Interim Results
F&C Latin American Inv Trust PLC
22 September 2005
Date: 22 September 2005
Contact: Rupert Brandt Lisa Stanley
F&C Emerging Markets Lansons Communications
020 7628 8000 020 7294 3692
F&C LATIN AMERICAN INVESTMENT TRUST PLC
Unaudited Statement of Results
for the half-year ended 30 June 2005
HIGHLIGHTS
• As a result of a more cautious view on markets, the Company moved from
a geared position which averaged 12.0% in 2004 to a net cash position which
averaged 7.2% during the first half of 2005. The NAV on 30 June 2005 was 425.2
cents producing a +9.8% total shareholder return over the six month period.
The MSCI Latin American Index rose 11.5% over the same period.
• Underperformance was caused by the combination by our net cash
position and asset allocation. Stock selection continued to be positive.
• The Company's dividend income continued to increase over the period
and as a result the Board are pleased to declare an interim dividend of 2.5
cents per share compared with 2.0 cents per share in the 2004 interim period.
• The Company remains relatively cautious over the direction of its
markets over the next 12 months as valuations are very high by historical
standards, we can identify plenty of negative catalysts that might be triggered
and the chance of a sharp correction has thereby risen considerably.
• No tender offer was triggered in the 60 days ended 31 March 2005
because the average discount in this period was below the 13.5% trigger level.
We are currently part the way through the discount calculation period for the 60
days to the end of September 2005 that will determine whether this bi-annual
tender offer is triggered or not.
SUMMARY OF RESULTS
30 June 2005 31 Dec 2004 % Change
Net assets attributable to equity
shareholders
US$330.4m US$302.3m +9.30
Net assets per ordinary share -
basic cum income
473.58 cents **433.26 cents +9.31
Net assets per ordinary share -
basic total return*
+10.00
Net assets per ordinary share -
diluted cum income
425.22 cents **390.12 cents +9.00
Net assets per ordinary share -
diluted total return*
+9.77
Share price 371.00 cents 335.50 cents +10.58
Share price total return* +11.58
Warrant price 270.50 cents 232.00 cents +16.59
6 months to 6 months to
30 June 2005 30 June 2004
Dividend per share ***2.50 cents 2.00 cents +25.00
* Total return figures include income distributed during the year.
** Restated to reflect changes in accounting standards.
*** Payable on 4 November 2005 to shareholders registered on 7 October 2005.
Extracts from the Chairman's Statement
Your Company's fully diluted cum income net asset value per share ('NAV') on 30
June 2005 was 425.2 cents, an increase of +9.8% on a total return basis over the
six month from 31 December 2004.
During the period, the Company's NAV underperformed its benchmark, the MSCI
Latin American Index, which rose 11.5%. However, the share price total return
of +11.6% virtually mirrored the benchmark. The reasons for the Company's
underperformance were primarily related to its net cash position and asset
allocation.
From a geared position in 2004 which averaged 12.0%, we moved to a net cash
position which averaged 7.2% over the past six months. In generally strong
markets this strategy proved to be incorrect and the negative consequences were
compounded by the strong performance of some of the regions currencies.
As regards asset allocation, the underweight position in Brazil negatively
affected our performance as did the zero weight position in Argentina. Stock
selection still had a positive overall impact which was primarily down to good
stock selection in Brazil and Chile.
Over the short-term, the Company has suffered from our general concern that the
principal markets in the region are no longer attractively valued. By many
historical parameters, share valuations are now looking very expensive, we can
identify plenty of negative catalysts that might occur and we continue to
believe that the chance of a sizable correction justifies our relatively
cautious stance.
Since the end of the review period to 19 September, your Company's NAV has
appreciated by 18.2% on a total return basis, compared to the benchmark's 23.0%
gain.
The Company continued to enjoy significant dividend inflows from its investments
over the period. This positive background combined with the Board's revised
accounting policy (regarding the apportionment of management fees and capital
costs) announced and discussed in last year's financial reports have enabled the
Company to continue to increase its dividend payout. The Board are pleased to
declare an interim dividend of 2.5 cents per share to be paid on 4 November
2005. This compares with an interim dividend of 2.0 cents per share paid in
2004.
The cum income NAV discount ('discount') ended 2004 at 14.0% and fluctuated in a
volatile range throughout the period reaching lows of less than 9% during the
correction in March and peaking at 15% on occasions amid the sharp regional
rally in late May and June. The discount ended the period at 12.8%. As announced
in early April, the tender offer based discount control mechanism was not
triggered in the 60 days ending 31 March 2005 because the average discount in
this period was below the 13.5% trigger level. We are currently part the way
through the discount calculation period for the 60 days to the end of September
2005. We did not repurchase any shares over the period but continue to see the
ability to repurchase shares as a helpful tool in managing our discount level.
