Final Results

RNS Number : 1648D

Advance Developing Markets Fund Ltd

26 January 2015

 



ADVANCE DEVELOPING MARKETS FUND LIMITED

ANNUAL FINANCIAL REPORT ANNOUNCEMENT

For the year ended 31 October 2014

INVESTMENT OBJECTIVE AND PERFORMANCE

Investment objective

The Company's investment objective is to achieve consistent returns for Shareholders in excess of the MSCI Emerging Markets Net Total Return Index in Sterling terms (the "Benchmark")

Performance

For the year ended 31 October 2014

Net Asset Value ("NAV") per share1	-0.3%
Share price - mid market2	-2.3%
MSCI Emerging Markets Net Total Return Index in Sterling terms	+0.9%

As at 31 October 2014
NAV per share3	493.5p
Ordinary share price - mid market	442.3p
Net Assets	£256.2m

¹  Measured against a closing NAV at 31 October 2013 of 494.7p

²  Measured against a closing mid-market ordinary share price at 31 October 2013 of 452.5p

³  See note 13 in the Notes to the Financial Statements for basis of calculation

The Annual Report can be downloaded in electronic format from the website of the Investment Manager www.advance-emerging.com

CHAIRMAN'S STATEMENT 

On behalf of the Board, I present the annual financial report of Advance Developing Markets Fund Limited ("ADMF", the "Company" or the "Fund") for the period ended 31 October 2014.

Performance

The twelve months to the end of October proved to be a difficult year for investors in emerging markets. During the year, the MSCI Emerging Markets Net Total Return Index in Sterling terms gained 0.9% while the Company's net asset value declined by 0.3%.

The Investment Manager's report provides an analysis of the Company's performance across the areas of fund selection, asset allocation and discount opportunities.

Tender Offers and Share Repurchases

As reported in the Company's Half Yearly Report for the period ended 30 April 2014, a total of 6,412,758 shares were repurchased by the Company on 11 December 2013 via a tender offer, equating to 10% of the Company's shares in issue at that time (excluding shares held in treasury). The shares were purchased for cancellation at a 1% discount to formula asset value ("FAV"), being the net asset value of the tendered shares less the costs of the tender offer. 

In the six month period ended 30 April 2014, the Company's shares traded at an average discount of 11.0%. Consequently, on 18 June 2014 the Company conducted a further tender offer for 10% of the shares in issue priced at a 1% discount to the FAV on 13 June 2014.  A total of 5,769,467 shares were repurchased by the Company under the tender offer and cancelled.

In the twelve month period ended 31 October 2014, 20,000 shares were repurchased in the market by the Company at a discount to net asset value of approximately 11% and are held in treasury.

The Board continues to monitor the discount to net asset value at which the Company's shares trade and will act as and when it is appropriate.

Alternative Investment Fund Managers ("AIFM") Directive

Advance Emerging Capital Limited ("AECL"), the Company's investment manager, received its authorisation as an Alternative Investment Fund Manager from the UK's Financial Conduct Authority ("FCA") in July 2014. In line with the requirements of the directive, Northern Trust (Guernsey) Limited was appointed as depositary of the Company with effect from 1 August 2014.

Developments at Investment Manager

I am pleased to note the senior management changes at AECL. Andrew Lister and Bernard Moody were appointed as co-chief investment officers with effect from 1 July 2014 and I consider this to be a very positive development.  In addition, in September 2014 the investment team at AECL completed the acquisition of a substantial minority stake in the management company. I am pleased to note that all members of the investment management team participated and now own shares in the management company, as well as retaining long term personal investments in ADMF itself. This development should deliver ongoing team stability and provides a close alignment of interests between the investment manager, the Company and its shareholders.

Outlook

Although investor sentiment remains weak, your Board believes that emerging economies and stock markets continue to offer opportunities for long term wealth creation despite near term headwinds including the potential for further geopolitical events. We believe that the Company is well positioned to generate good performance over time.

As always, I would like to thank the Company's shareholders for their continued support, my fellow directors for their diligence and professionalism and all our advisers for their advice and assistance.

