Genesis Emerging

Annual Financial Report

RNS Number : 7096C
Genesis Emerging Markets Fund Ld
02 October 2018
 

Genesis Emerging Markets Fund Limited (the 'Fund' or 'GEMF')

(Registered in Guernsey, Registration Number: 20790)

 

This announcement contains regulated information

 

Annual Financial Report for the year ended 30th June 2018

 

The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the year ended 30th June 2018.  The Annual Financial Report will shortly be available from the Fund's website www.genesisemf.com  and also for inspection on the National Storage Mechanism, which is located at http://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 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.

 

 

Highlights and Performance

 

GEMF Total Return in GBP for the Year to 30th June 2018

 

Share Price*

8.4%

Net asset value per Participating Preference Share*

6.8%

MSCI EM (TR) Index

6.8%

 

Published Data

30th June 2018

30th June 2017

% change

Net Assets

£1,066.8m

£1,011.6m

5.4

Net Assets

$1,408.5m

$1,314.2m

7.2

Net Asset Value per Participating Preference Share

£7.90

£7.50

5.4

Net Asset Value per Participating Preference Share

$10.44

$9.74

7.2

Share Price

£6.97

£6.53

6.8

Discount of Share Price to Net Asset Value per

Participating Preference Share

 

11.9%

 

12.9%

 

Dividend per Participating Preference Share#

$ 0.190

$0.140

35.7

Ongoing charges ratio

1.10%

1.43%

 

Countries represented in portfolio

35

36

 

Number of holdings

126

125

 

 

* Actual Returns adjusted for dividends paid

† MSCI Emerging Markets (Total Return) Index

# A dividend of $0.190 per Participating Preference Share on the Fund's profits for the year ended 30th June 2018 has been proposed

 

 

Chairman's Statement

 

I have pleasure in presenting to shareholders the twenty-ninth Annual Report of the Genesis Emerging Markets Fund Limited, for the twelve-month period ending 30th June 2018.

 

Performance

At the beginning of 2018, investors in emerging markets ('EM') could look back over a two-year period of very impressive performance, with the MSCI EM (TR) Index (the 'Index') rising by some 78% in US dollar terms between 31st January 2016 and 31st January 2018. The last few months have, however, delivered a dose of reality: the potential impact on EM companies of a strengthening US dollar, increasing disruption to global trade, and weaker political governance in some countries have all been reflected in the market's decline so far this calendar year. After rising by 16.1% in US dollar terms in the second half of 2017, the Index fell 6.5% in the first half of 2018, returning 8.6% over the twelve month period.

 

The strengthening of sterling against the dollar over the year (despite the stronger dollar in recent months) gave UK investors a slightly lower Index return, of 6.8%.

 

There was an increase in the Fund's net asset value ('NAV') per share from 749.6p to 790.4p, giving a 6.8% return in sterling terms, in line with the Index. The Fund's performance lagged the rapid appreciation of the market in 2017, but protected value as the Index declined during the early part of 2018. (Events in emerging markets, particularly Turkey and Argentina, have contributed to increased volatility since the financial year end).

 

The Fund's share price rose by slightly more than this over the year; returning 8.4% (adjusted for dividends paid).

 

Although shareholders have seen positive absolute returns, I have noted on previous occasions, that the Fund's relative performance over the medium term has been less acceptable. The Manager has taken a number of steps over recent years that they, and we, believe will improve their ability to generate strong performance; naturally my fellow Directors and I continue to review and discuss this topic with the Manager on a regular basis.

 

The Fund's Portfolio and the Manager

The characteristics of the Fund's portfolio typically include a diversified group of investments in companies across different levels of market capitalisations and from a wide range of emerging markets, a relatively long holding period (on average 5 years at present) and correspondingly low turnover.

 

The Manager's investment approach aims to use rigorous fundamental analysis to identify high quality companies with reasonable management teams, and invest in them at attractive valuation levels. Importantly, 'quality' in this context is defined by the Manager not only in terms of a company's financial strength, competitive position, and its management's ability to add value for shareholders, but also of an appropriate approach to environmental, social and governance factors.

 

The Board remains confident that the Manager's team remains appropriately organised, resourced and skilled to implement the long-term fundamental investment approach of the Fund. Consequently, the Board considers that shareholders' interests remain well-served by the ongoing appointment of Genesis Asset Managers.