We passed the final subscription date for our warrants on 31 July 2005 and in
accordance with the terms of the warrant particulars, the Board appointed Law
Debenture Trust Corporation plc to exercise the 425,927 warrants which had not
been exercised by warrant holders at the final subscription date. In total
10,374,850 warrants have been exercised this year injecting US$10,374,850 of new
cash into your Company and increasing the total number of shares outstanding to
80,145,042. There are no warrants outstanding.
During the period, the Company has modified its corporate governance
arrangements. Membership of the Nominations Committee is now restricted to
independent directors who have served on the Board for less than 9 years. It has
further been agreed that the Nominations Committee should in future review the
terms of the management agreement and that it should be re-named the Nominations
and Management Engagement Committee.
Accounting standards | UK accounting standards have changed in anticipation of
UK companies moving to International Financial Reporting Standards. There are
two main alterations in our accounts. The first is to change the basis of
valuing the listed portfolio from using mid market prices to bid prices. This
has reduced assets at 31 December 2004 by US$2.732m. The second is to recognise
the dividend payable only after it has been declared. The interim dividend cost
of US$2.004m payable in November, is therefore not deducted from net assets
until after 30 June 2005.
Brazil | The Brazilian MSCI index rose by 12.6% in US$ over the period. The vast
majority of this rise was down to the 12.5% appreciation in the Brazilian real
against the US dollar. The real's appreciation resulted from a number of factors
including a robust global risk appetite, an increase in local Brazilian interest
rates to 19.75% over the period (which made real denominated money markets
attractive to both local and foreign investors) and because of Brazil's much
larger than expected trade surplus.
The Brazilian stock market struggled to produce positive performance in local
currency terms over the period because the sharper than expected increases in
the key SELIC interest rate from 16% in September 2004 to 19.75% in May 2005
caused a slowdown in Brazil's domestic economic recovery that started in 2004.
The nominal growth rate in retail sales slowed down sharply from 9.3% in 2004 to
only 4.6% in the first half of 2005. The slowdown in Brazil's domestic economy
was exacerbated by the timing of Easter which occurred in the first quarter this
year causing real GDP growth to decelerate from its average of 4.9% in 2004 to
only 2.8% compared to the same period in the prior year. The silver lining in
the period was export growth which was much faster than even the most optimistic
forecasts had predicted. Exports grew by 32% to US$43.3bn from a very high base
over the period which drove a 34% increase in the trade surplus to US$19.7bn.
This great result from export growth had a number of positive consequences
including the facilitation of a US$12.5bn increase in the central bank's net
reserves to US$40.5bn over the period and a recovery in the momentum in
industrial production over the second quarter which grew by an average growth
rate of 1.5% month on month. The recovery in industrial production in the second
quarter combined with the positive effect of not having Easter in this period
helped the rate of real GDP growth in the second quarter accelerate to +1.4%
compared to the first quarter of 2005 and +3.9% compared to the same period last
year.
The combination of the strength in the currency, increasing real interest rates
and the slowdown in the domestic economy caused inflation to decelerate over the
period. Consumer price inflation, measured by IPCA peaked at just over 8% on a
trailing 12 month basis during the middle of the review period and is currently
expected to be just a little above 5% for the full year 2005 which is an
improvement from 2004's 7.6% inflation rate. This allowed the Central Bank to
start an easing cycle in September with a 25bps reduction in the SELIC rate to
19.50%. We expect to see a number of further cuts in the SELIC rate during the
second half of the year which should support a renewed recovery in the domestic
economy. Formal employment grew by 6.3% in the first half of 2005 with a 1.2%
average increase in real wages which together with the strong expansion in
credit should set the scene for some good results from consumer companies down
the road. We believe that the central bank could certainly move the real
interest rate closer to 10% without causing an increase in inflationary pressure
which should allow the SELIC rate to fall back to 15-16% without that much
trouble over the next six to nine months. Other things being equal, this should
be a positive catalyst for performance by many of the domestic stocks but it may
also ultimately be a negative catalyst for the Brazilian real which currently
looks overvalued. Whilst the Central Bank may not currently want to risk trying
to take the real interest rate below 10% as we head toward a presidential
election next year this is ultimately likely to be their long term target.
Political noise rose over the period in Brazil which was another factor that
limited the stock market's performance in local currency terms. This rise in
political risk is symptomatic of the approach of the presidential election in
2006. There were two major corruption scandals which broke out during the
reporting period. The first scandal involved allegations of corruption in the
government run post office system and the second scandal involved the government
being accused of paying cash for votes in Congress. So far the governing PT
party has seen its Chief of Staff, Treasurer and President all resign which
implies that there is likely to be some truth in these accusations. The key risk
is that this latter scandal's tentacles spread and catch either the highly
respected finance minister and/or President Lula himself.