Richard Bonsor

Chairman

26 January 2015

 

INVESTMENT MANAGER'S REPORT

Performance review

Advance Developing Markets Fund Limited's net asset value per share ("NAV") fell by 0.3% in sterling terms during the reporting period, compared with a return of 0.9% for the Company's benchmark index (MSCI Emerging Markets Net Total Return Index in Sterling terms). The share price fell by 2.3%, with the discount to NAV at which the Company's shares trade closing the period at 10.4%, having commenced it at 8.5%.

Both fund selection and discount opportunities contributed positively to relative performance. Fund selection was particularly strong in the portfolio's Korean and Chinese investments. ADMF also benefitted from discount opportunities with the most notable contribution coming from India Fund Inc which completed a significant tender offer in April. These positives were, however, insufficient to offset the detraction from asset allocation where the Fund's overweight position in Russia during the period proved detrimental to returns as that market underperformed significantly following the escalation of the situation in Ukraine into a standoff between Russia and the West. A weaker oil price towards the end of the year compounded the impact of sanctions and prompted a significant devaluation of the rouble.

Performance attribution for the 12 months to 31/10/14

Fund Selection		0.5%
Asia	1.8%
EMEA	(1.1%)
Latin America	(0.2%)
Asset Allocation		(1.3%)
Asia	(0.5%)
EMEA	(1.1%)
Latin America	0.5%
Cash (direct & underlying)	(0.2%)
Discount Opportunities		0.6%
Fees & Expenses		(1.0%)
Relative net asset value Performance		(1.2%)

Market Environment

The performances of the various markets that comprise the benchmark index are shown in sterling terms in Chart 1. For comparison, we also include the performances of MSCI's indices for the UK (0.8%), US (16.6%), Japan (-0.4%), World (8.9%) and Frontier (21.6%).

Chart 1. Market performances during the financial year to 31 October 2014

see chart 1 in Annual report

Emerging Asia was by some margin the best performing region during the period, helped by a strong performance from India where Narendra Modi's overwhelming electoral victory in May generated expectations of much-needed structural reform. In China, negative headlines pertaining to slowing growth failed to dampen stock market returns. In general, the negativity surrounding China's macro-economic issues seemed to ease over the year, particularly towards the end of the period when strong returns were seen from domestically traded A-Shares. A major step towards liberalisation of China's domestic equity market took place in November 2014 with the launch of the Shanghai-Hong Kong connect program. This scheme allows global investors to trade Shanghai "A" shares via the Hong Kong stock exchange and mainland Chinese investors to trade Hong Kong "H" shares. Previously only foreign institutional investors with secured quota from the Chinese authorities were allowed to invest directly in China's domestic stock markets. This initiative has the potential to result in substantial liquidity flows into China's domestic stock markets.

Emerging Asia also benefitted from sharply declining energy prices from late June onwards and, if sustained, the decline will continue to have a material positive impact on energy importers in the region, most notably China, India, Korea, Taiwan and Thailand.

Within the EMEA region, Russia dominated the headlines once more, as a perfect storm of geopolitical tension, sanctions, corporate scandal and a declining oil price hampered both the currency and the stock market. In Turkey, weakness in the lira offset market gains in local currency terms. The Turkish economy is another significant beneficiary of lower oil prices. The South African market continued to perform reasonably despite elevated valuations and poor performance in the mining sector. The general election in May proved uneventful. The United Arab Emirates and Qatar, both new entrants into the emerging market index following its reconstitution at the end of May rallied strongly ahead of their inclusion although both declined sharply thereafter and remained volatile throughout the remainder of the period.

Latin America was a challenging region in which to invest during the period. The run up to October's general election in Brazil provided for elevated volatility, with the eventual victory of Dilma Rousseff taken as a negative by the stock market. This negativity also weighed on the currency, which weakened by 9.3% during the period against sterling. Negative developments in the iron ore market and allegations of corruption hampered the performance of index heavyweights Vale and Petrobras respectively. Domestic oriented companies also fared poorly as the weaker growth outlook was factored into their valuations. The Chilean market, usually considered a safe-haven within a Latin American context, performed poorly as the market's premium rating was eroded. The same trend was evident in Colombia. Both markets also suffered from currency weakness, with the Chilean and Colombian pesos down by 10.7% and 7.8% respectively against sterling.

