Half Yearly Report

RNS Number : 4899F

Genesis Emerging Markets Fund Ld

20 February 2015

 



GENESIS EMERGING MARKETS FUND LIMITED

(The "Company"; the "Fund")

Registered in Guernsey

(Registration Number: 20790)

STOCK EXCHANGE ANNOUNCEMENT

HALF YEAR REPORT

The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the six months ended 31^st December 2014. The Half Year Report will shortly be available from the Manager's website www.giml.co.uk and also for inspection on the National Storage Mechanism, which is located at www.morningstar.co.uk/uk/NSM where users can access the regulated information provided by listed entities.

INVESTMENT APPROACH

The investment approach is to identify companies which are able to take advantage of growth opportunities in emerging markets for the benefit of shareholders, and invest in them when they are trading at an attractive discount to the Manager's assessment of their intrinsic value.

BENCHMARK

MSCI Emerging Markets (Total Return) Index.

RESULTS

	31st December 2014	30th June 2014
Published net asset value*	£776.8m	£780.1m
Published net asset value per Participating Preference Share*	£5.76	£5.78
Published net asset value per Participating Preference Share*	US$8.98	US$9.88
Earnings per Participating Preference Share	$(0.91)	$0.66

* Figures are based on the last traded price for investments.

CHAIRMAN'S STATEMENT

In the Fund's Annual Report six months ago, we noted the generally strong performance of equity markets for the previous financial year, despite a backdrop of some uncertainty about the health of the global economy. Since then market performance has been increasingly disappointing, with emerging stock markets generally appearing to have become more in tune with overall economic sentiment, as growth concerns, a substantial decline in commodity prices, and the potential for higher interest rates in the US have combined to produce significant market weakness over the half-year to December. In particular the MSCI EM (TR) Index lost -7.6% in US dollar terms, compared with a loss of -1.0% for the MSCI World (TR) Index, although for UK-based investors this decline was mitigated by the strength of the US dollar over the period: translated into sterling terms the MSCI EM (TR) Index rose by 1.3%.

Over the half-year under review, the Fund's net asset value per share declined slightly from £5.78 at the end of June to £5.76 at the end of December, a return of -0.4%. At the same time, the Fund's share price fell by 4.0% from £5.43 to £5.22, taking the discount to NAV to 9.4% (the wider end of its typical 5% to 10% range) at the close of 2014.

The Fund held its Annual General Meeting on 30th October 2014; I am very pleased to report that shareholders voted in favour of all proposals at the Meeting, and I thank them for their continuing support. The Fund's Annual Information Meeting in London in October was also well attended by shareholders, who were able to hear presentations from representatives of the Manager on their outlook for emerging markets, as well as on the current positioning and recent performance of the Fund.

Shareholders may also have seen the announcement at the end of December noting the appointment of Russell Edey to the Board of Directors; he will formally stand for election at this year's Annual General Meeting. As I have mentioned previously, we are keen to ensure that together the Board of Directors represents a range of financial and business backgrounds and skills, enabling us to meet shareholders' expectations and protect their interests: we feel that this new appointment will be positive in this regard. Following a long and distinguished career at NM Rothschild & Sons where he was particularly involved in projects relating to the mining industry, Mr Edey brings extensive financial expertise to the Board, as well as specialist knowledge in what is a key economic sector for many developing countries. This will doubtless enable him to make a valuable contribution to the Board's deliberations.

Looking forward to the prospects for the Fund for the remainder of the financial year and beyond, investors will feel that 2014 has been a dramatic year for many emerging countries, with the positive election euphoria in India and Indonesia being countered by the disappointing political events in Brazil, and the sharp decline in commodity prices which has negatively affected not only major markets like Russia and Mexico but also smaller ones such as Nigeria, Chile and Colombia. It seems very likely that the difficult macro-economic environment that some developing countries now face will persist in the near-term, but there are encouraging signs too: in China, for example (despite 2014 being the fifth consecutive year of slower growth), there appears to be gradual movement towards the implementation of the economic reform that the country is felt to need. The Manager's Review that follows this Statement provides more thoughts on the current investment environment, as well as detailing some of the activity in the portfolio over the last few months.

As I have noted on previous occasions, the increasingly challenging environment facing emerging market businesses means that the differentiation in performance between good and bad companies is likely to become more marked, which in turn increases the importance of selecting exactly the right businesses to hold in a successful emerging markets portfolio. As a Board, we note the Manager's confidence in the quality and integrity of the companies in the Fund's portfolio, and would emphasise to shareholders the long-term perspective required by investors in emerging markets to allow this corporate quality to be recognised.

