735,860 | 741,095 |
| Revenue reserve | 15 | 54,583 | 49,375 |
| Total Equity Shareholders' Funds |
| 796,734 | 796,761 |
|
|
|
|
|
| Net asset value per Participating Preference Share | 16 | $8.75 | $8.75 |
1 The entire balance of investments in Financial assets at fair value through profit or loss was reclassified from Current assets to Non-Current assets. For more information please see Note 10 - Financial Assets at Fair Value through Profit or Loss.
The Financial Statements above were approved by the Board of Directors of the Company on 12 October 2023 and signed on its behalf by:
Heather Manners
Chairman
The notes below form an integral part of these financial statements.
Statement of Cash Flows
for the year ended 30 June 2023
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| Operating activities |
|
|
| Cash inflow from investment income | 24,214 | 20,371 |
| Cash inflow from derivative income | 6,184 | 3,808 |
| Cash inflow from other income | 33 | - |
| Cash inflow from securities lending income | - | 38 |
| Cash outflow from taxation paid | (1,063) | (3,694) |
| Cash outflow from the purchase of investments1 | (928,894) | (1,647,814) |
| Cash inflow from the sale of investments1 | 930,627 | 2,064,569 |
| Cash (outflow)/inflow from net proceeds from settlement of derivatives | (4,819) | 14,119 |
| Cash outflow from amounts held at futures clearing houses and brokers | (6,309) | (11,901) |
| Cash outflow from bank charges | - | (63) |
| Cash outflow from operating expenses1 | (5,150) | (11,409) |
| Net cash inflow from operating activities | 14,823 | 428,024 |
|
|
|
|
| Financing activities |
|
|
| Cash outflow from CFD interest paid | (10,111) | (4,585) |
| Cash outflow from short CFD dividends paid | (5,564) | (8,542) |
| Cash outflow from dividends paid to shareholders | (14,576) | (16,398) |
| Cash outflow from repurchase and cancellation of the Company's own shares | - | (388,300) |
| Net cash outflow from financing activities | (30,251) | (417,825) |
|
|
|
|
| Net (decrease)/increase in cash at bank | (15,428) | 10,199 |
| Cash at bank at the start of the year | 34,418 | 26,926 |
| Effect of foreign exchange movements | (933) | (2,707) |
|
|
|
|
| Cash at bank at the end of the year | 18,057 | 34,418 |
1 Transaction costs directly associated with purchases and sales of non-derivative securities changed presentation to be included under the `Net gains/(losses) on financial assets at fair value through profit or loss' line in the capital column of the Statement of Comprehensive Income. In the prior periods the transaction costs were included under `Other expenses'. The change in presentation is consistently applied for both for the current year and comparative reporting period.
The notes below form an integral part of these financial statements.
Notes to the Financial Statements
for the year ended 30 June 2023
1. Principal Activity
Fidelity Emerging Markets Limited (the `Company') was incorporated in Guernsey on 7 June 1989 and commenced activities on 19 September 1989. The Company is an Authorised Closed-Ended Investment Scheme as defined by The Authorised Closed-Ended Investment Schemes Rules and Guidance, 2021 (and, as such, is subject to ongoing supervision by the Guernsey Financial Services Commission). The Company is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
The Company's registered office is at Level 3, Mill Court La Charroterie, St Peter Port, Guernsey GY1 1EJ, Channel Islands.
The Company's investment objective is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging market companies, both listed and unlisted.
These financial statements were approved by the Board of Directors and authorised for issue on 12 October 2023.
2. Summary of Significant Accounting Policies
(a) Basis of preparation
The principal accounting policies applied in the preparation of these financial statements on a going concern basis are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. The Company's financial statements, which give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company, have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (`IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board (`IASB'), the IFRS Interpretations Committee and interpretations approved by the International Accounting Standards Committee (`IASC') that remain in effect and the Companies (Guernsey) Law, 2008. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.
Going concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these financial statements. In making their assessment the Directors have reviewed the income and expense projections, the liquidity of the investment portfolio, stress testing performed and considered the Company's ability to meet liabilities as they fall due. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these financial statements.
Significant accounting estimates, assumptions and judgements
The preparation of financial statements in conformity with IFRS may require management to make critical accounting judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from the estimates.
Valuations use observable data to the extent practicable. Changes in any assumptions could affect the reported fair value of the financial instruments. The determination of what constitutes observable requires significant judgement by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
Adoption of new and revised International Financial Reporting Standards
The accounting policies adopted are consistent with those of the previous financial year.
At the date of authorisation of these financial statements, the following revised International Accounting Standards (IAS) were in issue but not yet effective:
· IAS 1 Classification of Liabilities as Current or Non-current - (Amendments);
· IAS 1 Disclosure of Accounting Policies - (Amendments) and IFRS Practice Statement 2;
· IAS 8 Definition of Accounting Estimate - (Amendments); and
· IAS 12 Deferred Tax related to Assets and Liabilities arising from a Single Transaction
The Directors do not expect that the adoption of the above standards will have a material impact on the financial statements of the Company in future periods.
(b) Financial Instruments
Classification
(i) Assets
The Company classifies its investments based on both the Company's business model for managing those financial assets and the contractual cash flow characteristics of the financial assets. The portfolio of financial assets is managed and performance is evaluated on a fair value basis. The Company is primarily focused on fair value information and uses that information to assess the assets' performance and to make decisions. The Company has not taken the option to irrevocably designate any equity securities as fair value through other comprehensive income. All investments are measured at fair value through profit or loss. The Company's investments are included in the Financial assets at fair value through profit and loss line in the Statement of Financial Position.
(ii) Liabilities
Derivative contracts that have a negative fair value are presented as derivative financial liabilities at fair value through profit or loss. As such, the Company classifies all of its investment portfolio as financial assets or liabilities at fair value through profit or loss. The Company's policy requires the Manager and the Board of Directors to evaluate the information about these financial assets and liabilities on a fair value basis together with other related financial information.
Recognition/derecognition
The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument.
Regular-way purchases and sales of investments are recognised on their trade date, the date on which the Company commits to purchase or sell the investment. Investments are derecognised when the rights to cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or expires.
Measurement
Financial assets at fair value through profit and loss are measured initially at fair value being the transaction price. Transaction costs incurred to acquire financial assets at fair value through profit or loss are expensed in the Statement of Comprehensive Income. Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers. Subsequent to initial recognition, all financial assets at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of the `financial assets at fair value through profit or loss' category are presented in the Statement of Comprehensive Income in the year in which they arise.
The Company includes transaction costs, incidental to the purchase or sale of investments within Net gains/(losses) on financial assets at fair value through profit or loss in the capital column of the Statement of Comprehensive Income and has disclosed them in Note 10 below.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Securities listed on active markets are valued based on their last bid price for valuation and financial statement purposes.
Equity Linked Notes are valued based on the available price of the underlying asset as at reporting date.
In the normal course of business, the Company may utilise Participatory notes (`P Notes') to gain access to markets that otherwise would not be accessible as a foreign investor. P Notes are issued by banks or broker-dealers and allow the Company to gain exposure to local shares in foreign markets. They are valued based on the last price of the underlying equity at the valuation date.
The Company's investment in other funds (`Investee Funds') are subject to the terms and conditions of the respective Investee Fund's offering documentation. The investments in Investee Funds are primarily valued based on the latest available redemption price for such units in each Investee Fund, as determined by the Investee Funds' administrators. The Company reviews the details of the reported information obtained for the Investee Funds and considers the liquidity of the Investee Fund or its underlying investments, the value date of the net asset value provided, any restrictions on redemptions and the basis of the Investee Funds' accounting. If necessary, the Company makes adjustments to the net asset value of the Investee Funds to obtain the best estimate of fair value.
The Company may make adjustments to the value of a security if it has been materially affected by events occurring before the Company's NAV calculation but after the close of the primary markets on which the security is traded. The Company may also make adjustment to the value of its investments if reliable market quotations are unavailable due to infrequent trading or if trading in a particular security was halted during the day and did not resume prior to the Company's NAV calculation.
In preparing these financial statements the Directors have considered the impact of climate change risk as a principal and as an emerging risk as set out in the Annual Financial Report, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with IFRS 13 - "Fair Value Measurement" investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the statement of financial position date. Investments which are unlisted are priced using market-based valuation approaches. All investments therefore reflect the market participants view of climate change risk on the investments held by the Company.
Derivative Instruments
When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short contracts for difference ("CFDs"), futures and options.
Under IFRS 9 derivatives are classified at fair value through profit or loss - held for trading, and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:
· Long and short CFDs - the difference between the strike price and the value of the underlying shares in the contract;
· Futures - the difference between the contract price and the quoted trade price;
· Exchange Traded Options - valued based on similar instruments or the quoted trade price for the contract; and
· Over the counter options - valued based on broker statements.
Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in derivative income in the revenue column of the Statement of Comprehensive Income. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included in net gains on derivative instruments in the capital column of the Statement of Comprehensive Income. Any positions on such transactions open at the reporting date are reflected on the Statement of Financial Position at their fair value within current assets or current liabilities.
Amortised cost measurement
Cash at bank, amounts held at futures clearing houses and brokers and other receivables are carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses are recognised in profit or loss when the receivables are derecognised or impaired, as well as through the amortisation process.
Capital gains tax payable and other payables are measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are derecognised, as well as through the amortisation of these liabilities.
(c) Foreign Currency Translation
Functional and presentation currency
The books and records of the Company are maintained in the currency of the primary economic environment in which it operates (its functional currency). The Directors have considered the primary economic environment of the Company and considered the currency in which the original capital was raised, past distributions have been made and ultimately the currency in which capital would be returned on a break up basis. The Directors have also considered the currency to which underlying investments are exposed.
On balance, the Directors believe that US dollars best represent the functional currency of the Company. The financial statements, results and financial position of the Company are also expressed in US dollars which is the presentation currency of the Company and have been rounded to the nearest thousand unless otherwise stated.
Transactions and balances
Transactions in currencies other than US dollars are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items and non-monetary assets and liabilities that are fair valued and are denominated in foreign currencies are retranslated at rates prevailing at the end of the reporting period. Gains and losses arising on translation are included in the Statement of Comprehensive Income for the year. Foreign exchange gains and losses relating to cash and cash equivalents are presented in the Statement of Comprehensive Income within `Net foreign exchange gains or losses'. Foreign exchange gains and losses relating to financial assets at fair value through profit or loss and derivatives are presented in the Statement of Comprehensive Income within `Net gains or losses on investments' and `Net gains on derivative instruments' respectively.
(d) Recognition of dividend and interest income
Dividends arising on the Company's investments are accounted for on an ex-dividend basis, gross of applicable withholding taxes. Interest on cash at bank and collateral is accrued on a day-to-day basis using the effective interest method. Dividends and interest income are recognised in the Statement of Comprehensive Income.
(e) Income from derivatives
Derivative instrument income received from dividends on long (or payable from short) CFDs are accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited (or charged) to the revenue column of the Statement of Comprehensive Income.
Interest received on CFDs is accounted for on an accruals basis and credited to the revenue column of the Statement of Comprehensive Income. Interest received on CFDs represent the finance costs calculated by reference to the notional value of the CFDs.
(f) Finance costs
Finance costs comprise bank charges and finance costs paid on CFDs, which are accounted for on an accruals basis, and dividends paid on short CFDs, which are accounted for on the date on which the obligation to incur the cost is established, normally the ex-dividend date. Finance costs are charged in full to the revenue column of the Statement of Comprehensive Income.
(g) Dividend distribution
Dividend distributions are at the discretion of the Board of Directors. A dividend is recognised as a liability in the period in which it is approved at the Annual General Meeting of the shareholders and is recognised in the Statement of Changes in Equity.
(h) Cash and cash equivalents
Cash comprises current deposits with banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
Bank overdrafts are accounted for as short term liabilities on the Statement of Financial Position and the interest expense is recorded using the effective interest rate method. Bank overdrafts are classified as other financial liabilities.
(i) Amounts held at futures clearing houses and brokers
Cash deposits are held in segregated accounts on behalf of brokers as collateral against open derivative contracts. These are carried at amortised cost.
(j) Other receivables
Other receivables include amounts receivable on settlement of derivatives, securities sold pending settlement, accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets. Other receivables are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method and as reduced by appropriate allowance for estimated irrecoverable amounts.
(k) Other payables
Other payables include amounts payable on settlement of derivatives, securities purchased pending settlement, investment management fees, amounts payable for repurchase of shares, finance costs payable and expenses accrued in the ordinary course of business. Other payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Other payables are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
(l) Segment reporting
Operating Segments are reported in a manner consistent with the internal reporting used by the chief operating decision maker (`CODM'). The CODM, who is responsible for allocation of resources and assisting performance of the operating segments, has been identified as the Directors of the Company, as the Directors are ultimately responsible for investment decisions.
The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.
(m) Expenses
All expenses are accounted for on an accruals basis and are charged to the Statement of Comprehensive Income.
Expenses are allocated wholly to revenue with the following exceptions:
· Management fees are allocated 20% to revenue and 80% to the capital, in line with the Board's expected long-term split of revenue and capital return from the Company's investment portfolio; and
· Expenses which are incidental to capital events are charged to capital.
(n) Taxation
The Company currently incurs withholding taxes imposed by certain countries on investment income and capital gains taxes upon realisation of its investments. Such income or gains are recorded gross of withholding taxes and capital gains taxes in the Statement of Comprehensive Income. Withholding taxes and capital gains taxes are shown as separate items in the Statement of Comprehensive Income.
In accordance with IAS 12, `Income taxes', the Company is required to recognise a tax liability when it is probable that the tax laws of foreign countries require a tax liability to be assessed on the Company's capital gains sourced from such foreign country, assuming the relevant taxing authorities have full knowledge of all the facts and circumstances. The tax liability is then measured at the amount expected to be paid to the relevant taxation authorities, using the tax laws and rates that have been enacted or substantively enacted by the end of the reporting period. There is sometimes uncertainty about the way enacted tax law is applied to offshore investment funds. This creates uncertainty about whether or not a tax liability will ultimately be paid by the Company. Therefore, when measuring any uncertain tax liabilities, management considers all of the relevant facts and circumstances available at the time that could influence the likelihood of payment, including any formal or informal practices of the relevant tax authorities.
(o) Share capital
Participating Preference Shares are not redeemable and there is no obligation to pay cash or another financial asset to the holder but are entitled to receive dividends. They are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds net of tax.
(p) Purchase of own shares
The cost of purchases of the Company's own shares is shown as a reduction in Shareholders' Funds. The Company's net asset value and return per Participating Preference Share are calculated using the number of shares outstanding after adjusting for purchases.
(q) Securities lending
During the year ended 30 June 2022, the Company was engaged in securities lending with third party investment companies. As of 30 June 2023, the Company is no longer engaged in securities lending activities. JPMorgan Chase Bank N.A. acted as the securities lending agent (the `Lending Agent') providing the securities lending services, record keeping services and served as securities custodian, maintaining custody of all Company-owned listed investments. Under the terms of its lending agreement, the Company received compensation in the form of fees, 20% of which are commissions payable to the Lending Agent for their services. The Company received dividends on the securities loaned and any gains and losses that occurred during the term of the loan were accounted for by the Company. Income earned from the securities lending agreement is recognised on the Statement of Comprehensive Income on an accruals basis and shown net of the commissions paid to the Lending Agent.
(r) Critical accounting estimates and assumptions
As stated in Note 2(a) Basis of Preparation, the preparation of financial statements, in conformity with IFRS, requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying the Company's accounting policies. For example, the Company may, from time to time, hold financial instruments that are not quoted in active markets, such as minority holdings in investment and private equity companies. Fair values of such instruments are determined using different valuation techniques validated and periodically reviewed by the Board of Directors.
(s) Capital reserve
The following are transferred to capital reserve:
· Gains and losses on the disposal of financial assets at fair value through profit and loss and derivatives instruments;
· Changes in the fair value of financial assets at fair value through profit and loss and derivative instruments, held at the year end;
· Foreign exchange gains and losses of a capital nature;
· 80% of management fees;
· Dividends receivable which are capital in nature;
· Taxation charged or credited relating to items which are capital in nature; and
· Other expenses which are capital in nature.
3. Income
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Investment income |
|
|
| UK dividends | 798 | 608 |
| Overseas dividends | 21,474 | 23,595 |
| UK and overseas scrip dividends | - | 196 |
|
| 22,272 | 24,399 |
| Derivative income |
|
|
| Dividends received on long CFDs | 5,220 | 4,182 |
| Interest received on CFDs | 1,414 | 374 |
| Option Income | 11,075 | 6,293 |
|
| 17,709 | 10,849 |
| Other income |
|
|
| Securities lending income* | - | 38 |
| Interest income from cash and cash equivalents and collateral | 587 | 99 |
| Fee rebate | 33 | - |
|
| 620 | 137 |
| Total income | 40,601 | 35,385 |
* As of 30 June 2023, the Company is no longer engaged in securities lending activities. As at 30 June 2022, the Company generated gross income of $47,000 from securities lending transactions and Commissions amounting to $9,000 was paid to JPMorgan Chase Bank N.A. in respect of these transactions of which none were outstanding at the year end.
4. Management Fees
|
| Year ended 30 June 2023 | Year ended 30 June 2022 | ||||
|
| Revenue $'000 | Capital $'000 | Total $'000 | Revenue $'000 | Capital $'000 | Total $'000 |
| Management fees | 923 | 3,690 | 4,613 | 927 | 3,709 | 4,636 |
Up until 4 October 2021, the Company's Investment Manager was Genesis Investment Management, LLP (`GIML' or `Genesis').
