Annual Financial Report

RNS Number : 5826A

Advance Developing Markets Fund Ltd

03 February 2011

 



ADVANCE DEVELOPING MARKETS FUND LIMITED

Annual Financial Report Announcement

For the period from 16 September 2009 (date of incorporation) to 31 October 2010

INVESTMENT OBJECTIVE AND PERFORMANCE

Investment objective

The Company's investment objective is to achieve consistent returns for Shareholders in excess of the S&P/IFCI Emerging Markets Composite Index in Sterling terms (the "Benchmark")

Performance

For the period ended 31 October 2010*

Net Asset Value ("NAV") per share - undiluted1	+30.4%
Net Asset Value ("NAV") per share - diluted2	+27.0%
Ordinary share price - mid market3	+21.9%
S&P/IFCI Emerging Markets Composite Index in Sterling terms	+22.5%

As at 31 October 2010
NAV per share - undiluted	559.2p
NAV per share - diluted	517.4p
Ordinary share price - mid market	467.5p
Subscription share price - mid market	171.3p
Net Assets	£368.8m

* From 10 November 2009 when the Company's shares commenced trading on the London Stock Exchange

¹ Measured against an initial NAV of 428.9p net of share issue expenses

²  Measured against an initial NAV of 407.4p net of share issue expenses

³  Measured against an initial mid market ordinary share price of 383.5p

This report will be sent to shareholders and copies will be made available to the public at the registered office of the Company. It will also be available in electronic form on the Investment Manager's website, www.advance-emerging.com

Financial Calendar

Annual General Meeting

14 March 2011 at 11 a.m.

11 New Street

St Peter Port

Guernsey

GY1 2PF

CHAIRMAN'S STATEMENT

On behalf of the Board I am pleased to present to you the financial report covering the period from incorporation on 16 September 2009 to 31 October 2010. The investment period commenced on 9 November 2009, when the rollover of Advance Developing Markets Trust plc's ("ADMT") assets to Advance Developing Markets Fund Limited ("ADMF" or "the Fund" or "the Company") took place, following approval by ADMT's shareholders. The Company's shares commenced trading on the London Stock Exchange on 10 November 2009.

Your Investment Manager has reported in detail the result of its endeavours on your behalf and the Board is pleased to congratulate them on the substantial out-performance they have secured in this period. Healthy returns have been achieved against a background of continuing volatility in markets which looks likely to be prolonged given the uncertainty clouding the economic outlook for the major developed economies in 2011.

Prospects

This section of my report was entitled 'Longer-term prospects' last year. But so much depends on the short-term prospects for the developed economies which inevitably influence the outlook for emerging economies given the globalisation of trade, currency and capital markets. A number of questions need to be raised. The first, to which there is presently no answer, is whether the Euro will survive in its current structure, or will it implode? That depends on the willingness of the inhabitants of those member countries with large private sector debts and huge budget deficits, accumulated through a deadly combination of profligacy and corruption, to suffer years of austerity and substantial real reductions in wages and services. As this seems unlikely the ECB must continue to buy the bonds of these countries to prevent default and to revitalise the banking and financial sectors. Secondly, will the rich nations within the Eurozone, who have practised fiscal restraint and are enjoying booming exports, continue to underwrite the financial and structural problems at the expense of their domestic taxpayers? The answer is most certainly no. However, the problem is too large for the ECB to manage alone and it is highly probable that financial markets will force them to insist on a policy of restructuring. The alternative is default or a total re-organisation of the Eurozone which would be a difficult and drawn-out process, fraught with geopolitical tensions. Trying to reduce government spending at a time of slow (or no) economic growth merely prolongs the suffering. The time to reduce the government's participation in an economy is when growth is sound and the cycle is positive. That was in 2007! That is a lesson that Gordon Brown and other European leaders have plenty of time to reflect on when forcibly retired by their electorates. Their successors have no alternative but to act now. Thirdly, all the mortgage debt in the U.S. must, at some stage, be 'marked to market' as property values have not recovered and turnover remains moribund except at distressed levels. Continuing quantitative easing by the Federal Reserve and the maintenance of negative interest rates in real terms seems the likely strategy which will lead to a rise in inflation in the medium-term.

If all this sounds too gloomy it is also important to recognise that financial markets have recovered their confidence and a modest recovery in consumer expenditure is discernable. Shareholders can be reassured by the undoubted fact that emerging economies are enjoying substantial increases in economic growth and a notable improvement in corporate earnings. In particular, intra-regional trade has been very supportive of this growth and will continue to be so in 2011. As an example, Korea sends more than 70% of total exports to other emerging countries while exports to the USA have declined in the last 10 years from 20% to 10%. China is now clearly the main trading partner for many emerging countries, especially those with significant natural resources: energy, base metals, coal and agricultural commodities. China is diversifying the US dollar risk intelligently for its enormous foreign exchange reserves by securing the development of world-class sources of commodity supplies for the next generation. India, Brazil and Russia, among others, are clearly willing to follow China in these policies of trade and currency diversification.

The risk is now a rising rate of inflation and the dangers posed to the adoption of prudent strengthening of monetary and fiscal policies to combat both cost/push and demand /pull factors by the politics and corruption that are still clearly evident in many emerging economies and financial markets.  For example, the massive credit binge in China in 2009/10 has clearly been influenced by the impending appointment of new leaders in central, provincial and local governments in 2012/13. Leadership transition, and the need to adopt a new economic model focusing on fostering domestic consumer demand and the service industries rather than a continuation of exports and capital investment, suggests that the need for tightening monetary and fiscal policies is recognized by central government but often opposed by provincial and district authorities.