Portfolio

At the end of the period the portfolio was comprised of 36 positions with the top 20 accounting for 80.6% of net assets. The balance of investments by structure at the end of the period is shown below.

	October 2014	October 2013
Closed ended investment funds	56.9%	58.9%
Open ended investment funds	36.5%	32.5%
Market access products	5.9%	6.2%
Cash and other net assets	0.7%	2.4%

The average discount to net asset value on the closed end portion of the portfolio was 8.9% at the end of the period, compared with 9.5% a year ago. 

During the year the Investment Manager continued to concentrate the portfolio into its highest conviction ideas. A number of holdings were exited in their entirety. These included investments in several exchange traded funds that were held to provide liquidity for the tender offers that were conducted during the period as well as holdings in Baring Korea Trust, Baring Emerging Europe PLC, Templeton Russia and East European Fund Inc, Prosperity Voskhod and CC Asia Alpha Fund.

A material new addition to the portfolio was GBM Mexico Fund SICAV which provides exposure to a market that continues to benefit from sound policy making and a recovering US economy. The fund is managed from Mexico City by a team with a value approach and flexibility to invest away from the largest stocks in the market, which are amongst the most expensive companies on the bourse at present. We were able to negotiate an attractive fee arrangement with GBM as a cornerstone investor in their fledgling Luxembourg fund structure, which invests using the same process and strategy as their domestically domiciled funds. The fund returned 18.3% from launch in November 2013, significantly outperforming the 10.2% delivered by MSCI Mexico on a total return basis.

Another notable change was in Korea where we made a significant allocation to KIM Korea Navigator Fund. KIM is owned by Korea Investment Holdings, a financial holding company with a USD 2.7 billion market capitalisation which offers a wide range of financial services. The asset management division was established in 1974 and is the oldest such company in Korea. The firm manages approximately USD 25 billion and it has significant resources dedicated to research and analysis of Korean stocks. The product ADMF has invested in is a Luxembourg fund which mirrors an equivalent strategy the team has run very successfully for its domestic investors since 2005. The approach favours investing in growth stocks trading at reasonable valuations. We negotiated a favourable management fee for ADMF's investment. 

In China, the major addition to the portfolio was Fidelity China Special Situations where shares were acquired at an average discount to NAV of 12%. We like the portfolio's exposure to smaller companies and its focus on "new economy" and consumer discretionary stocks. The fund benefitted from the initial public offering of Chinese internet stock Alibaba in late September as it had participated in a pre-IPO funding round in 2012 and carried the holding at a price substantially below that achieved in the successful listing on the New York Stock Exchange. The resultant uplift saw Fidelity China's NAV boosted by approximately 7%.

The most notable corporate action in the portfolio during the year was in India Fund Inc, which conducted a tender offer in early April where ADMF was able to exit approximately 37% of its holding at a 2% discount to net asset value. At the time of its tender, the fund's shares were trading on a discount of 9.8% with ADMF's purchases in 2013 made at discounts as wide as 16%.

The asset allocation at the end of the year is shown on page 5 of the Annual Report.  Major changes over the last year have included increased exposure to Korea, a market where we view valuations as undemanding, and where we have also been able to access the market through deeply discounted preferred shares. Exposure to South Africa, Taiwan and Mexico has drifted higher over the year as a result of market performance and our decisions not to reduce holdings in those markets to fund the two tenders conducted by ADMF during the year.

Exposure to Russia decreased sharply during the year, both as a result of the decline in the market and ongoing sales or realisations from holdings there as the deteriorating geo-political situation reduced our appetite for the market despite what appear to be extremely low valuations.

Turkey and Thailand also decreased materially, with prospects in the former restrained by the macro-economic imbalances and the vulnerability of the currency whilst in the latter valuations became simply too rich for our liking.