 

The management fee payable to Genesis Asset Managers is currently 0.95% of NAV per annum. The Directors currently consider that it represents a competitive rate relative to the Fund's peer group of similar fund vehicles, but naturally the level is reviewed regularly by the Board.

 

The Manager's Review provides an account of some of the key portfolio activity over the year, and explains the main elements behind absolute and relative performance.

 

Discount

The share price of the Fund rose by 8.4% from 652.5p to 697.0p during the year. There was a corresponding narrowing of the discount to NAV at which the shares trade, from 12.9% at the beginning of the financial year to 11. 9% at the end, during which time the average level of discount was 12.7%.

 

Through discussion with shareholders in recent years, the Board has been kept abreast of a range of views with respect to the level of the discount to NAV, and it has become clear that - while the Fund's discount has not been out of line with comparable emerging markets funds - a significant number of shareholders would prefer the discount to be somewhat narrower than the 12-14% range it has occupied over the last two years. In response, a number of actions have therefore been taken by the Board, as follows:

 

·      Reduction in management fees in mid-2017 to 0.95%

·      Payment of a dividend in December 2017

·      Tender Offer for 10% of the Fund's shares, implemented in August 2018

·      Announcement of a further potential Tender Offer of 25% of the Fund's shares, to be implemented in 2021 if performance over the five years to June 2021 is not ahead of the Index

·      Appointment of Edison Group to carry out additional marketing to existing and potential new Shareholders.

 

I believe, as do my fellow Directors, that the combination of these proposals will, overtime, help narrow the discount, and that they will ultimately help position the Fund to deliver better returns to shareholders.

 

Dividend

As reported in last year's Chairman's Statement, the Fund declared a dividend for the first time in many years and this was in response to increased demand from shareholders for available income to be paid out. We also announced that from 1st July 2017, 80% of management fee (and certain other costs) would be allocated to the capital account and this has increased the level of revenue earnings available for distribution.

 

This year the Directors reviewed the Dividend Policy and propose to pay out substantially all of the Fund's revenue earnings. However, we wish to remind you that the Fund is managed on a total return basis and not to produce a particular level of income. Consequently, the level of the annual dividend will vary year on year.

 

For the 2018 financial year, we recommend to shareholders that the Fund distributes 19.0 cents per share. This takes into account the revised number of Participating Preference Shares outstanding after the recent Tender Offer and represents 82% of the Fund's revenue earnings in 2017. This is subject to approval at the Annual General Meeting ('AGM') and, whilst declared in US dollars, it will be paid in pounds sterling using the prevailing exchange rate on the payment date.

 

The Board of Directors

Other than the appointment of Katherine Tsang as a Non-Executive Director one year ago, there were no further changes to the composition of the Board during the Financial Year. Discussions and planning on potential changes, retirements and new appointments, however, form a regular part of our discussions; the better to ensure that shareholders continue to be represented by a group of Directors with the appropriate combination of skills and experience.

 

All Directors will stand for re-election at the AGM in accordance with the requirements of the AIC Code of Corporate Governance and the UK Corporate Governance Code. Following the Board's internal evaluation process, I wholeheartedly recommend all Directors for re-election; I hope that shareholders will continue to feel confident in our ability to protect their interests, and thus support us with their vote.

 

AGM, Shareholder Meeting, and Shareholder Communication

At the end of this Annual Report is the notice convening the AGM to be held on 13th November 2018 in Guernsey, along with the schedule of resolutions for consideration. As ever, we encourage all shareholders to avail themselves of the opportunity to vote on the resolutions.

 

An invitation to the Fund's annual Shareholder Information Meeting also accompanies this Report. This takes place on 14th November 2018 at the Investment Adviser's office in London, and we hope that as many shareholders as possible will be able to attend and hear directly from representatives of the Manager. A range of up-to-date information about the Fund is available to all shareholders. Fund literature, including monthly factsheets (containing details on portfolio activity and performance) as well as the Annual and Half-Year reports, can be found on the Fund's website www.genesisemf.com.

 

General queries from shareholders will usually be more easily answered by the Manager, but naturally it is very important for shareholders to be able to communicate directly with the Board too. I - along with Russell Edey as the Fund's Senior Independent Director - have spoken regularly with major shareholders over the year, but all shareholders are welcome to contact either of us with comments and feedback. Any members of the Board can be reached via the Manager or the Administrator.

 

Outlook

At the time of writing emerging markets continue to experience considerable volatility, driven by trade disputes, as well as a stronger US dollar and concerns around the economic management of Turkey and Argentina in particular. Consequently markets have fallen significantly over the last few weeks.