Conclusion

Your Investment Manager has summarised succinctly the case for investment in emerging economies and markets:

(1) Improving economic growth and corporate earnings; (2) reasonable stock market valuations; (3) positive structural changes in infrastructure, development, accountability and stock markets; (4) low levels of ownership by global investors relative to indices. The risks remain geopolitical, rising inflation and the need for improved corporate governance.

Emerging markets are no longer as cheap as they were at the beginning of the recovery. But, considering that share prices have risen 60% in 2009 and 22% in 2010, to find them on still acceptable valuations is testament to the skill of the corporate management in these emerging companies in growing sales and profits to support share price performance. Your Investment Manager believes that this will continue and that rising flows of investment funds to emerging markets will be a continuing feature in the coming years. Portfolio exposure will grow apace as  global economic and  financial power continues to move from developed to developing economies.

The Company was incorporated in Guernsey in September 2009 as a rollover vehicle for Advance Developing Markets Trust plc ("ADMT"), a company incorporated in the UK.  The reasons for the change of domicile were detailed in the 2009 ADMT Annual Report and the subsequent circular to shareholders issued in October 2009.  Following the approval of this proposal by ADMT's shareholders, the shares and subscription shares of ADMF were listed on the London Stock Exchange on 10 November 2009. The last date for conversion of the subscription shares by holders, at the subscription price of £2.91 each, occurs at the end of this financial year in October 2011. Issued gratis to continuing shareholders of ADMT at the time of the tender offer in 2008 they have provided a satisfactory return as they now stand at over £2 each.

On your behalf I wish to thank the Investment Manager and our administrators who have provided and supported the satisfactory returns since the commencement of the new Fund.

PE O'Connor

Chairman

10 January 2011

INVESTMENT MANAGER'S REPORT

The rollover of Advance Developing Markets Trust plc's ("ADMT") assets to Advance Developing Markets Fund Limited ("ADMF" or "the Fund" or "the Company") was approved by ADMT's shareholders on 9 November 2009 and the Company's shares commenced trading on the London Stock Exchange on 10 November 2009. Unless otherwise specified, all figures and narrative in this Investment Manager's report relate to the period 9 November 2009 to 31 October 2010. Figures in parentheses represent the Sterling denominated performance of the stock market in question.

The period under review saw continuing market volatility, notably as the concept of monetary union in Europe was tested by concerns about the ability of weaker members to meet their obligations. Global markets did, however, generally make gains for the year and emerging markets once again led the way. The S&P/IFCI Emerging Markets Composite Index in Sterling terms posted a return of +22.5%, with the majority of that return delivered in the latter half of the period despite a rally in the value of Sterling against the US dollar. The strong finish to the financial year was largely driven by strong fund flows to emerging markets as investors anticipated further quantitative easing from developed world central banks.

ADMF's undiluted NAV rose by 30.4% during the reporting period, representing outperformance of 7.9% over the 22.5% gain in the Benchmark index in Sterling terms. The share price gained 21.9%, lagging the NAV return as the potential dilution from the subscription shares became more material over the course of the period as the discount widened. On a diluted basis the discount to net asset value at which the Company's shares trade was 9.6% at period end having commenced the period at 5.9%. Holders of subscription shares in the Company benefitted from a gain of 82.2% in the price of those shares over the financial period.

The Company's outperformance at the net asset value level was driven largely by strong performances from a number of underlying managers. Investments such as Atlantis China Fund (NAV +32.3% vs. S&P/IFC China +14.9%), JPMorgan Fleming Russia (share price +41.0% vs. S&P/IFC Russia +16.5%) and Tarpon All Equities Fund (NAV +58.1% vs. S&P/IFC Brazil +17.5%) all beat their respective parts of the benchmark by considerable margins.

Asset allocation was a small negative, with an underweight position in Asia and cash holdings in underlying funds largely responsible. ADMF was close to fully invested throughout the period. In Asia, strong performances in Korea (+26.8%) and India (+32.6%) as well as the smaller markets of Indonesia (+51.6%) and the Philippines (+67.2%) were at odds with our asset allocation. The overweight position in Brazil (+8.8%) hurt in a Latin American context as other markets led in that region. In Eastern Europe the portfolio's positioning proved beneficial as minimal exposures in the Czech Republic (-3.4%) and Hungary (+5.7%) and an overweight allocation to Turkey (+55.4%) contributed to relative performance.

Changes in the discount levels of our closed end investments were a small positive, with discounts generally compressing in the second half of the period.

The Fund benefitted from the liquidity and uplift in value from tender offers conducted by both Edinburgh Dragon Trust and Eastern European Trust during the period.

Market Environment

The performances of the various markets that make up the benchmark are shown in Sterling terms in Chart 1. For comparison, we also include the performances of MSCI World (+10.2%), MSCI Frontier (+12.4%), MSCI UK (+8.0%), MSCI US (+13.3%) and MSCI Japan (+9.9%).