Market Outlook

2014 proved to be another year of negligible returns for investors in emerging market equities, extending a frustrating period, with the benchmark index essentially range-bound since the start of 2010. Global investors appear to be unexcited and sentiment towards the asset class is lukewarm at best. The headwinds facing the asset class include the impact of the eventual end of ultra-loose US monetary policy, uncertainties over the health of the Chinese economy and financial system, a lack of positive economic or earnings momentum and geopolitical risks in a number of countries.

A more bullish view rests on whether the aforementioned issues are priced in and whether some emerging markets can deliver positive surprises in terms of growth, reform or political change. Earnings growth estimates for emerging markets in 2015 are the most conservative we can recall, with consensus at just 9.6%. Valuations are reasonable with the asset class trading on 10.4 times 2015 earnings. On a price to book basis emerging markets are the cheapest they have been compared with developed markets since 2004, although we would caution that the relevance of these aggregate numbers has diminished as the fortunes of individual sectors and markets have diverged over the recent past. In general, we see an increasingly polarised landscape, with what people perceive to be high quality assets (dividend paying, cash generative, low debt companies) trading at expensive valuation levels while more cyclically exposed companies and many state controlled enterprises trade at seemingly appealing levels of valuation, but in many instances for good reason.

Many emerging currencies have returned to levels at which those economies now look more competitive. JP Morgan's Emerging Market Currency index, which measures the strength of emerging market currencies against the US dollar, recently fell to its lowest level since the index was created almost fifteen years ago.

With regards to how emerging markets fare in a tighter monetary policy environment, historical analysis indicates that emerging market equities typically underperform in the immediate aftermath of the Federal Reserve's first hike, but soon recoup their initial loss. If the rate hike cycle is associated with an improving US economy, then emerging markets should have little to fear.

We are cautiously optimistic but we acknowledge that the environment remains challenging for the medium term. From a bottom up level, we continue to see interesting opportunities to invest in closed-end funds at discounts to net asset value across many geographies. We note that 2014 was the fifth consecutive year in which underlying managers, in aggregate, outperformed their respective parts of the benchmark index. We are confident that by continuing to invest in undervalued opportunities and with local experts who invest based on fundamentals, not index weightings, the Company will generate good returns over the long term.

Advance Emerging Capital Limited

26 January 2015

PRINCIPAL RISKS AND UNCERTAINTIES

Together with the issues discussed in the Chairman's Statement and the Investment Manager's Report, the Board considers that the main risks and uncertainties 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 economies 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 effect on the value of the investee funds and, indirectly, on the value of the Company's portfolio.

(b) Liquidity of the 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. Investors should not expect that the Company will necessarily be able to realise its investments, within a period which they would otherwise regard as reasonable, and any such realisations that may be achieved may be at a considerably lower price than prevailing indicative market prices.  The Company has an overdraft facility in place which may be utilised to assist in the management of liquidity.  The borrowing facility is described later in this Directors' Report.

Liquidity of the portfolio is further discussed in note 16 to the financial statements.

(c) Foreign exchange risks

It is not the Company's present 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.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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 as issued by the International Accounting Standards Board ("IASB") 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:

·     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; and

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

The directors are responsible for keeping 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 auditor is 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 auditor is aware of that information.

Directors' responsibility statement in respect of the annual report and financial statements

The Directors confirm that to the best of their knowledge and belief the Annual Report and Financial Statements taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Company's performance, business model and strategy.

Directors' responsibility statement under the Disclosure and Transparency Rules 4.1.12

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

(a)  the financial statements, prepared in accordance with International Financial Reporting Standards as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and result of the Company; and

(b)  the management report (comprising the Chairman's Statement, the Investment Manager's Report and the Directors' 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.