There are also a lot of other negative issues floating around; Lula's cabinet
have just been accused of inflating their expenses by withdrawing an excessive
amount of cash out of their government credit cards last year and the Bingo
corruption enquiry from 2004 is also becoming noisy again. Considering that the
PT got elected partly because of its anti-corruption platform, it is not
surprising that its popularity is rapidly falling in the wake of these extremely
embarrassing scandals. The latest opinion polls show that Lula's popularity has
fallen to a fresh all time low since he became president and next year's
presidential election is fast becoming a very open race. Presidential elections
can be very important to the outlook of the Brazilian stock market because
Brazilian regulatory institutions are still highly influenced by the government.
A change in the governing party normally ushers in a change in the heads of both
the regulatory agencies and across the senior management teams of most of the
government controlled companies. Sentiment in the very important oil and utility
sectors could consequently be badly affected if a populist candidate started
doing well in the polls. These sectors make up about half of the Brazilian
stockmarket.
We are concerned that Brazilian corporate profits have generally been inflated
by the real's appreciation and the surge in commodity prices. The market
consensus is being very sanguine in assuming that both these elements will
remain strong and on that basis, many market commentators are extrapolating the
exceptionally strong rate of earnings growth that many companies have enjoyed
over the last few years well into the future. We think this is a very dangerous
situation and that there is a good chance that the aggregate net profit reported
by Brazilian companies may reach a medium term high water mark in the 2005
financial year. This could be caused by weakness in the real from its currently
very high levels and/or a correction in commodity prices.
Over 50% of the Brazilian stock market is made up of companies involved in the
commodity sector. Whilst we believe there is currently a good probability that
the aggregate level of Brazilian corporate profits might peak in 2005, there are
of course plenty of exceptions to this trend. Many companies in the consumer
sector in particular have experienced relatively tough trading conditions over
the last few years and there is plenty of opportunity for profit growth in these
sectors. There are also a new breed of secular growth companies coming through
in the mid cap section of the market in Brazil in the logistics, insurance and
healthcare sectors which all have very favourable earnings growth outlooks. Many
of our overweight positions are in these sectors and we have found that the
consolidation of the market in local currency terms during the last seven to
eight months has created some interesting stock specific opportunities.
Brazilian bond spreads are close to their all time lows. There is a risk that as
the US Federal Reserve continues to increase interest rates in the US, liquidity
will drain out of the global system which could prove very disruptive to the '
global carry trade'' and consequently to the Brazilian stock market's
performance. Whilst the market has consolidated in local currency terms this
year, it has none the less doubled in US$ terms from its lows after the last
correction in April 2004 which makes it vulnerable to profit taking if global
risk appetite were to diminish from its currently very high levels.
Our concerns over the Brazilian political outlook, commodity prices, the level
of the real, the level of Brazilian bond prices and the sustainability of
overall Brazilian earnings growth in 2006 resulted in us being underweight in
Brazil during the period with an emphasis on high dividend yield payers,
consumer stocks and secular growth stocks in general at the expense of commodity
stocks. As we get closer to the start of the SELIC rate cutting cycle, we have
decided to temporarily reduce the size of our underweighting and move closer to
neutral by adding some non commodity based cyclical domestic stocks which we
think will benefit from domestic interest rate cuts. We remain sceptical about
Brazil's 12 month outlook but feel on balance that the start of the interest
rate easing cycle is likely to be a positive catalyst and do not wish to be too
underweight in the market in the very near term. However we intend to keep a
very open mind on this strategy.
Mexico | The Mexican market rose by 10.1% in US dollars during the first 6
months of the year, assisted by a 3.4% appreciation in the peso.
Although Mexico has been a major beneficiary of the bull market in oil prices
and continued growth in the US economy during this period, its economy has
produced surprisingly sluggish performance. After ending 2004 with 4.9% real GDP
growth in the fourth quarter compared to the same period a year earlier, the
economy has slowed sharply to growth of only 2.4% in the first quarter of 2005
due to unexpectedly soft industrial production and the early Easter holiday,
with its resulting reduction in working days over the quarter. Although this
Easter effect gave an artificial boost to the second quarter, GDP still only
managed to grow by 3.1% compared to the same period last year. We were expecting
a stronger performance and view this as a warning sign that all might not be
well in the Mexican economy, a threat which the stock market has so far chosen
to completely overlook.
The central bank continued to tighten monetary policy over the period with the
Corto peaking in March at 79 million Mexican pesos and the benchmark 28 day
Cetes interest rate ending the period at 9.7%. The combination of high domestic
interest rates, upgrades by Moody's and S&P in their rating of Mexican foreign
currency denominated debt and the appreciation of the peso against the US dollar
over the period encouraged the continuation of 'carry trade' investments in
Mexico's domestic money markets. Whilst this is good news for Mexico in the
short term, it does however make Mexico vulnerable to a possible reversal of
these hot money flows down the road.