The period was one of Asian outperformance with several of the smaller South East Asian markets leading the way. The Philippines (+67.25) delivered a post election "feel good" rally following President Aquino's landslide victory in May's election while Thailand (+54.3%) rallied sharply from May, onwards post the cessation of political demonstrations, as investors focussed on the strong growth and earnings momentum of local companies. Indonesia's (+51.6%) structural reform and resilient growth continued to attract interest from foreigners. Index heavyweight China (+14.9%) lagged in performance terms, with government attempts to reign in property prices and slow the rate of growth tempering investor fervour. India (+32.6%) fared reasonably well and benefitted from a good monsoon.

Eastern European markets generally were more muted, with only Turkey (+55.4%) outperforming by a significant margin thanks to perceived structural improvements in its inflation and interest rate outlook. Russia (+16.5%) continued to have a high correlation to a largely range bound oil price. South Africa (+31.0%) was the centre of attention in early summer as it played host to the FIFA World Cup. Its return for the period was somewhat boosted by a strong exchange rate.

Latin America's largest economy and stock market, Brazil (+8.8%), lagged its regional and global peers. The presidential election, US$70+ billion share issuance by oil company Petrobras and a surging currency fuelled investor concerns. Mexico, meanwhile, benefitted from the gradual reacceleration of the US economy despite attracting a good deal of negative publicity in the international press because of drugs related violence. The Chilean market (+57.4%) performed remarkably well for a traditionally defensive market. Strength in the domestic economy and a substantial programme of reconstruction spending following a devastating earthquake in February helped stimulate the economy, which in turn prompted significant inflows to the stock market.

see chart 1 in Annual report

Portfolio

The portfolio breakdown by investment type was as follows at the end of the period.

                                                            31 October 2010            30 November 2009*

Closed-ended investment funds              54.0%                           55.2%

Open-ended investment funds                40.3%                           38.4%

Market access products                         5.8%                            6.2%

Cash and other net assets                      -0.1%                           0.5%

* position for ADMT

The exposure to open-ended funds increased marginally over the period as several new investments entered the portfolio. As noted in the Half Yearly Report the largest new allocation was to the Advance Brazil Leblon Equities Fund, a new fund established by Advance Emerging Capital Limited ("AECL"), the Investment Manager, to invest in domestic growth stories within Brazil. Another new allocation in the first half of the period was an investment into the Ton Poh Thailand Fund, an open-ended fund with a consistent track record and a very well connected manager, based on the ground in Bangkok. Again, our relationship with the manager goes back a number of years, and we have had numerous meetings with them on their home turf. The fund was added to our portfolio at the end of March as political unrest depressed valuations to attractive levels. From investment to period end the fund returned 48.5% compared with 29.0% for the Thai index.

In January, ADMF received a substantial amount of cash back in respect of our holding in Edinburgh Dragon Fund, which concluded a tender offer for 15% of its outstanding shares at a 4.3% discount to NAV. We were able to exit half the Fund's position, which, at the time, represented 4.6% of ADMF's NAV. The proceeds were used to finance the Ton Poh purchase. During the summer period we also received substantial proceeds from the redemption of IP Value Brazil Fund. Despite good performance the management team had seen significant turnover and thus we made a decision to exit.

In the closed-ended portion of the portfolio we increased existing positions to the likes of Turkish Investment Fund and Korea Fund in the United States as well as Henderson TR Pacific in the UK. All were bought on discounts that represented good value relative to their peers and open-ended alternatives. We also initiated a position in Macquarie International Infrastructure Fund, a Singapore listed vehicle trading on close to a 40% discount at the time of purchase. We conducted extensive due diligence and believe there to be a good chance that because of a lack of suitable further investments a decision will be made during the first half of 2011 to wind the fund up. On the flip side of these purchases we were able to reduce positions in the likes of China Fund and JPMorgan Fleming India Investment Trust, where discounts narrowed into low single digits.

The asset allocation is shown on page 6. The major exposures remain consistent with the view expressed in the Half Yearly Report. Export oriented Asia remains an underweight largely because of the portfolio's lower than benchmark holdings in Korea and Taiwan. The relative overweight positions in Europe, the Middle East and Africa increased as Israel, a market we had historically maintained minimal exposure to, was promoted to developed market status. Elsewhere in that region we continue to favour Russia and Turkey. Our long held preference for Brazil over Mexico in Latin American also remains intact although the size of the Brazilian overweight was reduced. We also continued to run small off index allocations to the frontier markets of Africa and the Middle East.

Market Outlook

We are now two years into the post crisis rally from the lows of October 2008. Emerging markets, as a prime beneficiary of the loose monetary conditions that have prevailed in the western world, have performed spectacularly well, rising by 99.8% in Sterling terms and significantly outperforming developed markets. To date, this outperformance has been more than justified by superior fundamentals and the prospect of higher returns than are achievable from developed markets, where austerity measures and sovereign crises look likely to dampen growth significantly in the years to come.  Increasingly though, investors have begun to question whether emerging markets can sustain such relative outperformance and indeed, whether they are in a bubble or not. In short, we do not believe they are in a bubble, more they are experiencing "growing pains".