John Hawkins - Director

William Collins - Director

26 January 2015

 

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 October 2014

	Revenue	2014 Capital	Total	Revenue	2013 Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments designated as fair value through profit or loss	-	(2,525)	(2,525)	-	26,781	26,781
Capital (losses)/gains on currency movements	-	(176)	(176)	-	117	117
Net investment (losses)/gains	-	(2,701)	(2,701)	-	26,898	26,898
Investment income	2,608	-	2,608	2,931	-	2,931
	2,608	(2,701)	(93)	2,931	26,898	29,829
Investment management fees	(2,315)	-	(2,315)	(2,938)	-	(2,938)
Other expenses	(665)	-	(665)	(688)	-	(688)
Operating (loss)/profit before finance costs and taxation	(372)	(2,701)	(3,073)	(695)	26,898	26,203
Finance costs	(19)	-	(19)	(28)	-	(28)
Operating (loss)/profit before taxation	(391)	(2,701)	(3,092)	(723)	26,898	26,175
Withholding tax expense	(271)	-	(271)	(246)	-	(246)
Total comprehensive income for the year	(662)	(2,701)	(3,363)	(969)	26,898	25,929
Earnings per ordinary share
- Basic and diluted	(1.17p)	(4.80p)	(5.97p)	(1.42p)	39.30p	37.88p

The Company does not have any income or expenses that are not included in the profit/(loss) for the year and therefore "profit/(loss) for the year" is also the "Total comprehensive income for the year", as defined in International Accounting Standard 1 (revised).

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 year. 

STATEMENT OF FINANCIAL POSITION

At 31 October 2014

	2014 £'000			2013 £'000
Non-current assets
Investments designated as fair value through profit or loss	254,386			309,697
Current assets
Cash and cash equivalents	2,018			5,413
Sales for future settlement	-			2,285
Other receivables	148			182
	2,166			7,880
Total assets	256,552			317,577
Current liabilities
Other payables	308			314
Total liabilities	308			314
Net assets	256,244			317,263
Equity
Share capital	187,725			245,381
Capital reserve	74,007			76,708
Revenue reserve	(5,488)			(4,826)
Total equity	256,244			317,263
Net assets per ordinary share	493.48p			494.73p
Number of ordinary shares in issue (excluding shares held in treasury)	51,926,229			64,128,454

Approved by the Board of Directors on 26 January 2015 and signed on their behalf by:

John Hawkins - Director

William Collins - Director

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 October 2014

	Share capital account		Capital reserve		Revenue reserve			Total
	£'000		£'000		£'000			£'000
Opening equity	245,381		76,708		(4,826)			317,263
Tender offer	(57,576)		-		-			(57,576)
Other share buy backs	(80)		-		-			(80)
Decrease in equity	-		(2,701)		(662)			(3,363)
Balance at 31 October 2014	187,725		74,007		(5,488)			256,244
For the year ended 31 October 2013
		Share capital account		Capital reserve		Revenue reserve		Total
		£'000		£'000		£'000		£'000
Opening equity		306,011		49,810		(3,857)		351,964
Tender offer		(60,533)		-		-		(60,533)
Other share buy backs		(97)		-		-		(97)
Increase/(decrease) in equity		-		26,898		(969)		25,929
Balance at 31 October 2013		245,381		76,708		(4,826)		317,263

STATEMENT OF CASH FLOW

 For the year ended 31 October 2014

	2014 £'000	2013 £'000
Cash flows from operating activities
Cash inflow from investment income and bank interest	2,559	3,247
Cash outflow from management expenses	(2,903)	(3,766)
Cash inflow from disposal of investments	119,981	201,756
Cash outflow from purchase of investments	(64,911)	(138,215)
Cash outflow from taxation	(271)	(15)
Net cash flow from operating activities	54,455	63,007
Cash flows from financing activities
Borrowing commitment fee and interest charges	(19)	(28)
Share buy backs/Tender offer	(57,656)	(60,630)
Net cash flow used in financing activities	(57,675)	(60,658)
Net (decrease)/increase in cash and cash equivalents	(3,220)	2,349
Opening balance	5,413	2,948
Cash flow	(3,220)	2,349
Effect of foreign exchange transactions	(175)	116
Balance at 31 October	2,018	5,413

NOTES

1. REPORTING ENTITY

Advance Developing Markets Fund Limited (the "Company") is a closed-ended investment company, registered in Guernsey on 16 September 2009. The Company's registered office is 11 New Street, St Peter Port, Guernsey GY1 2PF.  The Company's ordinary shares hold a premium listing on the London Stock Exchange. The financial statements of the Company are presented for the year ended 31 October 2014.