Under the terms of its Management Agreement and up to the end of same, GIML was entitled to receive a Management Fee from the Company, payable monthly in arrears equal to 0.90% (2022: 0.90%) per annum, calculated and accrued on the Net Asset Value of the Company as at each weekly Valuation Day, except for investments in Investee Funds, where GIML absorbed the expenses of the management of such funds to a maximum of 1% per annum of the value of the Company's holding in the relevant fund at the relevant time.
With effect from 4 October 2021, FIL Investment Services (UK) Limited was appointed as the Alternative Investment Fund Manager of the Company (`the Manager'), with the investment management of the Company undertaken by FIL Investments International (`Fidelity International', `the Investment Manager') collectively `Fidelity'.
Under the Investment Management Agreement (`the IMA'), Fidelity International is entitled to receive a Management Fee of 0.60% per annum of the Net Asset Value of the Company. Fees will be payable monthly in arrears and calculated on a daily basis.
Management fees incurred by collective investment schemes or investment companies managed or advised by the Investment Manager are reimbursed.
Fidelity International has waived its entitlement to receive a Management Fee for a period of nine months from its date of appointment. Hence, management fees for the financial year ended 30 June 2022 relates to the period under GIML management.
Please see information on ongoing charges ratio as presented in the Annual Financial Report.
5. Other Expenses
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Allocated to revenue: |
|
|
| Custodian fees | 362 | 1,002 |
| Directors' fees | 279 | 263 |
| Directors' expenses | 74 | 19 |
| Administration fees | 192 | 359 |
| Audit fees1 | 73 | 159 |
| Legal and professional fees | 117 | 213 |
| Sundry expenses | 522 | 436 |
|
| 1,619 | 2,451 |
| Allocated to capital:2 |
|
|
| Legal and professional fees | - | 1,318 |
|
| - | 1,318 |
| Other expenses | 1,619 | 3,769 |
1 The audit fees charged through the Statement of Comprehensive Income for the year ended 30 June 2022 also includes an element related to the prior year's Audit.
2 Transaction costs directly associated with purchases and sales of non-derivative securities changed presentation to be included under the `Net gains/(losses) on financial assets at fair value through profit or loss' line in the capital column of the Statement of Comprehensive Income. In the prior periods the transaction costs were included under `Other expenses'. The change in presentation is consistently applied for both for the current year and comparative reporting period.
Administration fees
The Administrator is entitled to receive a fee, payable monthly, based on the Net Asset Value of the Company and time incurred. Administration fees for the year were $192,000 and charged by JP Morgan Administration Services (Guernsey) Limited (2022: $359,000).
Custodian fee
Under the Custodian Agreement, the Custodian to the Company is entitled to receive a fee payable monthly, based on the Net Asset Value of the Company. All custody services are performed by JP Morgan Chase Bank.
The Company also incurs charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.05% (2022: 0.08%) per annum of the average Net Assets of the Company. Custodian fees for the year were $362,000 (2022: $1,002,000).
6. Finance Costs
|
| Year ended 30 June 2023 | Year ended 30 June 2022 | ||||
|
| Revenue $'000 | Capital $'000 | Total $'000 | Revenue $'000 | Capital $'000 | Total $'000 |
| Bank charges | - | - | - | 63 | - | 63 |
| Dividends paid on short CFDs | 5,270 | - | 5,270 | 9,097 | - | 9,097 |
| Interest paid on CFDs | 10,383 | - | 10,383 | 4,786 | - | 4,786 |
|
| 15,653 | - | 15,653 | 13,946 | - | 13,946 |
7. Taxation
|
| Year ended 30 June 2023 | Year ended 30 June 2022 | ||||
|
| Revenue $'000 | Capital $'000 | Total $'000 | Revenue $'000 | Capital $'000 | Total $'000 |
| Capital gains tax | - | (644) | (644) | - | (6,948) | (6,948) |
| Withholding taxes | 2,622 | - | 2,622 | 2,954 | - | 2,954 |
|
| 2,622 | (644) | 1,978 | 2,954 | (6,948) | (3,994) |
The Company is exempt from taxation in Guernsey under the provisions of the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 2012. As such, the Company is only liable to pay a fixed annual fee, currently £1,200 (2022: £1,200).
Income due to the Company is subject to withholding taxes. The Manager undertakes regular reviews of the tax situation of the Company and believes that withholding taxes on dividend income and capital gains taxes on capital gains are currently the material transactions that generate the amounts of tax payable.
In accordance with IAS 12, `Income taxes', where necessary the Company provides for deferred taxes on any capital gains/losses on the revaluation of securities in such jurisdictions where capital gains tax is levied.
The capital gains charge has been calculated on the basis of the tax laws enacted or substantially enacted at the reporting date in the countries where the Company's investments generate taxable income on realisation. The Manager, on behalf of the Board, periodically evaluates which applicable tax regulations are subject to interpretation and establishes provisions when appropriate.
As at 30 June 2023, $915,000 capital gains tax provision was recognised in the Statement of Financial Position (2022: $nil).
8. Earnings/(loss) per Participating Preference Share
|
| Year ended 30 June 2023 | Year ended 30 June 2022 |
| Revenue earnings per Participating Preference Share | $0.22 | $0.15 |
| Capital loss per Participating Preference Share | $(0.06) | $(5.11) |
| Total earnings/(loss) per Participating Preference Share - basic and diluted | $0.16 | $(4.96) |
The earnings/(loss) per Participating Preference Share is based on the profit/(loss) after taxation for the year divided by the weighted average number of Participating Preference Shares in issue during the year, as shown below:
|
| $'000 | $'000 |
| Revenue profit after taxation for the year | 19,784 | 15,107 |
| Capital loss after taxation for the year | (5,235) | (512,589) |
| Total profit/(loss) after taxation for the year attributable to Participating Preference Shares | 14,549 | (497,482) |
|
| Number | Number |
| Weighted average number of Participating Preference Shares in issue | 91,100,066 | 100,251,671 |
9. Dividends Paid to Shareholders
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Dividend paid |
|
|
| 2022 final dividend of 16.0¢ (2021: 18.0¢) per Participating Preference Share | 14,576 | 16,398 |
| Total dividend paid | 14,576 | 16,398 |
|
|
|
|
| Dividend proposed |
|
|
| 2023 final dividend of 19.0¢ (2022: 16.0¢) per Participating Preference Share | 17,309 | 14,576 |
| Total dividend proposed | 17,309 | 14,576 |
The Directors have proposed the payment of a dividend for the year ended 30 June 2023 of 19.0¢ per Participating Preference Share which is subject to approval by shareholders at the Annual General Meeting on 7 December 2023 and has not been included as a liability in these financial statements. The dividend will be paid on 15 December 2023 to shareholders on the register at the close of business on 17 November 2023 (ex-dividend date 16 November 2023).
10. Financial Assets at Fair Value through Profit or Loss
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| Financial Assets: |
|
|
| Equity securities | 752,126 | 642,794 |
| Equity linked notes | 17,433 | 78,739 |
| Investee funds | 9,049 | 5,809 |
| Total financial assets at fair value through profit or loss1 | 778,608 | 727,342 |
|
|
|
|
| Opening book cost | 907,801 | 1,184,256 |
| Opening unrealised (losses)/gains on financial assets at fair value through profit or loss | (180,459) | 495,679 |
| Opening fair value of financial assets at fair value through profit or loss | 727,342 | 1,679,935 |
| Movements in the year |
|
|
| Purchases at cost2 | 932,911 | 1,659,847 |
| Sales - proceeds2 | (918,198) | (2,077,408) |
| Gains/(losses) on financial assets at fair value through profit or loss2 | 36,553 | (535,032) |
| Closing fair value | 778,608 | 727,342 |
| Closing book cost | 884,753 | 907,801 |
| Closing unrealised losses on financial assets at fair value through profit or loss | (106,145) | (180,459) |
| Closing fair value of financial assets at fair value through profit or loss | 778,608 | 727,342 |
1 The fair value hierarchy of the financial assets at fair value through profit or loss shown in Note 17 below.
2 Transaction costs directly associated with purchases and sales of non-derivative securities changed presentation to be included under the `Net gains/(losses) on financial assets at fair value through profit or loss' line in the capital column of the Statement of Comprehensive Income. In the prior periods the transaction costs were included under `Other expenses'. The change in presentation is consistently applied for both for the current year and comparative reporting period.