Coen Teulings

February 2015

DIRECTORS' REPORT

CAPITAL VALUES

At 31st December 2014, the value of Equity Shareholders' Funds was $1,211,430,000 (30th June 2014: $1,334,019,000) and the Equity per Participating Preference Share was $8.98 (30th June 2014: $9.88), or in sterling terms, £5.76 (30^th June 2014: £5.78).

PRINCIPAL RISKS AND UNCERTAINTIES

The investment objective of the Fund is to achieve capital growth over the medium to long term, primarily through investment in equity securities quoted on emerging markets. The main risks to the value of its assets arising from the Fund's investment in financial instruments are unanticipated adverse changes in market prices and foreign currency exchange rates and an absence of liquidity. The Board reviews and agrees with the Manager policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the period to which these financial statements relate.

The economies, the currencies and the financial markets of a number of developing countries in which the Fund invests may be extremely volatile. To manage the risks posed by adverse price fluctuations the Fund's investments are geographically diversified, and will continue to be so. The Fund will not normally invest more than 25% of its assets (at the time the investment is made) in any one country. Further, the exposure to any one company or group (other than an investment company, unit trust or mutual fund) is unlikely to exceed 5% of the Fund's net assets at the time the investment is made. The Articles of Incorporation place a limit of 10% for securities issued by one company but the Directors use 5% for monitoring purposes.

The Fund's assets will be invested in securities of companies in various countries and income will be received by the Fund in a variety of currencies. However, the Fund will compute its net asset value in US dollars. The value of the assets of the Fund as measured in US dollars may be affected favourably or unfavourably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies.

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stock markets of the developed world. This lower level of liquidity exaggerates the fluctuations in the value of investments described previously. The restrictions on concentration and the diversification requirements detailed above also serve normally to protect the overall value of the Fund from the risks created by the lower level of liquidity in the markets in which the Fund operates.

The Fund's key operational risk is custody risk. Custody risk is the risk of loss of securities held in custody occasioned by the insolvency or negligence of the custodian. Although an appropriate legal framework is in place that eliminates the risk of loss of value of the securities held by the custodian, in the event of its failure, the ability of the Fund to transfer the securities might be temporarily impaired. The day to day management of these risks is carried out by the Manager under policies approved by the Board.

MANAGER

In the opinion of the Directors, in order to achieve the investment objective of the Fund, and having taken into consideration the performance of the Fund, the continuing appointment of the Manager is in the interests of the shareholders as a whole.

A more detailed commentary of important events that have occurred during the period and their impact on these financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year are contained in the Manager's Review.

Following a regular internal review, the Manager has considered that a reduction in the management fee charged to the Fund to 1.25% (from 1.50%) of NAV is appropriate.  Accordingly, this has been implemented as at 1^st January 2015.

DIRECTORS

The following directors served throughout the period under review (except where noted otherwise): Coen Teulings, Michael Hamson, Saffet Karpat, Dr John Llewellyn, Hélène Ploix and Sujit Banerji. Russell Edey was appointed with effect from 1st January 2015. As at 31st December 2014, Participating Preference Shares were held by Coen Teulings (40,000), Michael Hamson (8,700), Saffet Karpat (7,500) and Hélène Ploix (7,690).

RELATED PARTY TRANSACTIONS

During the reporting period, there were no transactions with related parties which materially affected the financial position or performance of the Fund. However, details of related party transactions are contained in the Annual Financial Report for the year ended 30th June 2014 which should be read in conjunction with this Half Year Report.

GOING CONCERN

The Directors believe that the Fund has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

DIRECTORS' RESPONSIBILITY STATEMENT

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm that to the best of their knowledge:

•         the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and return of the Fund;

•         the Half Year Report includes a fair review of important events that have occurred during the first six months of the financial year, their impact on the condensed financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

•         the Half Year Report includes a fair review of the information concerning related party transactions.