The Company invests in a portfolio of funds and products which give diversified exposure to developing and emerging market economies. The Company's investment objective is to achieve consistent returns for shareholders in excess of the MSCI Emerging Markets Net Total Return Index in Sterling terms (Bloomberg ticker: NDUEEGF Index) (the "Benchmark").

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

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 

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 the International Accounting Standards Board ("IASB") and are in compliance with the Companies (Guernsey) Law, 2008. There were no changes in the accounting policies of the Company in the year to 31 October 2014.

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.

The financial statements were approved and authorised for issue by the Board on 26 January 2015.

(b) Going concern

The directors have adopted the going concern basis in preparing the financial statements. The following is a summary of the directors' assessment of the going concern status of the Company.

The directors have a reasonable expectation that the Company has adequate operational resources to continue in operational existence for at least twelve months from the date of approval of this document.  In reaching this conclusion, the directors have considered the liquidity of the Company's portfolio of investments as well as its cash position, income and expense flows.  As at 31 October 2014, the Company held £2.0m in cash and £254.4m in investments. It is estimated that approximately 62% of the investments held at the year end could be realised in one month.  The total operating expenses for the year ended 31 October 2014 were £3.0m, which represented approximately 1.12% of average net assets during the year.  The Company therefore has substantial operating expense cover.  The Company's net assets at 31 December 2014 were £249.0m.

The directors are satisfied that it is appropriate to adopt the going concern basis in preparing the financial statements and, after due consideration, the directors consider that the Company is able to continue in the foreseeable future.

(c) 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.

(d) 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.

(e) Capital reserve

Profits achieved by selling investments and changes in fair value arising upon the revaluation of investments that remain in the portfolio are all charged to the capital column of the Statement of Comprehensive Income and allocated to the capital reserve.

(f) Revenue reserve

The balance of all items allocated to the revenue column of the Statement of Comprehensive Income in each year is transferred to the Company's revenue reserve. 

(g) Use of estimates and judgements

The preparation of the financial statements in conformity with IFRS 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 on-going 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 below.

Classification and valuation of investments

Investments are designated as fair value through profit or loss on initial recognition and are subsequently measured at fair value.  The valuation of such investments requires estimates and assumptions made by the management of the Company depending on the nature of the investments as described in notes 3 (a) and 17 and fair value may not represent actual realisable value for those investments.

Allocation of investments to fair value hierarchy

IFRS 13 requires the Company to measure fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. IFRS 13 establishes a fair value hierarchy that prioritises the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy under IFRS 13 are as follows:

Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices);

Level 3 - inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability.

The determination of what constitutes 'observable' requires significant judgement by the Company. The Company considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.

Functional currency

The Company's ordinary shares are issued and traded in Sterling and a significant proportion of its investments are quoted in Sterling.  For these reasons the Company has adopted Sterling as its functional currency.

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 which the Company becomes a party to the contractual provisions of the instrument.  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 in an active market are valued by reference to their market bid prices;

ii)  investments other than those in i) above which are dealt on a trading facility in an active market are valued by reference to broker bid price quotations, if available, for those investments;

iii)  investments in underlying funds, which are not quoted or dealt on a recognised stock exchange or other trading facility or in an active market, are 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 uses 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 are assessed and approved by the directors. The estimates may differ from actual realisable values;  

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

v) any other investments are valued at the directors' best estimate of fair value.

Investments are derecognised on the trade date of their disposal, which is the point where the Company transfers substantially all the risks and rewards of the ownership of the financial asset.  Gains or losses are recognised in the capital column of the Statement of Comprehensive Income. The Company uses the weighted average cost method to determine realised gains and losses on disposal of investments.  

(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/(losses) on currency movements" line.