Under the previous Investment Manager and until the re-balancing of the portfolio by the new Investment Manager, the entire balance of investments in Financial assets at fair value through profit or loss was classified under Current assets. Under the investment approach adopted by the current Investment Manger, the portfolio does not meet the definition of current assets, therefore the entire balance of investments in Financial assets at fair value through profit or loss is classified as Non-current assets. This led to a restatement of the entire balance of Financial assets at fair value through profit or loss as at 30 June 2022 reducing the Current assets from $824,595,000 to $97,253,000 and increasing the Non-current assets from Nil to $727,342,000. The restatement of the 30 June 2022 balance has no impact on the Net Asset Value of the Company or any other indicators, including the Alternative Performance Measures as at 30 June 2022.
As the investment objective of the Company is to achieve long-term capital growth, the classification of investments in Financial assets at fair value through profit or loss as Non-current assets is representative of the way the portfolio is managed.
The appropriate classification for periods prior to the change of Investment Manager (4 October 2021) and accounting periods prior to that is considered to be impracticable to determine, due to the change in Investment Manager and directors.
Gains/(losses) on financial assets at fair value through profit or loss
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Realised gains/(losses) on financial assets at fair value through profit or loss |
|
|
| Realised gains | 75,936 | 385,792 |
| Realised losses | (113,697) | (244,686) |
| Net realised (losses)/gains on financial assets at fair value through profit or loss | (37,761) | 141,106 |
| Change in unrealised gains/(losses) on financial assets at fair value through profit or loss |
|
|
| Change in unrealised gains on financial assets at fair value through profit or loss | 20,750 | (499,923) |
| Change in unrealised losses on financial assets at fair value through profit or loss | 53,564 | (176,215) |
| Net change in unrealised gains/(losses) on financial assets at fair value through profit or loss | 74,314 | (676,138) |
| Net gains/(losses) on financial assets at fair value through profit or loss | 36,553 | (535,032) |
The Company received $918,198,000 (2022: $2,077,408,000) from financial assets at fair value through profit or loss sold in the year. The book cost of these financial assets at fair value through profit or loss when they were purchased was $955,959,000 (2022: $1,936,302,000). These financial assets at fair value through profit or loss have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the financial assets at fair value through profit or loss.
Transaction costs incurred during the year in the acquisition and disposal of financial assets at fair value through profit or loss, which are included in the Net realised gains/(losses) on financial assets at fair value through profit or loss were as follows:
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Purchases transaction costs | 1,403 | 2,094 |
| Sales transaction costs | 1,123 | 2,945 |
|
| 2,526 | 5,039 |
Transaction costs for the year ended 30 June 2022 were higher due to the rebalancing of the investment portfolio following the change of Investment Manager to Fidelity.
11. Derivative Instruments
|
| Year ended 30 June 2023 $'000 | Year ended 30 June 2022 $'000 |
| Realised (losses)/gains on derivative instruments |
|
|
| Gains on CFDs | 163,817 | 129,741 |
| Gains on futures | 19,508 | 117,231 |
| Gains on options | 10,947 | 6,269 |
| Losses on CFDs | (187,154) | (227,268) |
| Losses on futures | (21,287) | (3,963) |
| Losses on options | (13,600) | (6,068) |
| Net realised (losses)/gains on derivative instruments | (27,769) | 15,942 |
| Change in unrealised (losses)/gains on derivative instruments |
|
|
| Change in unrealised gains on CFDs | (11,177) | 19,541 |
| Change in unrealised gains on futures | 849 | - |
| Change in unrealised gains on options | 138 | 948 |
| Change in unrealised losses on CFDs | (15) | (10,890) |
| Change in unrealised losses on futures | 277 | (277) |
| Change in unrealised losses on options | (112) | (2,035) |
| Net change in unrealised (losses)/gains on derivative instruments | (10,040) | 7,287 |
| Net (losses)/gains on derivative instruments | (37,809) | 23,229 |
|
| 30 June 2023 Fair value $'000 | 30 June 2022 Fair value $'000 |
| Fair value of derivative instruments recognised on the Statement of Financial Position* |
|
|
| Derivative instrument assets | 9,468 | 20,515 |
| Derivative instrument liabilities | (12,847) | (14,408) |
|
| (3,379) | 6,107 |
* The fair value hierarchy of the derivative instruments is shown in Note 17 below.
|
| 30 June 2023 | 30 June 2022 | ||
|
| Fair value $'000 | Asset exposure $'000 | Fair value $'000 | Asset exposure $'000 |
| At the year end the Company held the following derivative instruments |
|
|
|
|
| Long CFDs | (4,598) | 312,737 | 3,781 | 249,053 |
| Short CFDs | 2,057 | 203,746 | 4,967 | 188,830 |
| Short CFD (hedging exposure) | - | - | (97) | (7,938) |
| Futures (hedging exposure) | 849 | (130,176) | (277) | (60,312) |
| Long call options | 254 | 2,879 | 973 | 3,675 |
| Short put options | (1,557) | 10,789 | (2,954) | 16,092 |
| Short call options | (384) | 6,406 | (286) | 3,334 |
|
| (3,379) | 406,381 | 6,107 | 392,734 |
12. Other Receivables
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| CFD dividend receivable | 827 | 377 |
| Securities sold pending settlement | 789 | 13,218 |
| Amounts receivable on settlement of derivatives | - | 9,770 |
| Accrued income | 4,834 | 6,189 |
| Other receivables | 30 | 865 |
|
| 6,480 | 30,419 |
13. Other Payables
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| CFD interest payable | 473 | 201 |
| CFD dividend payable | 261 | 555 |
| Securities purchased pending settlement | 16,050 | 12,033 |
| Amounts payable on settlement of derivatives | 2,762 | 103 |
| Management fees | 391 | - |
| Custodian fees | 89 | 108 |
| Directors' fees | 45 | 76 |
| Capital gains tax payable | 915 | - |
| Accrued expenses | 256 | 350 |
|
| 21,242 | 13,426 |
14. Share Capital
|
| 2023 Number of shares | 2022 Number of shares |
| Authorised |
|
|
| Founder shares of no par value | 1,000 | 1,000 |
| Issued |
|
|
| Participating Preference Shares of no par value adjusted for purchase of own shares | 91,100,066 | 121,466,754 |
| Repurchase and cancellation of the Company's own shares | - | (30,366,688) |
| Participating Preference Shares as at 30 June | 91,100,066 | 91,100,066 |
On 6 September 2021, the Company launched a tender offer to buy back up to 25% of its issued share capital. As a result of the tender offer, on 22 October 2021, the Company repurchased 30,366,688 Participating Preference Shares for cancellation. The resultant number of shares in issue is 91,100,066 Participating Preference Shares.
The costs associated with the cancellation of the shares of $388,300,000 were charged to the capital reserve for the year ended 30 June 2022.
The Company may issue an unlimited number of Unclassified Shares of no par value.
Founder Shares
All of the Founder Shares were issued on 6 June 1989 to GIML or its nominees. The Founder Shares were issued at $1 each par value. The Founder Shares are not redeemable. At the Extraordinary General Meeting of the Company on 30 October 2009 and in accordance with The Companies (Guernsey) Law, 2008 it was approved that each Founder Share be redesignated as no par value shares.
The Founder Shares confer no rights upon holders other than at general meetings, on a poll, every holder is entitled to one vote in respect of each Founder Share held.
On 7 October 2021, all of the Founder shares were transferred from GIML to FIL Investment Services (UK) Limited.
Treasury Shares
The Company does not hold treasury shares as all historical repurchases of its own shares have been cancelled.
Participating Preference Shares
At the Extraordinary General Meeting of the Company held on 30 October 2009 it was approved that each Participating Preference Share be divided into ten Participating Preference Shares. Under The Companies (Guernsey) Law, 2008 (as amended), the nominal values of the shares were also converted into sterling and redesignated as no par value shares.
The holders of Participating Preference Shares rank ahead of holders of any other class of share in issue in a winding up. They have the right to receive any surplus assets available for distribution. The Participating Preference Shares confer the right to dividends declared, and at general meetings, on a poll, confer the right to one vote in respect of each Participating Preference Share held. Participating Preference Shares are classed as equity as they have a residual interest in the assets of the Company.
All of the above classes of shares are considered as Equity under the definitions set out in IAS 32, `Financial instruments: Disclosure and presentation', because the shares are not redeemable and there is no obligation to pay cash or another financial asset to the holder.