The Mexican political environment has already started to show signs of strain as
we head toward the end of the six year presidential term with the election on 2
July 2006. The leading candidate in the polls has consistently been Lopez
Obrador who is the maverick and somewhat populist mayor of Mexico City and
widely perceived as an anti-establishment candidate. In April, the congressional
oversight committee recommended that Lopez Obrador ('AMLO') have his political
immunity removed due to allegations that he had broken the law whilst holding
the office as mayor. The next week brought a massive rally of AMLO supporters in
Mexico City's central square, which coincided with congress' vote on his
impeachment. Following this there was a series of legal actions lodged with the
Supreme Court from both the Local Assembly and opposing them, the Federal
Congress, before another larger demonstration on the 24 April took place with
wider social unrest becoming a real possibility. After this demonstration,
President Fox decided to back down and fired the attorney general who prepared
the case, effectively ending the whole saga, and leaving AMLO further ahead in
the polls whilst providing the perfect stage from which to launch his
presidential campaign. Since May, political news-flow has quietened. The
Constitutional Court sided with President Fox in his effort to exercise a veto
over the changes made to the 2005 budget by congress at the end of last year.
AMLO, Roberto Madrazo and Santiago Creel have all announced their intentions to
seek nomination as the presidential candidates of their respective parties and
the PRI have said that they will be implementing an open primary to elect their
presidential candidate. Within the PRI, Arturo Montiel is Roberto Madrazo's
main competitor for the nomination and within the PAN, Felipe Calderon is
Santiago Creel's main contender.
We have maintained our underweight position in Mexico as we grow increasingly
concerned that the valuations of many Mexican companies reflect an extremely
optimistic outlook. Whilst the performance of corporate Mexico over the last 18
months has been impressive, growing profits and cash flow very rapidly, we feel
that the market is extrapolating the current corporate profit growth rate over
the long term, whereas in reality we believe that this growth rate will probably
slowdown in 2006. We expect that over the next 6-12 months there is a high
probability that the focus of the Mexican stock market will shift from earnings
growth to rising political risk. After the tremendous performance over the last
three years, the market may experience a correction in local currency terms
which could be compounded by weakness in the Mexican peso from current levels
which look overvalued to us.
Chile | The Chilean market rose by 10.4% in US dollar terms in the first half of
2005. US dollar performance was not helped by a 4% fall in the value of the
Chilean peso against the US dollar. Whilst there is not the sort of carry trade
opportunities available in Chile during the period that occurred in many other
parts of the region, it was still surprising to see weakness in the peso
considering that copper prices rose by 5.5% over the period and the economic
newsflow out of the Chilean economy was very impressive. GDP grew by 5.8% and by
6.5% in the first and second quarters respectively compared to the same period
last year which once again was a much better performance than in Brazil and
Mexico.
Investment remains robust, unemployment is falling (to 8.7% in May compared to
9.6% in May 2004) and consumption is building momentum. Chile's trade numbers
remained very robust over the period with a surplus of between US$500m to US$1bn
each month and an accumulated US$5bn year to date surplus. Chile's fiscal
numbers are also very strong with a 3% nominal fiscal surplus expected for the
full year 2005 which should further reduce Chile's already very low sovereign
net debt to under 10% of GDP. Trailing twelve month inflation has continued to
creep up from its March 2004 lows of -0.7%, with CPI reaching 2.7% by the end of
June. As a result, the Central Bank has gradually increased the overnight rate
target from 2.25% at the start of the year, to 3.25% in June, with the market
expecting inflation of 3.3% and interest rates of 4.25% at year end.
The political environment remains benign, with a victory by the centre-left
candidate Michelle Bachelet, widely anticipated in the December 2005
presidential election. She is an experienced politician from the incumbent party
in power and appears to be a safe pair of hands. Any surprise result would be
positive for the stock market as both of the other candidates are more pro
business. The greatest risk to strong Chilean growth is a fall in commodity
prices, especially copper, and further natural gas supply problems from
Argentina. The government is addressing the latter, by pushing through
legislation to encourage investment and allowing electricity prices to rise.
We increased our overweight position in Chile during the course of the year, as
we feel, on balance, that its extremely strong sovereign balance sheet and its
very calm political outlook makes it a much lower risk investment than Brazil
and Mexico over the next twelve months. We believe that the robust growth being
experienced by the economy should support domestic earnings momentum and can see
moderate upside in the share prices of many Chilean companies on a 12 month
view. Our bullishness is however limited by the market's overall price to
earnings multiple, which whilst in Chile's traditional trading range, remains at
a sharp premium to the region.