 

This somewhat challenging environment serves to remind investors - especially following two years of particularly strong returns - that the developmental process in emerging markets does not run consistently smoothly, and that market volatility is an ever-present characteristic to be faced by investors.

 

That said, looking over the longer term, sterling-based investors have been rewarded by emerging markets over the past few years. Of key importance is the fact that the secular development trends remain positive.

 

As I have noted to shareholders in previous Reports, the populations of low-income countries are seeing income levels rising gradually towards those in high-income markets - a trend likely to continue for many decades to come. The steady progress that countries and companies in the emerging markets universe are making (notwithstanding current issues in Turkey and elsewhere) to improve the quality of their governance is substantial. And the ineciency of many emerging stock markets - through incomplete or misunderstood information, or of extremes in sentiment driving markets to unwarranted levels, both high and low - provides opportunities for skilful investors to buy and sell at attractively mispriced levels.

 

The Board shares with the Manager a strong conviction in the long-term attractions of investing in developing countries. We continue to believe that a patient, long-term investment approach, combined with the skill to identify high-quality companies who can sustain business success over many years, will continue to reward investors handsomely for their commitment to emerging markets.

 

Hélène Ploix

Chairman

1st October 2018

 

 

Strategy, Business Model and Principal Risks

 

Fund Objective

The objective of the Fund is to achieve long-term capital growth, primarily through investment in equity markets of developing countries.

 

Strategy

The core element of our strategy is to appoint and retain a high-quality manager whose investment philosophy best matches the Fund's objective, and carefully monitor the Fund's performance.

 

Genesis, the Fund's Manager, believes that it can best deliver excellent long-term performance by working as a team to make investments in quality businesses at attractive prices as explained below.

 

Business Model and Investment Process

The Fund has no employees or premises and the Board is comprised of non-executive Directors. The day to-day operations and functions of the Fund have been delegated to third-party service providers who are subject to the oversight of the Board.

 

During the year under review Genesis provided investment and risk management services, JP Morgan Chase Bank was the Custodian and JP Morgan Administration Services (Guernsey) Limited was the Administrator and Company Secretary. The Board regularly reviews the performance and risks of its primary service providers and checks that they have appropriate frameworks in place for the oversight of their internal controls, monitoring and reporting.

 

In line with the stated investment philosophy, the Manager employs a bottom-up investment approach with individual members of its investment team taking responsibility for analysis on individual companies. The investment process is founded on proprietary internal research, with the Manager's structure designed to allow a cohesive team of investors to generate fundamental research insights and, subject to rigorous challenge, express those insights in the portfolio. The Fund's portfolio is diversified across countries and industries and comprises approximately 130 holdings (currently representing some 35 different countries), to give a range of 10-15 per team member. The Manager believes that when its team concentrates on a smaller number of ideas, the research can be deeper and insights more valuable. Over the last few years, the Manager has increased this depth of focus and concentration, actively reducing the number of holdings in the Fund's portfolio from 160 three years ago to 126 at the end of the 2018 financial year.

 

The portfolio comprises holdings in predominantly high-quality, sustainable businesses, both large and small. As part of their analysis the Manager's team determines quality ratings for each company, which primarily measure a business' ability to generate sustainable excess returns on capital and US$ intrinsic value stability. Many factors are incorporated into this analysis: as well as company-specific elements, the team considers the political and macroeconomic framework in which the company operates. Environmental, Social and Governance ('ESG') considerations are included in the analysis of sustainability, and the team takes ESG factors into account when determining the quality rating of a business. The Manager recognises that governance issues in particular are relevant to all companies and has laid out the key principles that it expects companies to follow from a corporate governance perspective.

 

Given that the average holding period of investments in client portfolios has consistently been more than five years and that this characteristic is expected to persist, the Manager is comfortable buying into relatively illiquid situations and building positions gradually. In the Manager's experience the trading liquidity of a stock improves as its underlying merits are gradually appreciated by a wider domestic and international investor base. Turnover is correspondingly low; typically of the order of 20-25% per annum (although for the 12 months ended 30th June 2018, it was slightly higher).

 

There is no specific company market capitalisation range in which the Manager invests, and it is prepared to take positions in smaller-capitalisation stocks where compelling investment cases are found, in the belief that these can be a source of particularly attractive long-term investment opportunities. The Fund invests in a large number of emerging markets, many of which are not represented in the standard indices. The Manager aims to retain as much flexibility as possible with respect to portfolio constraints.