15. Capital and Reserves
|
| Share premium account $'000 | Capital reserve $'000 | Revenue reserve $'000 | Total equity $'000 |
| At 1 July 2022 | 6,291 | 741,095 | 49,375 | 796,761 |
| Net gains on investments at fair value through profit or loss (see Note 10) | - | 36,553 | - | 36,553 |
| Net losses on derivative instruments (see Note 11) | - | (37,809) | - | (37,809) |
| Net foreign exchange losses | - | (933) | - | (933) |
| Management fees (see Note 4) | - | (3,690) | - | (3,690) |
| Tax charged to capital (see Note 7) | - | 644 | - | 644 |
| Revenue profit after taxation for the year | - | - | 19,784 | 19,784 |
| Dividends paid to shareholders (see Note 9) | - | - | (14,576) | (14,576) |
| At 30 June 2023 | 6,291 | 735,860 | 54,583 | 796,734 |
|
| Share premium account $'000 | Capital reserve $'000 | Revenue reserve $'000 | Total equity $'000 |
| At 1 July 2021 | 6,291 | 1,642,118 | 50,666 | 1,699,075 |
| Net losses on investments at fair value through profit or loss (see Note 10) | - | (535,032) | - | (535,032) |
| Net gains on derivative instruments (see Note 11) | - | 23,229 | - | 23,229 |
| Net foreign exchange losses | - | (2,707) | - | (2,707) |
| Management fees (see Note 4) | - | (3,709) | - | (3,709) |
| Other expenses (see Note 5) | - | (1,318) | - | (1,318) |
| Tax charged to capital (see Note 7) | - | 6,948 | - | 6,948 |
| Write off receivable for shares | - | (134) | - | (134) |
| Repurchase and cancellation of the Company's own shares (see Note 14) | - | (388,300) | - | (388,300) |
| Revenue profit after taxation for the year | - | - | 15,107 | 15,107 |
| Dividends paid to shareholders (see Note 9) | - | - | (16,398) | (16,398) |
| At 30 June 2022 | 6,291 | 741,095 | 49,375 | 796,761 |
Share Premium
Share Premium is the amount by which the value of shares subscribed for exceeded their nominal value at the date of issue.
The capital reserve balance at 30 June 2023 includes unrealised losses on the revaluation of financial assets at fair value through profit or loss of $106,145,000 (2022: losses of $180,459,000) as detailed in Note 10 above.
16. Net Asset Value per Participating Preference Share
The calculation of the net asset value per Participating Preference Share is based on the following:
|
| 30 June 2023 | 30 June 2022 |
| Net assets | $796,734,000 | $796,761,000 |
| Participating Preference Shares in issue | 91,100,066 | 91,100,066 |
| Net Asset Value per Participating Preference Share | $8.75 | $8.75 |
17. Financial Instruments
Management of risk
The Company's investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Investment Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are investment performance, cybercrime and information security, business continuity & event management, gearing, discount to NAV, unlisted securities, foreign currency exposure, lack of market liquidity, environmental, social and governance (ESG) and key person risks. Other risks identified are tax and regulatory and operational risks, including those relating to third party service providers covering investment management, marketing and business development, company secretarial, fund administration and operations and support functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. Risks identified are shown in the Strategic Report.
This note is incorporated in accordance with IFRS 7: Financial Instruments: Disclosures and refers to the identification, measurement and management of risks potentially affecting the value of financial instruments.
The Company's financial instruments may comprise:
· Equity shares (listed and unlisted), preference shares, equity linked notes, convertible bonds, rights issues, holdings in investment companies and private placements;
· Derivative instruments including CFDs, warrants, futures and options written or purchased on stocks and equity indices and forward currency contracts; and
· Cash, liquid resources and short-term receivables and payables that arise from its operations.
The risks identified by IFRS 7 arising from the Company's financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, credit and counterparty risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.
Interest rate risk
The Company has the ability to borrow up to 10% of the Company's NAV in order to increase the amount of capital available for investment. The Company aims to keep its use of an overdraft facility for trading purposes to a minimum only using a facility to enable settlements. It may also hold interest bearing securities and cash.
The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company's financial instruments that are exposed to movements in interest rates are shown below:
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| Exposure to financial instruments that bear interest |
|
|
| Long CFDs - exposure less fair value | 317,335 | 245,272 |
|
| 317,335 | 245,272 |
| Exposure to financial instruments that earn interest |
|
|
| Short CFDs - exposure plus fair value | 205,804 | 201,638 |
| Amounts held at futures clearing houses and brokers | 18,210 | 11,901 |
| Cash and cash equivalents | 18,057 | 34,418 |
|
| 242,071 | 247,957 |
| Net exposure to financial instruments that (bear)/earn interest | (75,264) | 2,685 |
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at the statement of financial position date, an increase of 1% in interest rates throughout the year, with all other variables held constant, would have decreased the profit after taxation for the year and decreased the net assets of the Company by $753,000 (2022: decreased the loss after taxation for the year and increased the net assets of the Company by $27,000). A decrease of 1% in interest rates throughout the year would have had an equal but opposite effect.
Foreign currency risk
The Company invests in financial instruments and enters into transactions denominated in currencies other than its functional currency. Consequently, the Company is exposed to risks that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has an adverse effect on the value of that portion of the Company's assets or liabilities denominated in currencies other than US dollars (functional currency) or UK sterling (the currency in which shares are traded on the London Stock Exchange).
Three principal areas have been identified where foreign currency risk could impact the Company:
· movements in currency exchange rates affecting the value of investments and derivatives exposures;
· movements in currency exchange rates affecting short-term timing differences, for example, between the date when an investment is bought or sold and the date when settlement of the transaction occurs; and
· movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The Company's financial assets comprise of investments, positions on derivative instruments, short-term debtors and cash and cash equivalents.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves. The Company's financial liabilities comprise positions on derivative instruments and other payables.
The net currency exposure profile of these financial assets/(liabilities) is shown below:
| Currency | Investments held at fair value through profit or loss $'000 | Asset/ (liabilities) exposure of derivative instruments1 $'000 | Cash, cash equivalents and other receivables/ (payables)2 $'000 | 2023 Total foreign currency risk $'000 |
| Brazilian real | 70,992 | 263 | (74) | 71,181 |
| Canadian dollar | 23,451 | 19,717 | 15 | 43,183 |
| Chinese yuan renminbi | 6,364 | - | 30 | 6,394 |
| Euro | 35,411 | 3,570 | 5 | 38,986 |
| Hong Kong dollar | 77,538 | 53,348 | 1,265 | 132,151 |
| Indian rupee | 93,561 | - | 136 | 93,697 |
| Indonesian rupiah | 36,602 | - | - | 36,602 |
| Korean won | 9,563 | (604) | 36 | 8,995 |
| Mexican peso | 34,214 | 18,890 | (65) | 53,039 |
| Nigerian naira | 9,356 | - | 1,319 | 10,675 |
| Poland zloty | 12,087 | (7,503) | 21 | 4,605 |
| South African rand | 80,608 | (4,512) | (237) | 75,859 |
| UK sterling | 20,784 | 9,044 | (27) | 29,801 |
| Swedish krona | 10,837 | - | - | 10,837 |
| Taiwan dollar | 107,225 | - | 1,835 | 109,060 |
| United Arab Emirates dirham | 4,124 | - | - | 4,124 |
| United States dollar | 92,384 | (90,177) | 17,175 | 19,382 |
| Vietnamese dong | 15,131 | - | 68 | 15,199 |
| Other currencies | 38,376 | (15,959) | 3 | 22,420 |
|
| 778,608 | (13,923) | 21,505 | 786,190 |
1 The asset exposure of long and short derivative positions is after the netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing houses and brokers.
| Currency | Investments held at fair value through profit or loss $'000 | Asset/ (liabilities) exposure of derivative instruments1 $'000 | Cash, cash equivalents and other receivables/ (payables)2 $'000 | 2022 Total foreign currency risk $'000 |
| Brazilian real | 71,653 | - | 1,363 | 73,016 |
| Canadian dollar | 50,696 | (18) | 302 | 50,980 |
| Chinese yuan renminbi | 43,529 | - | 148 | 43,677 |
| Euro | 13,162 | (2,746) | 35 | 10,451 |
| Hong Kong dollar | 62,006 | 105,454 | 4,893 | 172,353 |
| Indian rupee | 68,882 | - | 472 | 69,354 |
| Indonesian rupiah | 10,611 | - | - | 10,611 |
| Korean won | 37,393 | 2,275 | 82 | 39,750 |
| Mexican peso | 1,737 | 16,545 | (67) | 18,215 |
| Nigerian naira | 15,731 | - | 1,602 | 17,333 |
| Polish zloty | 2,118 | (391) | 1 | 1,728 |
| South African rand | 60,046 | (3,091) | 2 | 56,957 |
| UK sterling | 20,936 | (7,209) | 112 | 13,839 |
| Swedish krona | 3,251 | - | - | 3,251 |
| Taiwan dollar | 99,327 | - | 2,971 | 102,298 |
| United Arab Emirates dirham | 26,679 | - | - | 26,679 |
| United States dollar | 132,765 | (85,971) | 47,516 | 94,310 |
| Vietnamese dong | 5,784 | - | 4,134 | 9,918 |
| Other currencies | 1,036 | (16,442) | (254) | (15,660) |
|
| 727,342 | 8,406 | 63,312 | 799,060 |
1 The asset exposure of long and short derivative positions is after the netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing houses and brokers.