When we look at equity market valuations and earnings growth it is clear to us that there is no bubble in the traditional sense. The 2011 Price to Earnings ratio for emerging markets as a whole is just 11.2x (Source: Credit Suisse, 7 January 2011). This is not out of line with its historic range. Your portfolio is skewed towards those markets at the lower end of the valuation scale, including Brazil, Russia and the frontier markets of the Middle East and Africa. Likewise, we have little exposure to those smaller markets that, we feel, have run ahead of themselves in terms of valuations (Indonesia, Malaysia, Mexico, Chile). Earnings growth is healthy and is forecast to be close to 19% for the coming year. We feel this number is distinctly achievable and it certainly doesn't represent the kind of wildly unrealistic predictions that are made in bubble conditions.

Technical factors, we believe, remain a net positive for emerging markets. Emerging Portfolio Fund Research Global calculates that almost US$84 billion has been invested into emerging market equities over the course of 2010, a record year. There has been a roughly corresponding flow out of developed market funds. Despite this, most investors remain significantly underweight emerging markets which, following their strong performance and significant stock issuance in 2010, now account for around 14% of global equity indices. Recent research from UBS shows the average global investor has just half of this amount invested. As long as developed market monetary conditions remain conducive to this reallocation of capital from West to East and North to South, emerging markets will benefit. We believe it is unlikely that monetary conditions will tighten significantly in developed markets in the near term given the fragility of the economies in question.

Something that does concern us is inflation. Thus far, increases in inflation have generally been mild and largely related to food prices which were affected by one-off events such as the summer fires in Russia which impacted wheat production. So-called "core inflation" which excludes the impact of volatile food and energy prices has been relatively well behaved but we remain wary of any significant feed through to the consumer price level and continue to monitor government and central bank responses. We expect to see tightening in many countries given the paranoid mindset of emerging market policy makers with regard to inflation. Having said this, authorities remain loath to unilaterally raise interest rates by anything other than small steps. The use of alternative means to control inflation (increasing reserve requirements, taxing foreign flows, direct price controls etc) will continue to increase, we expect, but should not be viewed as a negative as in many instances they are rational responses to exceptional circumstances. We are alert to the fact that, historically, such intervention has often been a prelude to bigger problems for many emerging economies.

It also concerns us that emerging markets are becoming a "crowded trade". Despite the figures quoted above from UBS in relation to average investor positioning, we continue to see evidence of huge interest in emerging markets, both at home and abroad. Emerging market conferences now occur on a weekly basis and are incredibly well attended. The number of column inches dedicated to the asset class has mushroomed. Closed end funds investing in specific regions or countries within emerging markets have begun to trade at parity or even premiums. New funds, both open and closed-ended, are being launched at a blistering pace, often run by "new entrants" to the space. Such issuance has historically coincided with periods of irrational exuberance and therefore we are treading increasingly carefully. We are very happy to be invested with seasoned experts and to have the flexibility to invest in open-ended funds, where the risk posed by discount widening does not exist.

On balance, we remain cautiously optimistic for our markets for the year ahead. They continue to offer superior growth at reasonable valuations, despite anecdotal evidence suggesting a degree of overheating in pockets of the emerging world. A global environment of "lower for longer" interest rates and only moderate tightening in emerging markets themselves should prove conducive to continued outperformance in both relative and absolute terms whilst also increasing the asset class' relevance within global portfolios. An increase in global risk aversion as a result of further financial stress in developed markets seems to us the biggest risk to this outlook, although home grown issues such as inflation and politics should not be ruled out. We will continue to manage the portfolio to give exposure to the most attractive products in the most attractive markets.

Table 1. Emerging market country valuations

Country / Region	P/E Ratio 2011E	P/B Ratio 2011E	EPS Growth 2011E
China	11.1	1.9	14.3
India	15.5	2.4	21.3
Indonesia	13.7	3.9	22.4
Malaysia	14.9	2.2	15.4
Philippines	14.7	2.4	9.0
South Korea	9.7	1.5	13.6
Taiwan	13.1	1.9	9.8
Thailand	12.1	2.3	19.9
Asia	11.7	1.9	14.3
Czech	10.2	1.9	-0.8
Egypt	11.3	1.8	20.0
Hungary	9.4	1.1	22.5
Poland	11.7	1.6	17.8
Russia	6.9	1.0	12.3
South Africa	11.1	2.5	42.2
Turkey	10.0	1.6	5.7
EMEA	9.6	1.7	26.1
Brazil	10.3	1.6	16.5
Chile	18.3	2.8	15.4
Mexico	16.4	2.7	26.0
Latin America	11.6	1.8	17.6
Emerging Markets	11.2	1.9	17.5

Source: Credit Suisse, 7 January 2011

Advance Emerging Capital Limited

2 February 2011

PRINCIPLE RISKS AND UNCERTAINTIES

The Board considers that the main risks faced by the Company fall into the following categories.

(i) General market risks associated with the Company's investments

Changes in economic conditions, interest rates, foreign exchange rates and inflationary pressures, industry conditions, competition, political and diplomatic events, tax, environmental and other laws and other factors can substantially and either adversely or favourably affect the value of the securities in which the Company invests and, therefore, the Company's performance and prospects.

The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of securities, and there can be no assurance that appreciation in the value of those investments will occur. There can be no guarantee that any realisation of an investment will be on a basis which necessarily reflects the Company's valuation of that investment for the purposes of calculating the net asset value.

The Company's investments, although not made into developed economies, are not entirely sheltered from the negative impact of economic slowdown, decreasing consumer demands and credit shortages in such developed economies which, amongst other things, impact the demand for the products and services offered by the companies in which the Company directly or indirectly invests.