Argentina | In the first six months of the year, the MSCI Argentina rose by
25.7% in US dollar terms due to the conclusion of its debt restructuring and
very strong performance by its key benchmark stock which is an oil services
company. After some delays due to litigation in US courts, the Argentine debt
restructuring was largely resolved on 2 June. This allowed Standard & Poor to
raise the country's debt rating to a 'B-', six levels below investment grade.
However, 24% of the original bondholders remained outstanding. There are rumours
that the original offer will be made available to the hold-outs, possibly after
the country's congressional elections in October. Argentina's economy continued
to power ahead with 8% real GDP growth in the first quarter of 2005 compared to
the prior year. Market performance was also supported by the 2.8% appreciation
of the peso against the US dollar.
We continue to be concerned that Argentina has squandered its recovery period
and failed to make any significant changes that will affect the country's long
term prospects. There has not been any significant improvement on the policy
front in the domestic economy and the government continues to address problems
on an immediate needs basis. This has been sufficient over the past two years
as the country benefited from a 'recovery bounce.' However, some growth
indicators are now showing signs of slowing - export growth was up 13.7% in the
second quarter, lower than the 20% growth of the first quarter. Also, key areas
such as industrial investment have failed to recover. We believe that one of
the main problems over the coming year will be inflation which has gradually
been picking up pace and in July reached 9.6% on a twelve month rolling basis,
its highest level in two years. We are also very concerned over judicial
insecurity and the persistence of a new high plateau of poverty and social
exclusion.
Venezuela | The Venezuelan market was the worst performing market globally in
the first half of 2005 in US dollar terms, declining by 14.3%, partly due to a
11% devaluation of the official exchange rate in March. The country's fiscal
balance continues to benefit from consistently high oil prices, while consumer
price inflation for the first 6 months came in at 8.0%, which was less than the
11.0% rate recorded in the same period last year. GDP grew by 8.0% in the first
quarter which whilst a very good result was a sharp deceleration from 2004's 18%
growth rate. Tensions with neighbouring Colombia grew in January after President
Chavez called for a suspension of commercial ties with Colombia. The conflict
was defused however in February, with a meeting of the two presidents, and
Chavez returned his focus to extending his 'revolutionary' agenda at home
promoting radicalism internationally.
The opposition parties have lost further ground since the referendum, and Chavez
now enjoys a personal approval rating above 70%. Venezuela is scheduled to have
its next presidential election in December 2006. Having made a lot of money, we
sold our position in this market in late 2004 and haven't re-entered the market
in 2005. With his confidence running high, Chavez may well sharpen his populist
policies against some of the listed companies and we do not rule out the
possibility of a ''Yukos'' type event occurring in corporate Venezuela.
Colombia | The Colombian market rose 15.0% in US dollar terms in the first half
of 2005, while the currency saw a marginal appreciation of 1.2%. Consumer
inflation remains under control at 3.9% year to date, versus 4.6% during the
comparable period in 2004, while the Central Bank has maintained the 6.5%
overnight lending rate since the start of the year. GDP appears to be trending
at our previous expectations, near 4% in the first quarter of 2005, with
economic indicators remaining strong. The previously positive political
environment has deteriorated somewhat in recent months. The law that congress
passed allowing current President Uribe to run for a second term must still pass
the Constitutional Court, whose verdict is still awaited. However, a recent
recommendation by the Solicitor General that the Court reject the reform due to
procedural errors, casts into doubt investors fairly sanguine expectations for
his re-election. President Uribe enjoys approval ratings above 70%, bi-partisan
support and has been responsible for progressing security in the country. Having
made a great deal of money in this very illiquid stock market in 2004, we have
liquidated our positions and currently have a zero weight.
Peru | The Peruvian market returned 4.7% in US dollar terms in the first half of
2005, supported by a 0.8% appreciation in the currency. Inflation for the period
remains low, with 12 month CPI down to 1.49% in June from 4.26% for the
comparable period. Inflation has now actually fallen below the Central Bank's
target range of 1.5% - 3.5%, while the overnight rate of 2.25% has been
maintained since October 2004. GDP in May rose to a strong 7.1%, bolstered by
persistently high copper prices and export demand. There remains a lack of clear
front runners for the presidential elections in the Spring of 2006, and
increased Peruvian risk premiums is still a potential risk for the second half
of the year. Our holdings in this somewhat illiquid market remain limited to a
position in a precious metal mining company and a small position in the banking
industry.