(c) Income from investments

Dividend income is recognised when the right to receive it is established and is reflected in the Statement of Comprehensive Income as Investment Income in the revenue column. For quoted equity securities this is usually on the basis of ex-dividend dates. For unquoted investments this is usually on the entitlement date confirmed by the relevant holding.  Income from bonds is accounted for using the effective interest 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. Bank interest receivable is accounted for on a time apportionment basis and is based on the prevailing variable interest rates for the Company's bank accounts.

(d) Treasury shares

Where the Company purchases its own share capital, the consideration paid, which includes any directly attributable costs, is recognised as a deduction from equity shareholders' funds through the Company's reserves. When such shares are subsequently sold or re-issued to the market any consideration received, net of any directly attributable incremental transaction costs, is recognised as an increase in equity shareholders' funds through the Share capital account. Shares held in treasury are excluded from calculations when determining NAV per share as detailed in note 13.

(e) Cash and cash equivalents

Cash comprises cash at 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.

(f) Investment management fees and finance costs

Investment management fees and finance costs are charged to the Statement of Comprehensive Income as a revenue item and are accrued monthly in arrears. Finance costs include interest payable and direct loan costs. Performance-related fees, if any, are payable directly by reference to the capital performance of the Company and are therefore charged to the Statement of Comprehensive Income as a capital item. 

(g) Financial liabilities

Financial liabilities (including bank loans) are classified according to the substance of the contractual arrangements entered into. Financial liabilities at fair value through profit or loss are measured initially at fair value, with transaction costs recognised in the Statement of Comprehensive Income.

(h) Taxation

The Company applied for exempt status under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 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.

(i) 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 developing and emerging market economies. 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. 

Further information on the Company's operating segment is provided in note 18.

(j) Offsetting

Financial assets and liabilities are offset and the net amount presented in the Statement of Financial Position when, and only when, the Company has a legal right to set off the recognised amounts and it intends to either settle on a net basis or to realise the asset and settle the liability simultaneously.

Income and expenses are only presented on a net basis when permitted under IFRSs.

(k)  Structured entities

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes; (a) restricted activities, (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors, (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks.

The Company holds shares, units or partnership interests in the funds or investment products held in the Company's portfolio.  The Company does not consider its investments in listed funds to be structured entities but does consider its investments in unlisted funds to be investments in structured entities because the voting rights in such entities are limited to administrative tasks and are not the dominant factor in deciding who controls those entities.

Changes in fair value of investments, including structured entities, are included in the Statement of Comprehensive Income

(l)  New standards and interpretations effective in the current financial year

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2013. 

IFRS 7 Financial Instruments: Disclosures

IFRS7 has been amended and requires additional disclosure of information about financial assets and financial liabilities which have been offset.  The amendment to IFRS 7 does not have any significant impact on the Company's financial statements.

IFRS 10 Consolidated Financial Statements (2012)

IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The new standard does not have a significant impact on the Company's financial position or performance.

IFRS 12 Disclosure of Interests in other entities

IFRS 12 includes the disclosure requirements for all forms of interests in other entities including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The adoption of IFRS 12 does not have any significant impact on the Company's financial statements but results in additional disclosures.

IFRS 13 Fair Value Measurement (2011)

IFRS 13 provides a single source of guidance on how fair value is measured, and replaces the fair value measurement guidance that is currently dispersed throughout IFRS and it enhances fair value disclosures. Subject to limited exceptions, IFRS 13 is applied when fair value measurements or disclosures are required or permitted by other IFRSs. The adoption of IFRS13 does not have a significant impact on the Company's financial statements but results in additional disclosures.

(m)  New 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:

IFRS 9 Financial Instruments (2010) and IFRS 9 Financial Instruments (2009) (together, IFRS 9)

IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additional disclosures relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets.

The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39 categories of held-to-maturity, available-for-sale and loans and receivables.

IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability's credit risk in other comprehensive income rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39.

The mandatory effective date of IFRS 9 is not specified but will be determined when the outstanding phases are finalised. However, early application of IFRS 9 is permitted.