A proportion of the Company's portfolio may be held in cash or cash equivalent investments from time to time. Such proportion of the Company's assets will be out of the market and will not benefit from positive stock market movements, but may give some protection against negative stock market movements.

(ii) Developing markets

The funds selected by the Investment Manager invest in developing markets. Investing in developing markets involves certain risks and special considerations not typically associated with investing in other more established economies or securities markets. In particular there may be (a) the risk of nationalisation or expropriation of assets or confiscatory taxation; (b) social, economic and political uncertainty including war and revolution; (c) dependence on exports and the corresponding importance of international trade and commodities prices; (d) less liquidity of securities markets; (e) currency exchange rate fluctuations; (f) potentially higher rates of inflation (including hyper-inflation); (g) controls on foreign investment and limitations on repatriation of invested capital and a fund manager's ability to exchange local currencies for pounds Sterling; (h) a higher degree of governmental involvement and control over the economies; (i) government decisions to discontinue support for economic reform programmes and imposition of centrally planned economies; (j) differences in auditing and financial reporting standards which may result in the unavailability of material information about economics and issuers; (k) less extensive regulatory oversight of securities markets; (l) longer settlement periods for securities transactions; (m) less stringent laws regarding the fiduciary duties of officers and directors and protection of investors; and (n) certain consequences regarding the maintenance of portfolio securities and cash with sub-custodians and securities depositories in developing markets.

(iii) Other portfolio specific risks

(a) Small cap stocks

The underlying investee funds selected by the Investment Manager may have significant investments in smaller to medium sized companies of a less seasoned nature whose securities are traded in an "over-the-counter" market. These "secondary" securities often involve significantly greater risks than the securities of larger, better-known companies, due to shorter operating histories, potentially lower credit ratings and, if they are not listed companies, a potential lack of liquidity in their securities. As a result of lower liquidity and greater share price volatility of these "secondary" securities, there may be a disproportionate affect on the value of the investee funds and, indirectly, on the value of the Company's portfolio.

(b) Liquidity of portfolio

The fact that a share is traded does not guarantee its liquidity and the Company's investments may be less liquid than other listed and publicly traded securities. The Company may invest in securities that are not readily tradable or may accumulate investment positions that represent a significant multiple of the normal trading volumes of an investment, which may make it difficult for the Company to sell its investments and may lead to volatility in the market price of the Shares. Investors should not expect that the Company will necessarily be able to realise, within a period which they would otherwise regard as reasonable, its investments and any such realisations that may be achieved may be at a considerably lower price than prevailing indicative market prices.

(c) Foreign exchange risks

It is not the Company's policy to engage in currency hedging. Accordingly, the movement of exchange rates between sterling and the other currencies in which the Company's investments are denominated or its borrowings are drawn down may have a material effect, unfavourable or favourable, on the returns otherwise experienced on the investments made by the Company.

Movements in the foreign exchange rate between sterling and the currency applicable to a particular shareholder may have an impact upon that shareholder's returns in their own currency of account.

(iv) Internal Risks 

Poor allocation of the Company's assets to both markets and investee funds by the Investment Manager, poor governance, compliance or administration, could potentially result in shareholders not making acceptable returns on their investment in the Company.

The control of risks related to the Company's business areas is described in detail in the corporate governance statement on page 16.

STATEMENT OF THE DIRECTORS' RESPONSIBILITY

The directors are responsible for preparing the Directors' Report and the financial statements in accordance with applicable law and regulations. 

Company law requires the directors to prepare financial statements for each financial year.  Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards and applicable law. 

The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the Company for that period. 

In preparing these financial statements, the directors are required to:

n select suitable accounting policies and then apply them consistently;

n make judgements and estimates that are reasonable and prudent;

n state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

n prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008.  They 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. 

Disclosure of information to auditor

The Directors who held office at the date of approval of this directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditors are unaware; and each director has taken all the steps that they ought to have taken as a director to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Statement under the Disclosure and Transparency Rules  4.1.12

The Directors confirm that to the best of their knowledge and belief :

(a)  This annual report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces; and

(b)  The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company.

John Hawkins - Director

Richard Hotchkis - Director

2 February 2011

STATEMENT OF COMPREHENSIVE INCOME

For the period from 16 September 2009 (date of incorporation) to 31 October 2010

	Revenue	2010 Capital	Total
	£'000	£'000	£'000
Gains on investments designated as fair value through profit or loss	-	89,779	89,779
Capital (loss) on currency movements	-	(32)	(32)
Net investment gains	-	89,747	89,747
Investment income	2,051	-	2,051
Total revenue	2,051	89,747	91,798
Investment management fees	(2,698)	(2,484)	(5,182)
Other expenses	(528)	-	(528)
Operating (loss)/profit before taxation	(1,175)	87,263	86,088
Taxation	(164)	-	(164)
Total comprehensive income for the period	(1,339)	87,263	85,924
Earnings per ordinary share
- Basic	(2.03p)	132.34p	130.31p
- Diluted	(1.93p)	125.57p	123.64p

There are no comparative figures as this is the Company's first financial period of operations. Business operations commenced on 10 November 2009 when the Company's shares listed on the London Stock Exchange.

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared under IFRS.  The revenue and capital columns, including the revenue and capital earnings per share data, are supplementary information prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.  No operations were acquired or discontinued during the period. 