Foreign currency risk management
The degree of sensitivity of the Company's assets to foreign currency risk depends on the net exposure of the Company to each specific currency and the volatility of that specific currency in the year. At 30 June 2023, had the average exchange rate of the US dollar weakened by a reasonable possible movement of 5% (2022: 5%) in relation to the basket of currencies in which the Company's net assets are denominated, weighted by the Company's exposure to each currency with all other variables held constant, the Company estimates the profit after taxation for the year would have increased and net assets would have increased by $38,340,000 (2022: decreased the loss after taxation for the year and increased the net assets of the Company by $35,238,000).
An increase in the US dollar by 5% in relation to the basket of currencies in which the Company's net assets are denominated would have resulted in a decline in net assets by the same amount, under the assumption that all other factors remain constant.
The Investment Manager does not consider it realistic or useful to examine foreign currency risk in isolation. The Investment Manager considers the standard deviation of the NAV (which is struck in US dollars) as the appropriate risk measurement for the portfolio as a whole as it reflects market price risk generally. Please see Market Price Risk section.
Market price risk
Market price risk is the risk that value of the instrument will experience unanticipated fluctuations as a result of changes in market prices (other than those arising from foreign currency risk and interest rate risk), whether caused by factors specific to an individual investment, its issuer, or all factors influencing all instruments traded in the market.
Market price risk management
Market price risk can be moderated in a number of ways by the Investment Manager through:
(i) a disciplined stock selection and investment process; and
(ii) limitation of exposure to a single investment through diversification and through amongst others, the implementation of investment restrictions.
The Board reviews the prices of the portfolio's holdings and investment performance at their meetings. Country and Sector Exposure of the Portfolio and Forty Largest Holdings illustrate the Company's portfolio at the end of reporting period reflects the diversified strategy.
The Investment Manager has identified the MSCI Emerging Markets Index as a relevant reference point for the markets in which it operates. However, the Investment Manager does not manage the Company's investment strategy to track the MSCI Emerging Markets Index or any other index or benchmark. The short-term performance of the Company and its correlation to the MSCI Emerging Markets Index is shown in the Financial Highlights section and is expected to change over time.
Market price risk - Investee Funds
The Company's investments in Investee Funds are subject to the terms and conditions of the respective Investee Fund's offering documentation and are susceptible to market price risk arising from uncertainties about future values of those Investee Funds. The Investment Manager makes investment decisions after extensive due diligence of the underlying fund, its strategy and the overall quality of the underlying fund's manager. All of the Investee Funds in the investment portfolio are managed by portfolio managers who are compensated by the respective Investee Funds for their services. Such compensation generally consists of an asset based fee and a performance based incentive fee and is reflected in the valuation of the Company's investment in each of the Investee Funds.
The exposure to investments in Investee Funds at fair value is disclosed as part of Note below. These investments are included in `Financial assets at fair value through profit or loss' in the Statement of Financial Position. The Company's maximum exposure to loss from its interests in Investee Funds is equal to the total fair value of its investments in Investee Funds.
Total purchases in Investee Funds amounted $3,846,000 (2022: none). Total sales amounted to $4,045,000 (2022: $1,473,000). As at 30 June 2023 and 2022 there were no capital commitment obligations and no amounts due to Investee Funds for unsettled purchases. During the year ended 30 June 2023 total net losses incurred on investments in Investee Funds were $1,154,000 (2022: losses of $1,488,000).
Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments. It represents the potential loss the Company might suffer through price movements in its investment positions. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective.
The Investment Manager is responsible for actively monitoring the portfolio selected in accordance with the overall asset allocation parameters and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from derivative positions, mainly due to the underlying exposures, are assessed by the Investment Manager's specialist derivative instruments team.
Other price risk sensitivity
The following table illustrates the sensitivity of loss after taxation for the year and net assets to an increase or decrease of 10% (year ended 30 June 2022: 10%) in the fair value of investments. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on investments with all other variables held constant.
The other price sensitivity analysis is based on the valuation of investments directly held by the Company. For underlying investment funds this is based on the net assets of such underlying funds as included in the Company's portfolio of investments at reporting date.
The value of certain investments, in particular positions held in underlying funds may vary due to currency, interest rate and credit risks and such risks are not directly considered in the other price risk sensitivity analysis.
Effect of a 10% increase/(decrease) in fair value:
|
| 2023 | 2022 | ||
|
| 10% increase in fair value $'000 | 10% decrease in fair value $'000 | 10% increase in fair value $'000 | 10% decrease in fair value $'000 |
| Statement of Comprehensive Income - profit/(loss)after taxation |
|
|
|
|
| Total profit/(loss) after taxation for the year | 77,861 | (77,861) | 72,734 | (72,734) |
| Net assets | 77,861 | (77,861) | 72,734 | (72,734) |
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company's assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short-term flexibility is achieved by the use of a bank overdraft, if required.
The liquidity risk profile of the Company was as follows:
|
| 30 June 2023 $'000 | 30 June 2022 $'000 |
| Amounts due within one month |
|
|
| Securities purchased pending settlement | 16,050 | 12,033 |
| Amounts payable on settlement of derivatives | 2,762 | 103 |
| Derivative liabilities | 12,847 | 12,494 |
| CFD interest payable | 473 | 201 |
| CFD dividend payable | 261 | 555 |
| Custodian fees | 89 | 108 |
| Management fees | 391 | - |
| Directors' fees | 45 | 76 |
| Accrued expenses | 256 | 350 |
| Amounts due within one year |
|
|
| Derivative liabilities | - | 1,914 |
| Capital gains tax payable | 915 | - |
| Total liabilities | 34,089 | 27,834 |
Liquidity risk management
The restrictions on concentration and the diversification requirements detailed above (see market price risk) also serve normally to protect the overall value of the Company from the risks created by the lower level of liquidity in the markets in which the Company operates.
The Company has no payables past their due dates as at 30 June 2023 (2022: nil).
Credit and counterparty risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment it has entered into with the Company. Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Investment Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Investment Manager. Exposure to credit risk arises on outstanding security transactions and derivative instrument contracts and cash at bank. The Company only engages with approved counterparties that are rated investment grade or above.
The Company has no receivables past their due dates as at 30 June 2023 (2022: nil).
Credit risk management
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association's ("ISDA") market standard derivative legal documentation. These are known as Over The Counter ("OTC") trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and evaluates derivative instrument credit risk exposure.
The maximum exposure to credit risk at 30 June is the carrying amount of the financial assets as set out below.
|
| 30 June 2023 Amounts due within 1 year $'000 | 30 June 2022 Amounts due within 1 year $'000 |
| Derivative assets | 9,468 | 20,515 |
| Securities sold pending settlement | 789 | 13,218 |
| Amounts receivable on settlement of derivatives | - | 9,770 |
| Amounts held at futures clearing houses and brokers | 18,210 | 11,901 |
| Cash and cash equivalents | 18,057 | 34,418 |
| CFD dividend receivable | 827 | 377 |
| Accrued income | 4,834 | 6,189 |
| Other receivables | 30 | 865 |
|
| 52,215 | 97,253 |
None of these assets are impaired nor past due but not impaired.
For OTC and exchange traded derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions and held in segregated collateral accounts. Collateral can be held by brokers on behalf of the Company to reduce the credit risk exposure of the Company or held by the Company on behalf of brokers to reduce the credit risk exposure of the brokers. All collateral received or pledged at reporting date is in form of cash. The value of collateral received from brokers and pledged to brokers is shown below:
|
| 30 June 2023 | 30 June 2022 | ||
|
| collateral received $'000 | collateral pledged $'000 | collateral received $'000 | collateral pledged $'000 |
| Bank of America Merrill Lynch International | - | 250 | - | - |
| Goldman Sachs International Ltd | - | 3,430 | 2,730 | - |
| J.P. Morgan Securities plc | 1,180 | - | - | 440 |
| Morgan Stanley & Co. International Ltd | 110 | - | 8,090 | - |
| HSBC Bank plc | - | 1,800 | 5,180 | - |
| UBS AG | - | 12,730 | 740 | 11,461 |
Credit Risk - Securities Lending
During the year ended 30 June 2022, the Company was engaged in securities lending. As of 30 June 2022 and during the year ended 30 June 2023, the Company was no longer engaged in securities lending activities.
Participation in securities lending transactions during the year ended 30 June 2022 exposed the Company to risk of default by the third party borrower. To mitigate this risk, during the period when the Company was engaged in securities lending, the loans were secured by collateral comprising of governmental securities and was called in on a daily basis to a value of 102% of the fair value of securities on loan if that collateral was denominated in the same currency as the securities on loan and 105% if it was denominated in a different currency. The Lending Agent was responsible for monitoring the collateralisation of 102% and 105% and ensuring that these levels were maintained on marked to market fair values of all securities on loan. The Company had the right under the lending agreement to recover the securities from the borrower on demand. In case of default by the borrower, the responsibility to `make good' the transaction was with the Lending Agent.