 

Because the Manager aims to invest in companies that can compound shareholders' capital, but also aims to invest at a discount to intrinsic value, the portfolio tends to have both growth and value characteristics.

 

The portfolio's investments are primarily listed equity securities. However, the Fund will also hold positions in Genesis affiliated investment companies, Participatory notes and Investee Funds, where appropriate.

 

The Fund does not engage in any active management of foreign currency risk and the portfolio is currently unleveraged.

 

The Fund entered into a securities lending programme with JP Morgan Chase Bank N.A. in April 2016.

 

Principal Risks and Risk Management

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 on the following page. These policies have remained unchanged since the beginning of the period to which these financial statements relate.

 

Volatility of emerging markets and market risk

The economies, 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 invest more than 25% of its assets (at the time 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.

 

Foreign currency exposure

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 and distributions 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. The Fund has opted not to engage in any active management of foreign currency risk, and therefore all its open foreign exchange positions are typically unhedged.

 

Lack of liquidity

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stockmarkets of the developed world and trading may even be temporarily suspended during certain periods. Liquidity can also be negatively impacted by temporary capital controls in certain markets. A lower level of liquidity can exaggerate 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.

 

Custody risk

The Fund is also exposed to operational risks such as 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.

 

Other Matters

 

Viability Statement

In accordance with provision C.2.2. of the 2016 UK Corporate Governance Code, as issued by the Financial Reporting Council, the Board has assessed the prospects of the Fund over the next three years. The Board considers that this period of time is appropriate to assess the viability of the Fund given the inherent uncertainty in the global emerging markets and the Fund's investment cycle. As part of its assessment, the Board has considered the Fund's business model including its investment objective and investment policy as well as the principal risks and uncertainties that may aect the Fund.

 

The Board has noted that:

 

·      The Fund's investment objective is to achieve capital growth over the long term and the Board believes shareholders should regard the Fund as a long-term investment. The average holding period for companies in the Fund's portfolio is currently over five years, with turnover at around 33% over the last twelve months. These attributes reflect the Manager's long-term fundamental approach.

 

·     The Fund's portfolio consists of a diversified group of companies from a large number of emerging market countries. The majority of these are traded on major international stock exchanges. In the opinion of the Manager, the portfolio is suciently liquid to meet all ongoing and future liabilities arising from the Fund's day-to-day business.

 

·      No significant increases to ongoing charges or operational expenses are anticipated.

 

·     Announcement of a potential Tender Oer of 25% of the Fund's shares, to be implemented in 2021 if performance over the five years to June 2021 is not ahead of the Index.

 

The Board has therefore concluded that there is a reasonable expectation that the Fund will be able to continue in operation and meet its liabilities as they fall due over the next three years.

 

Environmental, Social and Governance Factors

Genesis meaningfully  integrates  ESG  factors  into  the  investment  process  as  part  of  its  ongoing qualitative judgement of a company's sustainable competitive advantage. Genesis recognises that ESG factors can expose potential investment opportunities and risks, reflect the quality of management and impact a company's financial performance. ESG factors are assessed in the context of materiality and particular attention is paid to the quality of company management and the alignment of interests with minority investors.

 

Signed on behalf of the Board

Hélène Ploix

1st October2018

 

 

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 adopted by the EU and applicable law.

 

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

 

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

 

·      select suitable accounting policies and then apply them consistently;

 

·      make judgements and estimates that are reasonable and prudent;

 

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

 

·      assess the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

 

·      use the going concern basis of accounting unless they either intend to liquidate the Fund or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Fund and to prevent and detect fraud and other irregularities.

 

The Directors who hold oce at the date of approval of this Directors' Report confirm that so far as they are aware, there is no relevant audit information of which the Fund's auditor is unaware, and that each Director has taken all the steps he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Fund's auditor is aware of that information.

 

Compliance with disclosure and transparency directive

 

The Directors confirm to the best of their knowledge that:

 

·      the financial statements are prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Fund; and

 

·    this Annual Financial Report includes a fair review of the development and performance of the business and the position of the Fund, together with a description of the principal risks and uncertainties that exist.