STATEMENT OF FINANCIAL POSITION

AT 31 OCTOBER 2010

	2010 £'000
Non-current assets
Investments designated as fair value through profit or loss	369,595
Current assets
Cash and cash equivalents	601
Sales for future settlement	1,263
Other receivables	113
	1,977
Total assets	371,572
Current liabilities
Other payables	323
Performance fee accrual	2,484
	2,807
Net assets attributable to equity holders	368,765
Capital and reserves attributable to equity holders
Share capital	282,841
Capital reserve	87,263
Revenue reserve	(1,339)
Total Equity	368,765
Net assets per ordinary share -undiluted	559.24p
Net assets per ordinary share -diluted	517.42p
Number of ordinary shares in issue	65,940,247

There are no comparative figures as this is the Company's first financial period of operations.

STATEMENT OF CHANGES IN EQUITY

For the period from 16 September 2009 (date of incorporation) to 31 October 2010

	Share capital account	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000
Contributions by shareholders
Issue of shares	283,676	-	-	283,676
Share issue expenses	(835)	-	-	(835)
Increase/(decrease) in equity	-	87,263	(1,339)	85,924
Balance at 31 October 2010	282,841	87,263	(1,339)	368,765

There are no comparative figures as this is the Company's first financial period of operations.

 

STATEMENT OF CASH FLOW

For the period from 16 September 2009 (date of incorporation) to 31 October 2010

	2010 £'000
Operating activities
Cash inflow from investment income and bank interest	1,968
Cash outflow from management expenses	(2,933)
Cash inflow from disposal of investments	63,150
Cash outflow from purchase of investments	(63,329)
Cash outflow from foreign exchange transactions	(32)
Cash outflow from taxation	(164)
Net cash flow used in operating activities	(1,340)
Financing
Cash inflow from rollover	2,617
Share issues expenses	(676)
Net cash flow from financing activities	1,941
Net increase in cash and cash equivalents	601
Balance at 31 October 2010	601

There are no comparative figures as this is the Company's first financial period of operations.

NOTES TO THE FINANCIAL STATEMENTS

1. REPORTING ENTITY

Advance Developing Markets Fund Limited (the "Company") is a closed-ended investment company, incorporated  in Guernsey on 16 September 2009. The Company's registered office is 11 New Street, St Peter Port, Guernsey GY1 2PF.  The Company's shares hold a premium listing on the London Stock Exchange and commenced trading on 10 November 2009. The financial statements of the Company are presented for the period from 16 September 2009 (date of incorporation) to 31 October 2010.

The Company invests in a portfolio of funds and products which give diversified exposure to emerging market economies and those of the Pacific Rim with the objective of achieving consistent returns for Shareholders in excess of the S&P/IFCI Emerging Markets Composite Index in Sterling terms.

The investment activities of the Company are managed by Advance Emerging Capital Limited.

2. BASIS OF PREPARATION

(a) Statement of compliance

The financial statements which give a true and fair view have been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted by International Accounting Standards Board ("IASB") and are in compliance with the Companies (Guernsey) Law, 2008.

Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for Investment Companies issued by the Association of Investment Companies ("AIC") in January 2009 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

The total column of the Statement of Comprehensive Income is the profit and loss account of the Company.  The capital and revenue columns provide supplementary information.

These financial statements were authorised for issue by the Board of directors on 2 February 2011.

This report will be sent to shareholders and copies will be made available to the public at the registered office of the Company.  It will also be available in electronic form on the Investment Manager's website, www.advance-emerging.com 

(b) Basis of measurement

The financial statements have been prepared on the historical cost basis except for financial instruments at fair value through profit or loss which are measured at fair value.

(c) Functional and presentation currency

The Company's shares are issued in Sterling and the majority of its investors are UK based, therefore the financial statements are presented in Sterling, which is the Company's functional currency. All financial information presented in Sterling has been rounded to the nearest thousand pounds.

(d) Use of estimates and judgements

The preparation of the financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in note 3.

3. SIGNIFICANT ACCOUNTING POLICIES

(a) Investments

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, financial assets are designated as fair value through profit or loss on initial recognition.  These investments are recognised on the trade date of their acquisition.  At this time, the best evidence of the fair value of the financial assets is the transaction price.  Transaction costs that are directly attributable to the acquisition or issue of the financial assets are charged to the Statement of Comprehensive Income as a capital item. Subsequent to initial recognition, investments designated as fair value through profit or loss are measured at fair value with changes in their fair value recognised in the Statement of  Comprehensive Income and determined by reference to:

i) investments quoted or dealt on recognised stock exchanges will be valued by reference to their market bid prices;

ii)  investments in underlying funds, which are not quoted or dealt on a recognised stock exchange or other trading facility, will be valued at the net asset values provided by such entities or their administrators. These values may be unaudited or may themselves be estimates and may not be produced in a timely manner. If such information is not provided, or is insufficiently timely, the Investment Manager will use appropriate valuation techniques to estimate the value of investments. In determining fair value of such investments, the Investment Manager takes into consideration the relevant issues, which may include the impact of suspension, redemptions, liquidation proceedings and other significant factors. Any such valuations will be assessed and approved by the directors. The estimates may differ from actual realisable values;  

iii) investments in open-ended funds will be valued at the latest net asset value provided by the open-ended fund for single priced funds or the latest bid price for those funds with a bid-offer spread;

iv) investments which are in liquidation will be valued at the estimate of their remaining realisable value;

v) all derivatives, forwards or other option contracts on quoted securities will be valued at estimated realisable value.