Outlook | We continue to have a relatively defensive twelve month outlook for
the region but remain very bullish over the long term. Economic growth should
remain robust throughout most of the region in 2005 which should continue to be
a source of constructive newsflow. This should provide a fertile backdrop for
solid earnings momentum but we continue to believe the risk/ reward in the
markets has deteriorated. Whilst some of the key Latin equity markets continue
to trade at relatively attractive levels on forecast twelve month forward
earnings, these forecasts have become very optimistic across the region, which
increases the risk of disappointment and reduces the potential of positive
surprises. Corporate profits and trade surpluses have been materially supported
by one of the steepest commodity price bull markets in history and we are
suspicious that we might be closer to the top of this commodity cycle than the
very bullish brokers consensus believe.
Latin American country valuations on a price to book basis, which tend to
average out of the long term cyclicality of earnings, show that both Mexico and
Brazil are trading at higher than one standard deviation above their long term
average and both are essentially at all time highs on this measure of valuation.
Latin American currencies are also looking increasingly overvalued against the
US dollar. We are also very concerned that political risk will materially rise
across the region as we approach 2006's very busy presidential election
timetable. The first hints of a major increase in political risk have already
started to appear in Mexico and Brazil. We are therefore continuing to run a
defensive portfolio which is overweight in cash and in Chile and neutral or
underweight in all the other markets. There is however a reasonable possibility
that the extremely high level of global risk appetite that currently
characterises global markets will continue to support positive performance from
Latin American stock markets in the very near term and we will continue to
actively pursue whatever opportunities we can find to make money in the short
term without taking on too much risk. Once we feel that the global risk appetite
is fading we plan to further increase the defensiveness of the portfolio's
structure. We have a high level of conviction that our defensive strategy will
pay off during the next twelve months.
Peter Burnell | September 2005
Unaudited Statement of Total Return (incorporating the Revenue Account*)
6 months to 30 June 2005 6 months to 30 June 2004
Revenue Capital Total Revenue Capital Total
**(Restated) **(Restated)
US$'000s US$'000s US$'000s US$'000s US$'000s US$'000s
Gains/(losses) on
investments - 27,297 27,297 - (4,656) (4,656)
Exchange gains /(losses) on 9 (659) (650) 17 (928) (911)
currency balances
Income 7,113 - 7,113 5,497 - 5,497
Management fee (518) (1,555) (2,073) (1,732) - (1,732)
Other expenses (540) (31) (571) (561) (15) (576)
Net return before finance costs
and taxation 6,064 25,052 31,116 3,221 (5,599) (2,378)
Interest payable and similar
charges (23) (68) (91) (374) - (374)
Return on ordinary activities
before taxation 6,041 24,984 31,025 2,847 (5,599) (2,752)
Taxation on ordinary activities (1,000) 216 (784) (375) - (375)
Return attributable to equity
shareholders 5,041 25,200 30,241 2,472 (5,599) (3,127)
Return per ordinary share
(basic) - cents 7.23 36.12 43.35 3.35 (7.59) (4.24)
Return per ordinary share
(diluted) - cents 6.52 32.58 39.10 3.05 (6.90) (3.85)
*The revenue column of this statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
** See note 1
6 months to 30 June 2005 6 months to 30 June 2004
Cents per share Total Cents per share Total
US$'000s US$'000s
Ordinary dividends payable for period (see
note 3) 2.5 2,004 2.0 1,457
Unaudited Balance Sheet
30 June 30 June 2004 31 Dec 2004
2005 (Restated) (Restated)
US$'000s US$'000s US$'000s
Fixed assets
Listed investments 305,132 253,895 299,952
Current assets
Debtors 4,586 1,646 7,379
Short-term deposits 27,000 - -
Cash at bank 3,614 5,996 8,693
35,200 7,642 16,072
Creditors: amounts falling due within one year
US dollar bank loans - (37,250) (11,250)
Other (9,891) (3,399) (2,462)
(9,891) (40,649) (13,712)
Net current assets/(liabilities) 25,309 (33,007) 2,360
Total assets less current liabilities 330,441 220,888 302,312
Creditors: amounts falling due after more than one year
US dollar bank loans - (7,250) -
Non-equity redeemable shares (24) (24) (24)
Net assets 330,417 213,614 302,288
Capital and Reserves
Called up share capital 6,977 7,353 6,977
Share premium account 2,318 61,562 63,880
Capital redemption reserve 972 338 972
Special reserve 61,562 - -
Warrant reserve 3,484 4,349 3,484
Non distributable reserve 872 7 872
Capital reserves 248,527 137,533 223,346
Revenue reserve 5,705 2,472 2,757
Total shareholders' funds 330,417 213,614 302,288
Net asset value per ordinary share
Basic - cents 473.58 290.50 433.26
Diluted - cents 425.22 261.97 390.12
Unaudited Cash Flow Statement
6 months to 6 months to
30 June 2005 30 June 2004
US$'000s US$'000s
Net cash inflow from operating activities 5,001 3,584
Interest paid (99) (563)
Total taxation paid (1,263) (425)
Net cash inflow/(outflow) from purchases and sales of 32,278 (13,437)
investments
Equity dividends paid (2,093) (413)
Net cash inflow/(outflow) before use of liquid resources
and financing 33,824 (11,254)
Increase in short-term deposits (27,000) -
Net cash (outflow)/inflow from financing (11,235) 15,014
(Decrease)/increase in cash during the period (4,411) 3,760
1) Changes in Accounting Policies
With effect from 1 January 2005, the Company has adopted the following Financial
Reporting Standards (FRS);
FRS 21 (Events after the Balance Sheet date) - Dividends paid by the Company are
accounted for in the period in which the Company is liable to pay them.