 

Signed on behalf of the Board

Hélène Ploix

Russell Edey

1st October 2018

 

Manager's Review

 

Investment Environment

The Fund's financial year was characterised by two distinct periods. The first, lasting until January, saw a continuation of the bull market rally which had started in January 2016. As we identified in the Fund's interim report, this rally was driven by a narrow segment of the opportunity set, particularly IT hardware and internet. The second period, which persisted until the end of the Fund's financial year, saw a strengthening dollar which compounded various political and macroeconomic concerns in markets such as Turkey and Brazil. This resulted in increased volatility and weaker asset prices.

 

As risk-aware investors who build diversified portfolios for long-term clients, we have at times over our 28-year history struggled to keep pace with sharp market rallies. It was therefore unsurprising the Fund's NAV failed to match the benchmark in the first half of the year. However, in the second half our bias toward quality companies combined with a rigorous assessment of intrinsic value allowed the Fund to recoup the losses sustained earlier in the year. This resulted in the Fund's NAV performing in line with the MSCI EM (TR) Index over the 12-month period, each rising by 6.8% in sterling terms.

 

Performance

Substantial relative performance was added from Chinese consumer staples holdings, notably from the baijiu producers Yanghe (up 55%) and Moutai (up 45% until being sold from the portfolio in April) as both businesses expanded sales volumes. Instant noodle company Tingyi was the top performing holding as its share price doubled, while dairy company China Mengniu also gained an impressive 71%. Elsewhere, significant value was also added from strong performing stocks in India. Banks led the contributors to relative performance there as Kotak and HDFC Bank rose by 31% and 19% respectively. We view these banks in early-stage economies as simple consumer businesses with long-run penetration opportunities. Decent gains were also achieved by the three Indian IT services companies TCS (up 48%), Infosys (up 34%) and Cognizant (up 18%), while Pidilite rose by 23%. Further gains were achieved from good stock performance in Mexico, where FirstCash increased by 53%, and in Indonesia where BCA saw its share price rise by 10% in a market that fell 14% during the period.

 

Significant value was lost versus the benchmark in the strong performing Chinese internet sector despite notable share price gains from Naspers, which derives the majority of its value from its holding in the Chinese internet company Tencent, and Alibaba as they rose 29% and 30% respectively. The portfolio's lower weighting compared to the Index in this sector cost the portfolio in relative terms, but shareholders will be aware that our investment approach, with its focus on diversification and investing at reasonable valuations, is unlikely to lead us to large Index-like positions in stocks that appear somewhat expensive. Sizeable losses were also incurred in Turkey as the two banks, Yapı Kredi (down 36%) and Garanti (down 32%), were aected by currency weakness and political and macroeconomic concerns. Losses also came in Russia, with the largest performance detractor being food retailer Magnit (down 53%), impacted by the combination of a weak consumer environment, heightened competitive intensity, and the founder unexpectedly selling most of his stake in January. Notwithstanding their recent performance, we remain confident in the attractiveness of all three of these holdings: the Turkish banks because of their quality, and Magnit as a result of our assessment of, and rising conviction in, its new ownership.

 

By sector, substantial gains were made in consumer, largely due to the performance of the aforementioned Chinese positions. Further gains came in the industrials sector and also in financials where Sberbank (up 48%) and insurer AIA (up 19%) supported the Indian banks mentioned above. However, these were oset by losses in the health care, IT and energy sectors.

 

Portfolio Activity

China saw a significant portion of the trading activity over the period as seven new positions were initiated and six positions were sold, while several other holdings were reduced mainly in response to higher share prices. Significant sales were seen amongst the A-share positions as Yanghe Brewery and Midea were reduced following strong share price performance, and Jiangsu Hengrui Medicine and Kweichow Moutai were sold, with the proceeds from the latter reinvested into another A-share spirits company, Wuliangye Yibin. Other holdings sold included Anhui Conch Cement, due to concerns over the sustainability of its high level of profitability, and China Mobile, due to governance and capital allocation concerns, while consumer companies Tingyi and China Mengniu Dairy were reduced. The new positions introduced included restaurant operator Yum China, A-shares China South Publishing and Yutong Bus and internet company 58.com, while AAC Technologies was reintroduced to the portfolio in June following a 30% price decline since November. The portfolio's position in the Chinese internet sector was further increased through additional investment in Naspers, making it the largest position in the portfolio.