During the period when the Company was engaged in securities lending, Genesis actively monitored the capital levels and credit rating of the Lending Agent and the third party borrowers.
Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in the Risk Management Process document. This document was approved by the Board and allows the use of derivative instruments for the following purposes:
· to gain exposure to equity markets, sectors or individual investments;
· to hedge equity market risk in the Company's investments with the intention of mitigating losses in the event markets fall;
· to enhance portfolio returns by writing call and put options; and
· to take short positions in equity markets, sectors or individual investments which would benefit from a fall in the relevant market price, where the Investment Manager believes the investment is overvalued. These positions distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.
The risk and investment performance of these instruments are managed by an experienced, specialist derivative team of the Investment Manager using portfolio risk assessment tools for portfolio construction.
Derivative instruments exposure sensitivity analysis
The Company invests in derivative instruments to gain or reduce exposure to the equity market. An increase of 10% in the share prices of the investments underlying the derivative instruments at the reporting date would have increased the profit after taxation for the year and increased the net assets of the Company by $1,392,000 (2022: decreased the loss after taxation for the year and increased the net assets of the Company by $841,000). A decrease of 10% in share prices of the investments underlying the derivative instruments would have had an equal but opposite effect.
Offsetting
To mitigate counterparty risk for OTC derivative transactions, the ISDA legal documentation is in the form of a master agreement between the Company and the brokers. This allows enforceable netting arrangements in the event of a default or termination event. Derivative instrument assets and liabilities that are subject to netting arrangements have not been offset in preparing the Statement of Financial Position.
The Company's derivative instrument financial assets and liabilities recognised in the Statement of Financial Position and amounts that could be subject to netting in the event of a default or termination are shown below:
| Financial assets | Gross amount $'000 | Gross amount of recognised financial liabilities set off on the statement of financial position $'000 | Net amount of financial assets presented on the statement of financial position $'000 | Related amounts not set | 2023 | |
| Financial instruments $'000 | Margin account received as collateral $'000 | Net amount $'000 | ||||
| CFDs | 8,365 | - | 8,365 | (6,055) | (1,290) | 1,020 |
| Options | 254 | - | 254 | (254) | - | - |
| Futures | 849 | - | 849 | - | - | 849 |
|
| 9,468 | - | 9,468 | (6,309) | (1,290) | 1,869 |
| Financial liabilities | Gross amount $'000 | Gross amount of recognised financial assets set off on the statement of financial position $'000 | Net amount of financial liabilities presented on the statement of financial position $'000 | Related amounts not set | 2023 | |
| Financial instruments $'000 | Margin account pledged as collateral $'000 | Net amount $'000 | ||||
| CFDs | (10,906) | - | (10,906) | 6,055 | 4,235 | (616) |
| Options | (1,941) | - | (1,941) | 254 | 1,687 | - |
|
| (12,847) | - | (12,847) | 6,309 | 5,922 | (616) |
| Financial liabilities | Gross amount $'000 | Gross amount of recognised financial assets set off on the statement of financial position $'000 | Net amount of financial liabilities presented on the statement of financial position $'000 | Related amounts not set | 2022 | |
| Financial instruments $'000 | Margin account pledged as collateral $'000 | Net amount $'000 | ||||
| CFDs | 19,542 | - | 19,542 | (10,444) | (6,635) | 2,463 |
| Options | 973 | - | 973 | (973) | - | - |
|
| 20,515 | - | 20,515 | (11,417) | (6,635) | 2,463 |
| Financial assets | Gross amount $'000 | Gross amount of recognised financial liabilities set off on the statement of financial position $'000 | Net amount of financial assets presented on the statement of financial position $'000 | Related amounts not set | 2022 | |
| Financial instruments $'000 | Margin account received as collateral $'000 | Net amount $'000 | ||||
| CFDs | (10,891) | - | (10,891) | 10,444 | - | (447) |
| Options | (3,240) | - | (3,240) | 973 | 2,267 | - |
| Futures | (277) | - | (277) | - | 277 | - |
|
| (14,408) | - | (14,408) | 11,417 | 2,544 | (447) |
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.
| Classification | Input |
| Level 1 | Valued using quoted prices in active markets for identical assets |
| Level 2 | Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly |
| Level 3 | Valued by reference to valuation techniques using inputs that are not based on observable market data |
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Note 2(b). The table below sets out the Company's fair value hierarchy:
| Financial assets at fair value through profit or loss | Level 1 $'000 | Level 2 $'000 | Level 3 $'000 | 30 June 2023 Total $'000 |
| Investments in equity securities | 751,117 | - | 1,009 | 752,126 |
| Equity linked notes | - | 17,433 | - | 17,433 |
| Investee funds | - | 3,943 | 5,106 | 9,049 |
| Derivative instrument assets - Futures contracts | 849 | - | - | 849 |
| Derivative instrument assets - Options | 13 | 241 | - | 254 |
| Derivative instrument assets - CFDs | - | 8,365 | - | 8,365 |
|
| 751,979 | 29,982 | 6,115 | 788,076 |
| Financial liabilities at fair value through profit or loss |
|
|
|
|
| Derivative instrument liabilities - Options | 1,516 | 425 | - | 1,941 |
| Derivative instrument liabilities - CFDs | - | 10,906 | - | 10,906 |
|
| 1,516 | 11,331 | - | 12,847 |
Financial instruments classified under Level 2 are valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly. The Level 2 instruments include underlying investment funds, equity linked notes, over the counter option contracts and contracts for difference.
| Financial assets at fair value through profit or loss | Level 1 $'000 | Level 2 $'000 | Level 3 $'000 | 30 June 2022 Total $'000 |
| Investments in equity securities | 642,794 | - | - | 642,794 |
| Equity linked notes | - | 78,739 | - | 78,739 |
| Investee funds | - | - | 5,809 | 5,809 |
| Derivative instrument assets - Options | 973 | - | - | 973 |
| Derivative instrument assets - CFDs | - | 19,542 | - | 19,542 |
|
| 643,767 | 98,281 | 5,809 | 747,857 |
| Financial liabilities at fair value through profit or loss |
|
|
|
|
| Derivative instrument liabilities - Futures contracts | (277) | - | - | (277) |
| Derivative instrument liabilities - Options | (2,155) | (1,085) | - | (3,240) |
| Derivative instrument liabilities - CFDs | - | (10,891) | - | (10,891) |
|
| (2,432) | (11,976) | - | (14,408) |
| Valuation basis for Level 3 Investment | 30 June 2023 $'000 | 30 June 2022 $'000 |
| Net asset value | 5,106 | 5,809 |
| Most recently available published price | 1,009 | - |
|
| 6,115 | 5,809 |
As at 30 June 2023 there were twelve holdings (2022: twelve holdings) classified as Level 3 investments. Two holdings (2022: two holdings) in Investee Funds were valued using the most recently available valuation statements as received from the respective general partner/manager/administrator, updated to include subsequent cash flows. One holding (China Renaissance) was valued using the most recently available published price. Nine holdings (2022: ten holdings) had a nil value.
As at the reporting date seven Russian securities (2022: seven) as well as one investment exposed to Ukrainian securities (2022: one) have been fair valued at nil as at 30 June 2023 as a result of trading being suspended on international stock exchanges. These investments have been transferred from Level 1 to Level 3 with a value of nil during the year ended 30 June 2022.
As the key input into the valuation of Level 3 investments is official valuation statements from the investee funds and the adjusted most recently available published price, we do not consider it appropriate to put forward a sensitivity analysis on the basis that insufficient value is likely to be derived by the end users.
The following table summarises the change in value associated with Level 3 financial instruments carried at fair value during the year:
| Movements in level 3 investments during the year | 30 June 2023 Level 3 $'000 | 30 June 2022 Level 3 $'000 |
| Opening balance | 5,809 | 8,770 |
| Sales | (4,045) | (1,473) |
| Transfers into level 3 | 1,009 | - |
| Realised gains | 3,112 | 889 |
| Net change in unrealised gains/(losses) | 230 | (2,377) |
| Closing balance | 6,115 | 5,809 |
Unrealised losses as at year end amounting to $6,956,000 (2022: unrealised losses of $7,186,000) related to Level 3 securities. Gains and losses (realised and unrealised) included in the Statement of Comprehensive Income for the year are reported in `Net (losses)/gains on financial assets at fair value through profit or loss'.
The Company holds seven securities issued by Russian entities (2022: seven). These securities continue to be impacted by a range of actions taken by governments, stock exchanges and counterparties, including sanctions regimes, leading to significant valuation and liquidity issues. Due to these issues, and the Company's inability to transact or transfer these assets, the value of the seven Russian securities (2022: seven) held by the Company was written down to nil (2022: nil), reflecting the significant uncertainty in the resolution of geopolitical events. These securities, classified as Level 1 immediately prior to the suspension of Russian markets, were transferred to Level 3 during the year ended 30 June 2022. The Company's investments in the seven Russian securities (2022: seven) amounted to $17,283,661 immediately prior to suspension of markets on 28 February 2022 with a cost of $99,959,944 (2022: $99,959,944).