Previously, the Company accrued dividends in the period in which net revenue, to
which those dividends related, was accounted for.
FRS 25 (Financial Instruments: Disclosure and Presentation) and FRS 26
(Financial instruments: Measurement) - The Company has designated its assets and
liabilities as being measured at 'fair value through profit or loss'. The fair
value of fixed asset listed investments is deemed to be the bid value of those
investments at the close of business on the relevant date. Previously, all
listed investments were valued at mid value.
Redeemable shares are, under FRS 25, deemed to be a liability as there is a
contractual obligation to deliver cash to the shareholders. As such they are
disclosed within Creditors: amounts falling due after more than one year.
The accounts for the period ended 30 June 2004 and for the year ended 31
December 2004 have been restated to give effect to the above changes. Notes 2, 4
and 5 further explain the restatements. In addition, the Company has changed
its basis of allocation for management fees (and related VAT expense) and
finance costs with effect from 1 January 2005, to reflect their allocation
between the Revenue account (25%) and Capital Reserve realised (75%) in
accordance with the Board's long-term expected split of returns from the
investment portfolio of the Company. Previously all management fees and finance
costs were charged to Revenue.
2) Return per share
Total return per share attributable to ordinary shareholders reflects the
overall performance of the Company in the period. Net revenue recognised in the
first six months is not reflective of the total likely to be received in the
full accounting year.
a) Basic return per ordinary share is based on 69,770,192 weighted average
number of ordinary shares in issue during the period (30 June 2004: 73,764,779
and 31 December 2004: 72,708,083 ordinary shares).
b) Diluted revenue return per share attributable to ordinary shareholders has
been calculated in accordance with FRS22, under which the Company's outstanding
warrants are considered dilutive only if the exercise price is lower than the
market price of the ordinary shares at the period average. The dilution is
calculated by reference to the additional number of ordinary shares which
warrant holders would have received on exercise as compared with the number of
ordinary shares which the subscription proceeds would have purchased in the open
market ('dilutive potential shares').
6 months to 6 months to Year ended
30 June 2005 30 June 2004 31 December 2004
(restated) (restated)
US$'000s US$'000s US$'000s
Total return 30,241 (3,127) 103,913
Revenue return 5,041 2,472 4,214
Capital return 25,200 (5,599) 99,699
Weighted average
ordinary shares in
issue 69,770,192 73,764,779 72,708,083
Dilutive potential shares 7,578,394 7,371,039 6,295,485
Weighted average
number of shares
for diluted return
calculations 77,348,586 81,135,818 79,003,568
6 months to Year ended
30 June 2004 31 December 2004
As previously stated: £'000s £'000s
Total return (5,601) 100,501
Capital return (6,615) 99,837
The total and capital returns for the six months to 30 June 2004 have been
increased by $1,016,000 (1.38 cents per share) and for the year to 31 December
2004 have been decreased by $137,000 (0.19 cents per share). This reflects the
effect of the reduction in valuation of investments, as a result of the change
in accounting policy, at 1 January 2004 by $2,595,000, 30 June 2004 by
$1,579,000 and 31 December 2004 by $2,733,000.
3) Dividend
The dividend of 2.50 cents per ordinary share will be paid on 4 November 2005 to
shareholders on the registered at 7 October 2005. The total cost of the
dividend, based on 80,145,042 shares in issue (30 June 2004 - 73,533,790 and 31
December 2004 - 69,770,192) is $2,004,000 (30 June 2004 - $1,457,000 and 31
December 2004 - $2,093,000).