 

Other significant trading activity occurred in India and South Africa. In India, the IT services companies Tata Consultancy Services and Infosys were scaled back on strength, while the aggregate pharmaceutical exposure was reduced as Lupine exited the portfolio. This was considered prudent considering the lack of clarity on FDA clearance and margin erosion. There was a new position introduced in one of India's largest mortgage finance companies, Housing Development Finance. In South Africa, telecoms company MTN Group was a new holding and share price weakness saw the position in Mediclinic increased. Anglo American's share price hit a three year high and the position was sold, as were Bidvest and Standard Bank, the latter due to concerns over the low growth environment in South Africa. Aspen Pharmacare was trimmed as we consider its transition from a South African generics company into a global speciality pharmaceutical company is now more challenging than initially expected.

 

Away from these markets, Russian natural gas producer Novatek was sold with the proceeds reinvested into Sberbank. By carrying out the switch, the quality and expected return of the portfolio was upgraded while marginally reducing the sanctions risk as, unlike Novatek, Sberbank has no oligarch connections. Elsewhere, there was a new holding in Brazilian insurer BB Seguridade, and a position was built in Dangote Cement (Nigeria). A sale was initiated in Tullow Oil and South Korean holding Samsung Fire & Marine Insurance was reduced. At the end of the period there were 126 holdings, with 29 new positions introduced and 28 positions sold.

 

Outlook

Following an acceleration of EM GDP growth and a recovery of EM corporate earnings in 2017 we have been somewhat cautious about the sustainability of EM economic and aggregate earnings growth in 2018. US interest rates are rising, activity levels in China are slowing, export growth is decelerating, the potential for damaging trade wars has increased and certain key commodity prices are trading well above our long-term estimates. In addition, aggregate financial sector earnings are over-dependent on a debt-inflated economy (Chinese institutions contribute the majority of EM financial sector earnings, which are in turn a third of total EM earnings).

 

However, long-term we remain optimistic on the investment opportunity in EM. We expect incomes in low- and middle-income economies to continue to converge with those in high-income economies. Improving institutional quality should further enhance returns. And we are convinced that emerging market equities are less price ecient compared with those in developed markets. We continue to see attractive investment opportunities which are reflected in the Fund's well-diversified portfolio, consistent with our long-term preference for investing alongside good management teams in quality businesses at attractive prices.

 

Genesis Asset Managers, LLP

October 2018

 

 

Statement of Financial Position

as at 30th June 2018

 

 

2018

2017

 

$'000

$'000

 

 

 

 

Financial assets at fair value through profit or loss

1,383,056

1,279,759

Amounts due from brokers

2,375

4,636

Dividends receivable

4,287

2,295

Other receivables and prepayments

204

172

Cash and cash equivalents

25,260

35,059

1,415,182

1,321,921

 

 

 

 

 

ties

 

 

Amounts due to brokers

3,649

4,644

Capital gains tax payable

1,239

1,038

Payables and accrued expenses

1,828

2,055

6,716

7,737

1,408,466

1,314,184

 

 

 

 

 

Share Premium

134,349

134,349

Capital reserve

1,217,468

1,132,448

Revenue account

56,649

47,387

1,408,466

1,314,184

 

 

 

$10.44

$9.74

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2017: 134,963,060).

 

Signed on behalf of the Board of

Genesis Emerging Markets Fund Limited

Hélène Ploix

Russell Edey

1st October 2018

 

 

Statement of Comprehensive Income Statement

for the year ended 30th June 2018

 

 

2018

2017

 

Capital

Revenue

 

Capital

Revenue

 

 

Reserve

Account

Total

Reserve

Account

Total

 

$'000

$'000

$'000

$'000

$'000

$'000

 

 

 

 

 

 

 

INCOME

 

 

 

 

 

 

Net change in financial assets at fair value through profit or loss

97,475

-

97,475

185,686

-

185,686

Net exchange gains/(losses)

561

-

561

(210)

-

(210)

Dividend income

-

36,468

36,468

-

30,000

30,000

Securities lending income

-

830

830

-

186

186

Interest income

-

14

14

-

95

95

TOTAL INCOME

98,036

37,312

135,348

185,476

30,281

215,757

EXPENSES

 

 

 

 

 

 

Management fees

(11,088)

(2,795)

(13,883)

-

(15,110)

(15,110)

Custodian fees

-

(1,215)

(1,215)

-

(1,125)

(1,125)

Transaction costs

(1,726)

-

(1,726)

-

(1,543)

(1,543)

Directors' fees and expenses

-

(366)

(366)

-

(370)

(370)

Administration fees

-

(318)

(318)

-

(280)

(280)

Audit fees

-

(52)

(52)

-

(61)

(61)