During the year ended 30 June 2023, one security (China Renaissance) transferred from Level 1 into Level 3 as its shares were suspended from trading on the Hong Kong Stock Exchange in April 2023. The fair value of shares held in China Renaissance amounts to USD 1,008,686 and was determined based on the last available published price for the shares before suspension, with a cost of USD 1,466,334.
The Company's policy is to recognise transfers in and transfers out at the end of each accounting period.
Securities Lending
During the year ended 30 June 2023, the Company was not engaged in securities lending activities. As of 30 June 2022, the Company was no longer engaged in securities lending activities.
Capital Risk Management
The capital of the Company is represented by the equity attributable to holders of Participating Preference Shares. The amount of equity attributable to holders of Participating Preference Shares is subject to change, at most, twice monthly as the Company is a closed-ended fund with the ability to issue additional shares only if certain conditions are met as set out in the Company's scheme particulars. The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and to maintain a strong capital base to support the development of the investment activities of the Company.
18. Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital, reserves and gearing, which are disclosed on the Statement of Financial Position. The Company is managed in accordance with its investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report. The principal risks and their management are disclosed in the Strategic Report and in Note 17 above.
The Company's gearing at the year end is set out below:
|
| 30 June 2023 | |||
|
| Gross gearing | Net gearing | ||
|
| Exposure $'000 | %1 | Exposure $'000 | %1 |
| Investments | 778,608 | 97.7 | 778,608 | 97.7 |
| Long CFDs | 312,737 | 39.2 | 312,737 | 39.2 |
| Short put options | 10,789 | 1.4 | 10,789 | 1.4 |
| Long call options | 2,879 | 0.4 | 2,879 | 0.4 |
| Total long exposures before hedges | 1,105,013 | 138.7 | 1,105,013 | 138.7 |
| Less: short derivative instruments hedging the above | (130,176) | (16.3) | (130,176) | (16.3) |
| Total long exposures after the netting of hedges | 974,837 | 122.4 | 974,837 | 122.4 |
| Short CFDs | 203,746 | 25.5 | (203,746) | (25.5) |
| Short call options | 6,406 | 0.8 | (6,406) | (0.8) |
| Gross Asset Exposure/net exposure | 1,184,989 | 148.7 | 764,685 | 96.1 |
| Net Assets | 796,734 |
| 796,734 |
|
| Gearing2 |
| 48.7% |
| (3.90)% |
|
| 30 June 2022 | |||
|
| Gross gearing | Net gearing | ||
|
| Exposure $'000 | %1 | Exposure $'000 | %1 |
| Investments | 727,342 | 91.3 | 727,342 | 91.3 |
| Long CFDs | 249,053 | 31.3 | 249,053 | 31.3 |
| Short put options | 16,092 | 2.0 | 16,092 | 2.0 |
| Long call options | 3,675 | 0.5 | 3,675 | 0.5 |
| Total long exposures before hedges | 996,162 | 125.1 | 996,162 | 125.1 |
| Less: short derivative instruments hedging the above | (68,250) | (8.6) | (68,250) | (8.6) |
| Total long exposures after the netting of hedges | 927,912 | 116.5 | 927,912 | 116.5 |
| Short CFDs | 188,830 | 23.7 | (188,830) | (23.7) |
| Short call options | 3,334 | 0.4 | (3,334) | (0.4) |
| Gross Asset Exposure/net exposure | 1,120,076 | 140.6 | 735,748 | 92.4 |
| Net Assets | 796,761 |
| 796,761 |
|
| Gearing2 |
| 40.6% |
| (7.6)% |
1 Exposure to the market expressed as a percentage of Net Assets.
2 Gearing is the amount by which Gross Asset Exposure/net exposure exceeds Net Assets expressed as a percentage of Net Assets.
19. Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company's Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International. Both companies are Fidelity group companies.
Details of the current fee arrangements are given in Note 4 above. During the year, management fees of $4,613,000 (2022: $4,636,000) were payable to the Manager. During the year, marketing fees of $176,000 (2022: $148,000) were payable to the Manager. Amounts payable at the reporting date are included in other payables.
At the date of this report, the Board consisted of five non-executive Directors (as shown in the Annual Financial Report) all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company.
The Directors received for the financial year fees totalling £221,115, the breakdown of the fees is shown in the Directors' Remuneration Report in the Annual Financial Report. From 1 July 2023, the Chairman receives an annual fee of £50,000, the Chairman of the Audit Committee and Senior Independent Director receive £38,000 and the other Directors receive an annual fee of £36,000. The following members of the Board hold ordinary shares in the Company at the date of this report: Dr Simon Colson 4,416 shares, Katherine Tsang nil shares, Torsten Koster 15,000 shares, Julian Healy* nil shares and Heather Manners 10,000 shares.
Directors' expenses for the year include travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Company.
Directors' related party interests are stated on in the Annual Financial Report as part of the Directors' Remuneration Report.
* Appointed on 12 December 2022.
20. Ultimate Controlling Party
In the opinion of the Directors on the basis of the shareholdings advised to them, the Company has no immediate or ultimate controlling party.
21. Segment Information
The Directors, after having considered the way in which internal reporting is provided to them, are of the opinion that the Company continues to be engaged in a single segment of business, being the provision of a diversified portfolio of investments in emerging markets.
All of the Company's activities are interrelated, and each activity is dependant on the others. Accordingly, all significant operating decisions are based upon analysis of the Company operating in one segment.
The financial positions and results from this segment are equivalent to those per the financial statements of the Company as a whole, as internal reports are prepared on a consistent basis in accordance with the measurement and recognition principles of IFRS.
A breakdown of the Company's financial assets at fair value through profit and loss is shown in the Country exposure of the Company's portfolio in the Annual Financial Report.
The Company is domiciled in Guernsey. All of the Company's income from investment is from entities in countries or jurisdictions other than Guernsey.
22. Subsequent events
No significant events have occurred since the end of the reporting date which would impact on the financial position of the Company disclosed in the Statement of Financial Position as at 30 June 2023 or on the financial performance and cash flows of the Company for the year ended on that date.
Alternative Performance Measures
Active Share
Active Share is a measure of the percentage which stock holdings in the Company differ from the constituents of the benchmark, the MSCI Emerging Markets Index. Active share is calculated by taking the sum of the absolute difference between the weights of the holdings in the Company and those in the MSCI Emerging Markets Index and dividing the result by two. See The Year at a Glance inside the front cover of the Annual Report for further details.
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the NAV of the Company and the share price and is expressed as a percentage of the NAV. Details of the Company's discount are on the Financial Highlights page of the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18 in the Annual Report for details of the Company's gearing.
Net Asset Value ("NAV") per Participating Preference Share
The NAV per Participating Preference Share is considered to be an Alternative Performance Measure. See the Statement of Financial Position in the Annual Report and Note 16 in the Annual Report for further details.
Ongoing charges ratio
Ongoing charges ratio is considered to be an Alternative Performance Measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of management fees and other expenses expressed as a percentage of the average net assets throughout the year.
|
| 30 June 2023 | 30 June 2022 |
| Management fees ($'000) | 4,613 | 4,636 |
| Other expenses ($'000)1 | 1,619 | 3,769 |
| Less legal fees - not recurring ($'000) | - | (1,318) |
| Ongoing charges ($'000) | 6,232 | 7,087 |
| Average net assets ($'000) | 768,785 | 1,179,409 |
| Ongoing charges ratio | 0.81% | 0.60% |
1 Transaction costs directly associated with purchases and sales of non-derivative securities changed presentation to be included under the `Net gains/(losses) on financial assets at fair value through profit or loss' line in the capital column of the Statement of Comprehensive Income. In the prior periods the transaction costs were included under `Other expenses'. The change in presentation is consistently applied for both for the current year and comparative reporting period.
Total Return Performance
Total return performance is considered to be an Alternative Performance Measure (as defined in the Glossary to the Annual Report). NAV per share total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. Share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.
The tables below provide information relating to the NAV per share and share prices of the Company, the impact of the dividend reinvestments and the total returns for the years ended 30 June 2023 and 30 June 2022.
The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 30 June 2023 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2022 and 2023 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2021 is derived from the statutory accounts for 2022 which have been delivered to the Guernsey Financial Services Commission. The 2023 Financial Statements will be filed with the Guernsey Financial Services Commission in due course.
A copy of the above results announcement will be available on the Company's website at www.fidelity.co.uk/emergingmarkets within two working days.
A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelity.co.uk/emergingmarkets where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
ENDS
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