Approved by the Board

Coen Teulings                                                                                                                    Saffet Karpat

Director                                                                                                                                     Director

February 2015

MANAGER'S REVIEW

Emerging market economic and stockmarket performance in 2014 disappointed even the low expectations held at the beginning of the year. In a challenging environment, the Fund's net asset value failed to match that of the MSCI EM (TR) Index over the half-year, with the Fund marginally down versus a positive Index return of 1.3% in sterling terms. Economic growth forecasts were downgraded across many emerging markets, with Russia, China, and Brazil recording significant downward revisions, as a result of poor performance of exports to developed economies, the drag on commodity exporters from lower prices, supply bottlenecks (such as in Brazil) and the withdrawal of monetary or fiscal stimulus.

In terms of significant drivers of relative performance, holdings from the materials and energy sectors were prominent as they struggled under lower commodity prices and poor market sentiment. One such holding was the African oil exploration company Tullow Oil, which posted a 51% decline over the six-month period which had a significant impact on relative performance. Elsewhere, US and European sanctions imposed on certain Russian companies - including two of the Fund's holdings, Novatek and Sberbank (down 30% and 57% respectively in US dollar terms) - also held the portfolio back, as did stock selection losses in South Africa and Zambia (through the portfolio's exposure to First Quantum Minerals), and the underweighting in the strong Chinese market. On the positive side, a number of Indian companies, notably Kotak Mahindra Bank (up 50%) and Pidilite Industries (up 73%), were high on the list of contributors, while the portfolio's overweight in this market was also beneficial. Stock selection gains in South Korea and being underweight in the weak Brazilian market were further positive drivers.

Looking at changes to the Fund's positioning over the six-month period, Brazil and China both saw notable buying and selling activity while a number of positions in India were scaled back on valuation grounds. In Brazil, Santander Brasil was reduced following a tender offer from the parent company and the weak market there triggered additions to Itaú Unibanco and Grupo Pão de Açúcar. In China, three new holdings were introduced, including WH Group, the world's largest pork producer, while China Mobile was trimmed. In India, Sun Pharmaceutical and Kotak Mahindra Bank underwent large reductions, while Maruti Suzuki and Shriram Transport exited the portfolio. Elsewhere there were additions to Anglo American (South Africa, Mining), Tullow Oil (Africa, Energy) and to three banks: CIMB (Malaysia), Credicorp (Peru) and Garanti (Turkey), while the Fund took profits in Taiwan Semiconductor and scaled back the positions in América Móvil (Mexico) and Indocement (Indonesia).

In the Fund's last Annual Report we noted that we feel emerging markets companies are likely to experience more difficult conditions than they had become accustomed to over the last decade. Many will need to adjust to a new reality of lower levels of profitability in certain industries (due to factors like higher competition, taxes and regulatory pressure); a slower demand environment, reflecting the increased levels of penetration in many markets of basic goods and services over the last ten years; commodity prices which should in general fade to lower long-term equilibrium levels; and strong share price performance and hence rich valuations in certain industries. We also remain alive to the threats and opportunities posed by new disruptive business models, especially after a year marked by the spectacular Alibaba IPO. Evidence of these trends can be seen in a number of markets and sectors, but while some portions of the portfolio still seem relatively expensive (e.g. India, Thailand, health care and many consumer companies), others appear much cheaper. Russia, Nigeria and banks fall into this latter category, along with the portfolio's resources holdings, which we also believe are notably undervalued.

Genesis Asset Managers, LLP

February 2015

UNAUDITED STATEMENT OF FINANCIAL POSITION

as at 31^st December 2014 and 30^th June 2014

				(Audited)
		31st December 2014 $'000		30th June 2014 $'000
ASSETS
Current assets
Financial assets at fair value through profit or loss		1,198,171		1,310,219
Amounts due from brokers		643		7,637
Dividends receivable		1,357		1,426
Other receivables and prepayments		199		167
Cash and cash equivalents		13,442		17,416
TOTAL ASSETS		1,213,812		1,336,865
LIABILITIES
Current Liabilities
Amounts due to brokers		295		265
Capital gains tax payable		133		267
Payables and accrued expenses		1,954		2,314
TOTAL LIABILITIES		2,382		2,846
TOTAL NET ASSETS		1,211,430		1,334,019
EQUITY
Share premium		134,349		134,349
Capital reserve		1,048,308		1,169,925
Revenue account		28,773		29,745
TOTAL EQUITY		1,211,430		1,334,019
EQUITY PER PARTICIPATING PREFERENCE SHARE*		$8.98		$9.88

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (30^th June 2014: 134,963,060).