Legal and professional fees

-

(77)

(77)

-

(92)

(92)

Other expenses

-

(203)

(203)

-

(170)

(170)

TOTAL OPERATING EXPENSES

(12,814)

(5,026)

(17,840)

-

(18,751)

(18,751)

OPERATING PROFIT

85,222

32,286

117,508

185,476

11,530

197,006

FINANCE COSTS

 

 

 

 

 

 

Bank charges

-

(19)

(19)

-

(4)

(4)

TOTAL FINANCE COSTS

-

(19)

(19)

-

(4)

(4)

 

 

 

 

 

 

 

TAXATION

 

 

 

 

 

 

Capital gains tax

(202)

-

(202)

-

(897)

(897)

Withholding taxes

-

(4,110)

(4,110)

-

(3,239)

(3,239)

TOTAL TAXATION

(202)

(4,110)

(4,312)

-

(4,136)

(4,136)

 

 

 

 

 

 

 

PROFIT AFTER TAX FOR THE YEAR ATTRIBUTABLE TO PARTICIPATING PREFERENCE SHARES

85,020

28,157

113,177

185,476

7,390

192,866

TOTAL COMPREHENSIVE INCOME

85,020

28,157

113,177

185,476

7,390

192,866

EARNINGS PER PARTICIPATING PREFERENCE SHARE*

$0.63

$0.21

$0.84

$1.37

$0.06

$1.43


Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2017: 134,963,060).

† With effect from 1st July 2017, 80% of the Management fees and all the Transaction costs and Capital gains tax have been allocated to the Capital Reserve.
Thetotal column of this statement represents the Company's Statement of Profit or Loss and Other Comprehensive Income prepared in accordance with IFRS. 
The supplementary information on the allocation between the revenue account and capital reserve is presented under guidance published by the AIC.

 

 

Statement of Changes in Equity

for the year ended 30th June 2018

 

 

2018

 

Share

Capital

Revenue

 

 

Premium

Reserve

Account

Total

 

$'000

$'000

$'000

$'000

 

 

 

 

 

Balance at the beginning of the year

134,349

1,132,448

47,387

1,314,184

Total Comprehensive Income

-

85,020

28,157

113,177

Dividends paid in the year

-

-

(18,895)

(18,895)

Balance at the end of the year

134,349

1,217,468

56,649

1,408,466

 

 

2017

 

Share

Capital

Revenue

 

 

Premium

Reserve

Account

Total

 

$'000

$'000

$'000

$'000

 

 

 

 

 

Balance at the beginning of the year

134,349

946,972

39,997

1,121,318

Total Comprehensive Income

-

185,476

7,390

192,866

Balance at the end of the year

134,349

1,132,448

47,387

1,314,184

 

 

Statement of Cash Flows

for the year ended 30th June 2018

 

 

2018

2017

 

$'000

$'000

OPERATING ACTIVITIES

 

 

Dividends and interest received

34,490

31,801

Securities lending income received

830

186

Taxation paid

(4,111)

(3,239)

Purchase of investments

(495,885)

(287,402)

Proceeds from sale of investments

491,329

292,224

Bank charges paid

(19)

(4)

Operating expenses paid

(18,099)

(18,542)

 

 

 

NET CASH FLOW FROM OPERATING ACTIVITIES

8,535

15,024

 

 

 

FINANCING ACTIVITIES

 

 

Dividends paid

(18,895)

-

NET CASH OUTFLOW FROM OPERATING ACTIVITIES

(18,895)

-

 

 

 

Effect of exchange gains/(losses) on cash and cash equivalents

561

(210)

 

 

 

NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS

(9,799)

14,814

Net cash and cash equivalents at the beginning of the year

35,059

20,245

 

 

 

NET CASH AND CASH EQUIVELANTS AT THE END OF THE YEAR

26,260

35,059

 

 

 

Comprising:

 

 

Cash and cash equivalents

25,260

35,059

 

 

Notes to the Financial Statements

for the year ended 30th June 2018

 

1.   Summary of Significant Accounting Policies

 

Basis of Preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS') and interpretations by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board.

 

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

 

The preparation of financial statements in conformity with IFRS may require management to make critical accounting judgements, estimates and assumptions that aect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions about the future which are made by management relating to unlisted securities, are made using models generally recognised as standard within the industry and inputs are based on the historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may dier from these estimates.