Investments are derecognised on the trade date of their disposal.  Gains or losses are recognised in the capital column of the Statement of Comprehensive Income. The Company uses the weighted average method to determine realised gains and losses on disposal of investment.  

(b) Foreign currency

Transactions in foreign currencies are translated into Sterling at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into Sterling at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value through profit or loss are retranslated into Sterling at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into Sterling using the exchange rate at the date of the transaction.

Foreign currency differences arising on retranslation are recognised in profit or loss and, depending on the nature of the gain or loss, are allocated to the revenue or capital column of the Statement of Comprehensive Income. Foreign currency differences on retranslation of financial instruments designated as fair value through profit or loss are shown in the "Capital gains on currency movements" line.

(c) Income from investments

Investment income from ordinary shares is accounted for on the basis of ex-dividend dates.  Income from bonds and preference shares is accounted for using the effective interest rate method.

Special dividends and distributions described as capital distributions are assessed on their individual merits and may be credited to the capital reserve if considered to be closely linked to reconstructions of the investee company or other capital transactions; with this exception all investment income is taken to revenue account. Bank interest receivable is accounted for on a time apportionment basis and is based on the prevailing variable interest rates at the Company's bank accounts.

(d) Cash and cash equivalents

Cash comprises of cash on hand and demand deposits. Cash equivalents, which include bank overdrafts, are short term, highly liquid investments that are readily convertible to known amounts of cash, are subject to insignificant risks of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.

(e) Investment management fees and finance costs

Investment management fees and finance costs are charged to the Statement of Comprehensive Income as a revenue item.  Performance-related fees, if any, are payable directly by reference to the capital performance of the Company and are therefore charged net of attributable tax to the Statement of Comprehensive Income as a capital item. 

(f) Taxation

The Company applied for exempt status under the Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 and is charged an annual exemption fee of £600.

Dividend and interest income received by the Company may be subject to withholding tax imposed in the country of origin. The tax charges shown in the Statement of Comprehensive Income relate to overseas withholding tax on dividend income.

(g) Operating segments

The Company has adopted IFRS 8, 'Operating segments'. This standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company. The Board has considered the requirements of the standard and is of the view that the Company is engaged in a single segment of business, which is investing in a portfolio of funds and products which give exposure to the emerging market economies and those of the Pacific Rim. The key measure of performance used by the Board is the Net Asset Value of the Company (which is calculated under IFRS). Therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements. 

The Board of directors is responsible for ensuring that the Company's objective and investment strategy is followed.  The day-to-day implementation of the investment strategy has been delegated to the Investment Manager but the Board retain responsibility for the overall direction of the Company.  The Board review the investment decisions of the Investment Manager at regular Board meetings to ensure compliance with the investment strategy and to assess the achievement of the Company's objective.  The Investment Manager has been given full authority to make investment decisions on behalf of the Company in accordance with the investment strategy. Details of the portfolio's asset allocation of the can be found on page 6.  Any significant change to the Company's investment strategy requires shareholder approval.

The Company has a diversified portfolio of investments and as disclosed in the Top Twenty Investments on page 7 no single investment accounts for more than 7.5% of the Company's net assets. The Investment Manager aims to identify funds which it considers are likely to deliver consistent capital growth over the longer term, as such investment income is not a focus of the investment policy and it does not anticipate regular income from its investments.  The largest income from an individual investment accounted for 18% of the total income received in the period.

At 31 October 2010 there were two shareholders who each held more than 10% of the issued share capital, from a total shareholder base of 724. Their holdings were 23% and 21% respectively. 

(h)  Standards and interpretations in issue but not yet effective

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective:

In November 2009, the IABS issued IFRS 9 "Financial Instruments" which becomes effective for accounting periods commencing on or after 1 January 2013. This represents the first of a three part project to replace IAS39 "Financial Instrument Recognition and Measurement". The objective of the standard is to enhance the ability of investors and other users of financial information to understand the accounting of financial assets and to reduce complexity.

The Company is currently in the process of evaluating the potential effect of this standard. The standard is not expected to have a significant impact on the financial statements since the majority of the Company's financial assets are designated at fair value through profit or loss.

4.	INVESTMENT INCOME
	Income from investments:	2010 £'000
	Dividends income	1,814
	Bond interest income	237
		2,051

5.	INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES		2010
		Revenue	Capital	Total
		£'000	£'000	£'000
	Investment management fee	2,698	-	2,698
	Performance fee	-	2,484	2,484
		2,698	2,484	5,182
	Administration fees	128	-	128
	Custodian's fees	40	-	40
	Registrar's fees	10	-	10
	Directors' fees	108	-	108
	Auditors' fees	39	-	39
	Other expenses	203	-	203
	Total other expenses	528	-	528
	Total expenses	3,226	2,484	5,710

6.      EARNINGS PER SHARE

Earnings per share is based on the total comprehensive income for the period of £85,924,000 attributableto the weighted average of 65,940,247 ordinary shares in issue in the period from listing of the Company's shares on the London Stock Exchange on 10 November 2009 to 31 October 2010.