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 31^st December 2014 and 31^st December 2013

		2014 $'000		2013 $'000
INCOME
Net change in financial assets at fair value through profit or loss		(123,153)		89,758
Net exchange gains		1,536		212
Dividend income		12,014		10,785
		(109,603)		100,755
EXPENSES
Management fees		(9,697)		(9,074)
Transaction costs		(787)		(733)
Custodian fees		(472)		(370)
Directors' fees and expenses		(267)		(228)
Administration fees		(148)		(143)
Audit fees		(42)		(54)
Other expenses		(157)		(114)
TOTAL OPERATING EXPENSES		(11,570)		(10,716)
OPERATING (LOSS)/PROFIT		(121,173)		90,039
Finance Costs		-		-
(LOSS)/PROFIT BEFORE TAX		(121,173)		90,039
Capital gains tax		(166)		101
Withholding taxes		(1,250)		(767)
(LOSS)/PROFIT AFTER TAX		(122,589)		89,373
Other Comprehensive Income		-		-
TOTAL COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO PARTICIPATING PREFERENCE SHARES		(122,589)		89,373
EARNINGS PER PARTICIPATING PREFERENCE SHARE*		$(0.91)		$0.66

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2013: 134,963,060).

UNAUDITED STATEMENT OF CHANGES IN EQUITY

for the six months ended 31^st December 2014 and 31^st December 2013

	For the six months ended 31st December 2014
	Share Premium $'000		Capital Reserve $'000		Revenue Account $'000		Total $'000
Balance at the beginning of the period	134,349		1,169,925		29,745		1,334,019
Total Comprehensive Loss	-		-		(122,589)		(122,589)
Transfer from Capital Reserves	-		(121,617)		121,617		-
Balance at the end of the period	134,349		1,048,308		28,773		1,211,430
	For the six months ended 31st December 2013
	Share Premium $'000		Capital Reserve $'000		Revenue Account $'000		Total $'000
Balance at the beginning of the period	134,349		982,168		28,788		1,145,305
Total Comprehensive Income	-		-		89,373		89,373
Transfer to Capital Reserves	-		90,071		(90,071)		-
Balance at the end of the period	134,349		1,072,239		28,090		1,234,678

UNAUDITED STATEMENT OF CASH FLOWS

for the six months ended 31^st December 2014 and 31^st December 2013

		2014 $'000		2013 $'000
OPERATING ACTIVITIES
Dividends received		12,083		10,254
Taxation paid		(1,550)		6
Purchase of investments		(198,267)		(142,972)
Proceeds from sale of investments		194,186		144,242
Operating expenses paid		(11,962)		(9,973)
NET CASH INFLOW FROM OPERATING ACTIVITIES		(5,510)		1,557
Effect of exchange gains on cash and cash equivalents		1,536		212
		(3,974)		1,769
Net cash and cash equivalents at the beginning of the period		17,416		9,389
NET CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD		13,442		11,158
Comprising: Cash and cash equivalents		13,442		11,158

1.   BASIS OF PREPARATION

The principle accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

The Interim Financial Information for the six months ended 31st December 2014 has been prepared in accordance with International Accounting Standards 34, 'Interim Financial Reporting'. The Interim Financial Information should be read in conjunction with the Annual Financial Statements for the year ended 30th June 2014, which have been prepared in accordance with International Financial Reporting Standards ("IFRS").

The unaudited financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.

2.   COST OF INVESTMENT TRANSACTIONS

During the period, expenses were incurred in acquiring or disposing of investments.

	31st December 2014		31st December 2013
	$'000		$'000
Acquiring	407		393
Disposing	380		340
	787		733

3.   SEGMENT INFORMATION

The Fund treats all of its operations, for management purposes, as a single operating segment as it does not aim at controlling or having any significant influence over the entities in which it holds its investments.

The Fund is invested in equity securities. All of the Fund's activities are interrelated, and each activity is dependent on the others. Accordingly, all significant operating decisions are based upon analysis of the Fund as one segment.

The financial positions and results from this segment are equivalent to those per the financial statements of the Fund as a whole, as internal reports are prepared on a consistent basis in accordance with the measurement and recognition principles of IFRS.

The table below analyses the Fund's operating income by investment during the period:

	31st December 2014		31st December 2013
	$'000		$'000
Equity Securities	(110,390)		100,022

For Genesis Emerging Markets Fund Limited

J.P. Morgan Administration Services (Guernsey) Limited

February 2015

 

END

 

 

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