Based on the initial assessment, the standard is not expected to have a material impact on the Company's financial statements.

4.	INVESTMENT INCOME
	Income from investments:	2014 £'000	2013 £'000
	Dividend income	2,608	2,900
	Bond interest income	-	31
		2,608	2,931

5.	INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	2,365	-	2,365	3,074	-	3,074
	-management fee rebate	(50)	-	(50)	(136)	-	(136)
		2,315	-	2,315	2,938	-	2,938
	Administration fees	194	-	194	144	-	144
	Depositary and custody service fees	58	-	58	40	-	40
	Registration fees	17	-	17	16	-	16
	Directors' fees	120	-	120	145	-	145
	Auditor's fees - annual audit and
	interim review	48	-	48	49	-	49
	Auditor's fees - tax compliance	3	-	3	-	-	-
	Marketing fees	32	-	32	32	-	32
	Broker fees	40	-	40	40	-	40
	Other expenses	153	-	153	222	-	222
	Total other expenses	665	-	665	688	-	688
	Total expenses	2,980	-	2,980	3,626	-	3,626

The Company's ongoing charges for the year ended 31 October 2014, calculated using the Association of Investment Companies methodology were 1.12% (2013: 1.06%).

6.      EARNINGS PER SHARE

Earnings per share is based on the total comprehensive income for the year ended 31 October 2014, being a loss of £3,363,000 (2013: profit of £25,929,000)attributable to the weighted average of 56,288,614 (2013: 68,449,991) ordinary shares in issue (excluding shares held in treasury) in the year ended 31 October 2014.

Supplementary information is provided as follows: revenue per share is based on the net revenue loss of £662,000 (2013: loss £969,000) and capital earnings per share is based on the net capital loss of £2,701,000 (2013: profit of £26,898,000) attributable to the above ordinary shares.

7.        NET ASSET VALUE PER SHARE

Net assets per share is based on net assets of £256,244,000 (2013: £317,263,000) divided by 51,926,229 (2013: 64,128,454) shares (excluding shares held in treasury) in issue at the Statement of Financial Position date.

8.    RELATED PARTY DISCLOSURES

Investment 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.  No performance fee accrual has been included (2013: £nil).

A director of AECL has a direct interest in 3,635 ordinary shares in the Company.  The investment management team at AECL has, in aggregate, direct or indirect interests in 7,664 ordinary shares in the Company.

Advance Brazil Leblon Equities Fund

As at 31 October 2014 the Company held an investment with a valuation of £8,531,098 (2013: £10,233,889) in Advance Brazil Leblon Equities Fund ("ABLE"), a fund established by AECL 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 products 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. A rebate on management fees charged by ABLE equivalent to £49,686 (2013: £136,274) was payable to the Company in the year ended 31 October 2014.

Directors' fees

Details of the directors' contracts and fees are provided in the Directors' Remuneration Report in the Annual Report. Total fees for the directors in the year ended 31 October 2014 were £120,000 (2013: £144,700). Of this amount £120,000 (2013: £144,700) had been paid at the year end, with an accrual of £nil (2013: £nil) outstanding. 

9. ANNUAL GENERAL MEETING

The Company's Annual General Meeting will be held at the Company's registered office at 11:00 a.m. on 1 April 2015.

10. FINANCIAL INFORMATION

The annual report was approved by the Board of directors on 26 January 2015.  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 FCA.

A copy of the annual report will be submitted to the National Storage Mechanism and will shortly be available at: http://www.morningstar.co.uk/uk/NSM

Registered office

11 New Street

St Peter Port

Guernsey GY1 2PF

Enquiries:

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

Andrew Lister / Bernard Moody       Tel: [phone]     

Orangefield Legis Fund Services Limited (Company Secretary)

Lisa Garnham        Tel: [phone]

Cavendish Administration Limited (UK Administration Agent)

Anthony Lee        Tel: [phone]

Ordinary Shares - Listing Category: Premium - Equity Closed-ended Investment Funds

26 January 2015

END

 

END

 

 

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