4) Statement of changes in equity
Share Capital Non dis-
Share premium redemption Special Warrant tributable Capital Revenue
capital account reserve reserve reserve reserve reserves reserve
US$'000s US$'000s US$'000s US$'000s US$'000s US$'000s US$'000s US$'000s
Balance at 31 December 2004
(as previously reported) 7,001 63,880 972 - 3,484 872 226,079 664
Non-equity shares treated
as liability (24) - - - - - - -
Add back accrued Dividend
at 31 December 2004 - - - - - - - 2,093
Less investment Valuation - - - - - - (2,733) -
changes
Balances at 31 December
2004 (restated) 6,977 63,880 972 - 3,484 872 223,346 2,757
Transfer of share premium
to special reserve - (61,562) - 61,562 - - - -
Dividends paid in respect
of 31 December 2004 - - - - - - - (2,093)
Realised gains on - - - - - - 52,967 -
investments
Unrealised gains on - - - - - - (25,670) -
investments
Capital tax - - - - - - 216 -
Amounts transferred to - - - - - - (2,332) 5,041
reserves
Balances carried forward
30 June 2005 6,977 2,318 972 61,562 3,484 872 248,527 5,705
5) Restatement of opening balances
A reconciliation is given between the closing balances per the 30 June 2004 and
31 December 2004 Accounts and the restated balances following the adoption of
revisions to UKGAAP.
Balance Sheet
Previously reported
30 June 2004 Restated
US$'000s Adjustment 30 June 2004
Notes US$'000s US$'000s
Non-current assets
a Investments at fair value 255,474 (1,579) 253,895
Current assets
Debtors 1,646 1,646
Cash at bank 5,996 5,996
7,642 7,642
Creditors :amounts falling due
within one year
US dollar bank loans (37,250) (37,250)
b Other (4,856) 1,457 (3,399)
(42,106) (40,649)
Net current liabilities (34,464) (33,007)
Total assets less current
liabilities 221,010 220,888
Creditors: amounts falling due
after more than one year
US dollar bank loans (7,250) (7,250)
c Non-equity redeemable shares - (24) (24)
Net assets 213,760 (146) 213,614
Capital and reserves
c Called up share capital 7,377 (24) 7,353
Share premium account 61,562 61,562
Capital redemption reserve 338 338
Warrant reserve 4,349 4,349
Non-distributable reserve 7 7
a Capital reserves 139,112 (1,579) 137,533
b Revenue reserve 1,015 1,457 2,472
Total shareholders' funds -
equity 213,760 (146) 213,614
Net asset value per ordinary
share (basic) - cents 290.66 (0.16) 290.50
Net asset value per ordinary
share (diluted) - cents 262.11 (0.14) 261.97
Notes to the restatement of opening balances
a) Effect of revaluation of fixed asset investments from mid to bid value.
b) Effect of not recognising the proposed dividend declared after the
balance sheet date.
c) Effect of reclassifying non-equity share capital as a liability.
Balance Sheet
Previously reported
31 December Restated
2004 31 December
Notes $'000s Adjustment 2004
$'000s $'000s
Non-current assets
a Investments at fair value 302,685 (2,733) 299,952
Current assets
Debtors 7,379 7,379
Cash at bank 8,693 8,693
16,072 16,072
Creditors :amounts falling due
within one year
US dollar bank loans (11,250) (11,250)
b Other (4,555) 2,093 (2,462)
(15,805) (13,712)
Net current assets 267 2,360
Total assets less current
liabilities 302,952 302,312
Creditors: amounts falling due
after more than one year
US dollar bank loans - -
c Non-equity redeemable shares - (24) (24)
Net assets 302,952 (664) 302,288
Capital and reserves
c Called up share capital 7,001 (24) 6,977
Share premium account 63,880 63,880
Capital redemption reserve 972 972
Warrant reserve 3,484 3,484
Non-distributable reserve 872 872
a Capital reserves 226,079 (2,733) 223,346
b Revenue reserve 664 2,093 2,757
Total shareholders' funds -
equity 302,952 (664) 302,288
Net asset value per ordinary
share (basic) - cents 434.18 (0.92) 433.26
Net asset value per ordinary
share (diluted) - cents 390.92 (0.80) 390.12
Notes to the restatement of opening balances
a) Effect of revaluation of fixed asset investments from mid to bid value.
b) Effect of not recognising the proposed dividend declared after the
balance sheet date.
c) Effect of reclassifying non-equity share capital as a liability.
Notes
The interim financial statements have been prepared on the basis of the
accounting policies set out in the Company's financial statements at 31 December
2004. The above financial information comprises non-statutory accounts within
the meaning of section 240 of the Companies Act 1985. The financial information
for the year ended 31 December 2004 has been extracted from published accounts
for the year ended 31 December 2004 that have been delivered to the Registrar of
Companies and on which the report of the auditors was unqualified and did not
contain a statement under section 237 of the Companies Act 1985.
The Interim Report will be posted to shareholders in late September 2005. Copies
may be obtained during normal business hours from the Company's Registered
Office, Exchange House, Primrose Street, London EC2A 2NY.
By order of the Board
F&C Emerging Markets Limited, Secretary
22 September 2005
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