Earnings per share may be diluted by the impact of the subscription shares in issue during the course of the period. The diluted earnings per share for the period 31 October 2010 is based on the total comprehensive income for the period, as above, attributable to  diluted weighted average of 69,492,635 ordinary shares in the period from listing of the Company's shares on the London Stock Exchange on 10 November 2009 to 31 October 2010.  The average bid price per ordinary share during that period was 410.81 pence.  The subscription price per ordinary share is 291 pence.  For the purposes of the diluted earnings per share figure, 3,552,388 ordinary shares were assumed to be issued for no consideration on 10 November 2009; this being the difference between the number of ordinary shares assumed to be issued on subscription and the number of ordinary shares assumed to be bought back at the average bid price of 410.81 pence from the assumed subscription proceeds.

Supplementary information is provided as follows: revenue per share is based on the net revenue loss of £1,339,000 and capital earnings per share is based on the net capital profit of £87,263,000 attributable to the above ordinary shares.

7.        NET ASSET VALUE PER ORDINARY SHARE

Undiluted net assets per ordinary share is based on net assets of £368,765,901 divided by 65,940,247 ordinary shares in issue at the Statement of Financial Position date.

Dilution in the net asset value ("NAV") per ordinary share at the end of the period was due to the NAV being higher than the conversion price of the subscription shares into ordinary shares, being 291p per share. Diluted net assets per ordinary share is based on net assets of £404,211,000 divided by 78,121,004 diluted ordinary shares at the Statement of Financial Position date.

8.        RELATED PARTY DISCLOSURES

Investment Manager (the "Manager")

Advance Emerging Capital Limited ("AECL" or the "Investment Manager") has been appointed as the Company's investment manager. Details of its fee are provided in note 5.

Fees payable to the Investment Manager are shown in the Statement of Comprehensive Income.  A performance fee accrual of £2,483,844 has been included.  An interim payment of £2,000,000 has been made since the period end and the balance will be paid following the publication of these accounts.

At 31 October 2010, in addition to the performance fee accrual, Investment Manager's monthly fee of £256,892 was accrued in the Statement of Financial Position.

Advance Brazil Leblon Equities Fund

As at 31 October 2010 the Company held an investment with a valuation of £12,831,000 in Advance Brazil Leblon Equities Fund, a fund established during the period by Advance Emerging Capital Limited to invest in domestic growth opportunities within Brazil.  Leblon Equities Gestao de Recursos, a locally based investment manager with a highly experienced team, has been appointed as sub investment manager to run the portfolio on a day-to-day basis. The launch of this fund was a means to circumvent the lack of closed end product or appropriately structured open-ended vehicles in this highly attractive market. The Company's shareholders benefit from significantly reduced management and performance fees on the investment and no double fees are charged by AECL.

Details of the directors' contracts and fees are provided in the Directors Remuneration Report on page 16. Total fees from the directors' first meeting on 30 September 2009 to 31 October 2010 were £107,680, with an accrual of £13,750 outstanding as at 31 October 2010. 

9. FINANCIAL INFORMATION

The annual report was approved by the Board of directors on 2 February 2011.  The information in this announcement has been extracted from the annual report on which the Company's auditors have given an unqualified report.  The annual report will be posted to shareholders and will be made available on the Investment Manager's website at www.advance-emerging.com It will also be available from the registered office of Company and the UK administration agent.

This announcement contains regulated information under the Disclosure Rules and Transparency Rules of the FSA.

DIRECTORS, INVESTMENT MANAGER AND ADVISERS

DIRECTORS (All appointed on 16 September 2009)	INVESTMENT MANAGER
Mr PE O'Connor (Chairman)	Advance Emerging Capital Limited
Mr AR Bonsor	1st Floor, Colette House
Mr JA Hawkins	52/55 Piccadilly
Mr RDN Hotchkis	London W1J 0DX
Mr TF Mahony	Telephone: [phone]
	www.advance-emerging.com
COMPANY SECRETARY AND	UK ADMINISTRATION AGENT
ADMINISTRATOR	Cavendish Administration Limited
Legis Fund Services Limited	145-157 St John Street
11 New Street	London EC1V 4RU
St Peter Port
Guernsey GY1 2PF
STOCKBROKER	SOLICITORS AS TO ENGLISH LAW
Westhouse Securities Limited	Lawrence Graham LLP
One Angel Court	4 More London Riverside
London EC2R 7HJ	London SE1 2AU
AUDITOR	ADVISERS AS TO GUERNSEY LAW
KPMG Channel Islands Limited	Mourant Ozannes
PO Box 20	1 Le Marchant Street
20 New Street	St Peter Port
St Peter Port	Guernsey GY1 4HP
Guernsey GY1 4AN
REGISTRARS	CUSTODIAN
Capita Registrars (Guernsey) Limited	The Northern Trust Company
Longue Hougue House	50 Bank Street
St Sampson	Canary Wharf
Guernsey GY2 4JN	London E14 5NT
REGISTERED OFFICE*
11 New Street
St Peter Port
Guernsey GY1 2PF
* Incorporated in Guernsey with registered number 50900

Enquiries:

Advance Emerging Capital Limited (Investment Manager to Advance Developing  Markets Fund Limited)

Dr Slim Feriani              Tel: [phone]                      

Cavendish Administration Limited (UK Administration Agent)

Anthony Lee / Russell Scott       Tel: [phone]

END

 

END

 

 

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