 

Valuations use observable data to the extent practicable. Changes in any assumptions could aect the reported fair value of the financial instruments. The determination of what constitutes observable requires significant judgement by the Fund. The Fund considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

 

2. Earnings Per Share

 

Basic earnings per share are calculated by dividing the profit for the year by the weighted average number of Participating Preference Shares in issue during the year.

 

 

2018

 

$'000

$'000

 

 

 

Capital return

85,020

185,476

Revenue return

28,157

7,390

Profit after tax for the year attributable to Participating Preference Shares

113,177

192,866

 

 

 

Weighted average number of Participating Preference Shares outstanding

134,963,060

134,963,060

Capital earnings per Participating Preference Shares

$0.63

$1.37

Revenue earnings per Participating Preference Shares

$0.21

$0.06

Basic earnings per Participating Preference Shares - basic and diluted

$0.84

$1.43

 

All gains and losses derived from the sale, realisation or transfer of investments, and any other sums which in the opinion of the Directors are of a capital nature are applied to the capital reserve.

 

3. Related Parties and Other Material Agreements

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

 

(a) Manager's remuneration and terms of appointment

The Manager's appointment is under a rolling contract which may be terminated by three months written notice given by the Fund and twelve months by the Manager.

 

Under the Management Agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly in arrears equal to 0.95% (2017: 1.25%) per annum, calculated and accrued on the Net Asset Value of the Fund as at each weekly Valuation Day, except for investments in Investee Funds, where the Manager will absorb the expenses of the management of such funds to a maximum of 1% per annum of the value of the Fund's holding in the relevant fund at the relevant time. Genesis aliated investment companies do not charge a separate management fee to the Manager.

 

(b) Administration fees

The Administrator is entitled to receive a fee, payable monthly, based on the Net Asset Value of the Fund and time incurred. Administration fees for the year were $318,000 and charged by JP Morgan Administration Services (Guernsey) Limited (2017: $280,000).

 

(c) Custodian fee

Under the Custodian Agreement, the Custodian to the Fund is entitled to receive a fee payable monthly, based on the Net Asset Value of the Fund. All custody services are performed by JP Morgan Chase Bank.

 

The Fund also reimburses the charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.09% (2017: 0.09%) per annum of the average Net Assets of the Fund.

 

(d) Securities lending fees

The Fund generated gross income of $1,037,000 (2017: $232,000) from securities lending transactions during the year. Commissions amounting to $207,000 (2017: $46,000) were paid to JPMorgan Chase Bank N.A. during the year in respect of these transactions of which none were outstanding at the year end.

 

(e) Directors' fees and expenses

Included in Directors' fees and expenses are Directors' fees for the year of $281,000 (2017: $243,000). Also included are travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Fund.

 

(f) Other group investments

The Genesis Smaller Companies SICAV is a related party of the Fund by virtue of having a common Manager in Genesis Asset Managers, LLP. Subscriptions and redemptions during the year under review are detailed in the table below. No dividends were received from this fund during the year (2017: nil). The Genesis Smaller Companies SICAV was placed into liquidation on 14th December 2017.

 

There were no other transactions between the Fund and such related parties during the year except as disclosed in Notes (a), (b), (c), (d) and (e) above and there were no outstanding balances between these entities at 30th June 2018.

 

 

2018

 

Subscriptions

Redemptions

 

$'000

$'000

 

 

 

Genesis Smaller Companies SICAV

-

10,229

 

 

 

 

2017

 

Subscriptions

Redemptions

 

$'000

$'000

 

 

 

Genesis Smaller Companies SICAV

-

3,685

 

 

4. Annual Results

 

This Annual Results announcement does not constitute the Company's statutory accounts for the years ended 30th June 2018 and 30th June 2017 but is derived from those accounts. Statutory accounts for the year ended 30th June 2017 have been delivered to the Guernsey Financial Services Commission. The statutory accounts for the year ended 30th June 2018 and the year ended 30th June 2017 both received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

 

The Annual General Meeting of the Company will be held on Tuesday, 13th November 2018.

 

The Annual Financial Report for the year ended 30th June 2018 will be sent to shareholders shortly and will also be available for download from the Company's section of Genesis Investment Management's website www.genesisemf.com

 

For further information, please contact:

 

Jonathan Snow

Genesis Investment Management, LLP

020 7201 7200

 

J.P. Morgan Administration Services (Guernsey) Limited

Company Secretary

01481758 620

 

2nd October 2018

 

 

[END]

 

 

 

 


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