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Genesis Emerging (GSS)

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Monday 30 September, 2019

Genesis Emerging

Annual Financial Report

RNS Number : 2365O
Genesis Emerging Markets Fund Ld
30 September 2019
 

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

(Registered in Guernsey, Registration Number: 20790)

 

 

Annual Financial Report for the year ended 30th June 2019

 

The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the year ended 30th June 2019.  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 2019

 

Share Price Total Return(1)

11.1%

Net asset value per Participating Preference Share Total Return(1)

9.0%

MSCI EM (TR) Index(2)

5.4%

 

 

Published Data

30th June 2019

30th June 2018

% change

USD

 

 

 

Net Assets(3)

$1,305.3m

$1,408.5m

(7.3)

Net Asset Value per Participating Preference Share(3)

$10.75

$10.44

3.0

Dividend per Participating Preference Share(3)(4)

$0.19

$0.19

-

GBP

 

 

 

Net Assets(5)

£1,025.6m

£1,066.8m

(3.9)

Net Asset Value per Participating Preference Share(5)

£8.44

£7.90

6.8

Share Price

£7.57

£6.97

8.6

Discount of Share Price to Net Asset Value per

 

 

 

Participating Preference Share(1)

10.3%

11.9%

 

Number of Participating Preference Shares

121,466,754

134,963,060

 

Ongoing charges ratio(1)

1.11%

1.10%

 

Countries represented in portfolio

32

35

 

Number of holdings

112

126

 

 

(1)  Alternative Performance Measures

(2)  MSCI Emerging Markets (Total Return) Index.

(3)  IFRS measure

(4)  A dividend of $0.19 per Participating Preference Share on the Fund's profits for the year ended 30th June 2019 has been proposed.

(5)  Translation of the USD measures using the GBP/USD exchange rate as at 30th June 2019 of 1.2727 (2018: 1.3203).

 

Past performance is no guarantee of future performance.

 

 

Chairman's Statement

 

I have pleasure in presenting to shareholders the thirtieth annual report of the Genesis Emerging Markets Fund Limited, for the twelve-month period ended 30th June 2019.

 

Overview

Over the year to 30th June 2019, the Fund's net asset value (NAV) rose by 9.0% in sterling total return terms. This compares to a rise of 5.4% in the Fund's benchmark, the MSCI Emerging Markets Total Return Index (the 'Index'). The Fund's share price rose by 11.1% (adjusted for dividends paid) over the same period.

 

The Fund has benefited significantly from opportunities arising from market weakness at the end of 2018 and into early 2019, with several new positions, particularly in China, contributing substantially to relative performance. Further value was derived from a broad range of positions across the markets of Brazil, India, Thailand and Indonesia, with notable gains generated in three sectors - financials, consumer and IT. Such performance attests to the Manager's focus on long-term investment performance. This is produced by working as a team in making investments in quality businesses at attractive prices, supported by deep fundamental research, constructive challenge and support. Although the average holding period in the Fund is in excess of five years, the Manager has shown decisiveness when markets present compelling valuation opportunities.

 

A more detailed explanation of the year's performance is provided in the Manager's Review.

 

The Fund held its Annual General Meeting ('AGM') on 13th November 2018, and as ever, we appreciate shareholders' support and thank them for their approval of all resolutions presented at the meeting. The subsequent Shareholder Information Meeting on 14th November 2018 provided shareholders an opportunity to hear from, and ask questions of, representatives of the Manager.

 

A dividend of 14.8p (19.0 cents) per Participating Preference Share was paid to shareholders on 21st December 2018. As discussed in the 2018 Annual Report, the Board considers that this level of dividend represents an appropriate balance between the various differing interests, and opinions, held across the shareholder base - while maintaining the fundamental focus on capital growth as the Fund's primary objective.

 

For the year ended 30th June 2019, a final dividend of 19.0 cents per Participating Preference Share has been proposed and is subject to approval by shareholders at the AGM.

 

A new Investment Management Agreement was entered into between GIM, LLP and the Fund effective from 30th June 2019 and the management fee payable to Genesis Investment Management, LLP was reduced slightly to 0.90% of net asset value ('NAV') of the Fund per annum. The Board continue to monitor the appropriateness of such a fee level in relation to the peer group of similar closed end funds and remain confident that such a fee level is warranted.

 

Discount

The discount of the share price to NAV per Participating Preference Share at the end of the period was 10.3%. The average level of the discount over the 12 months was 11.6% and has fluctuated between 9.1% and 14.5%. The Board continue to consider carefully such statistics, their relevance in comparison with an appropriate peer group, and potential options for active management of the discount. A tender offer as recommended by the Board, and approved by shareholders, for up to 10% of the shares in issue was executed in August 2018 at a 3.5% discount. Following the tender offer, a total of 13,496,306 shares was repurchased by the Fund and cancelled. Such action has had limited impact on the longer-term discount, which continues to move broadly in line with the associated peer group. Marketing activity was also stepped up in support of widening the Fund's shareholder base, following the appointment of an external agency, Edison, to raise exposure to both the wholesale and retail sectors.

 

In addition to the tender offer, the Board intends that if the Fund's NAV Total Return over 5 years ending 30th June 2021 does not exceed the Fund's benchmark NAV Total Return, the Fund will undertake a further tender offer for up to a further 25% of the Fund's issued share capital (excluding any shares held in treasury).

 

The Board

At a Board meeting in June 2019, Dr Simon Colson was appointed as an independent Non-Executive Director with effect from 1st July 2019. Dr Colson has over 30 years' experience in financial markets, working in investment banking, investment management and financial consulting. The retirement of Dr John Llewellyn was also noted, with the Board thanking him for nine years of excellent service. Shareholders will have the opportunity to approve Dr Colson's appointment at the AGM, at which, the remaining five Directors will stand for re-election in accordance with the requirements of the AIC Code of Corporate Governance and the UK Corporate Governance Code. As ever, we continue to review how best the Board can provide the appropriate mix of skill, expertise and experience necessary in representing the interests of all shareholders. I continue to feel that we have such a combination and will continue to ensure that we remain current with best market practice.

 

AGM, Shareholder Meeting, and Shareholder Communication

At the end of the Annual Report is the notice convening the AGM to be held on 4th November 2019 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.

 

The Board wishes to ensure that shareholders have access to a range of up-to-date information about the Fund. As well as releasing announcements to the London Stock Exchange and issuing the Annual and Half-Yearly Reports, we encourage all shareholders to refer to the information on investment performance and portfolio activity contained in the Fund's monthly factsheets. These - and other Fund literature - can be found on the Fund's website: www.genesisemf.com. Shareholders will also find at the end of this Annual Report an invitation to the Fund's annual Shareholder Information Meeting which this year will take place on 5th November 2019 at the Manager's office in London. We hope that as many shareholders as possible will take this opportunity to hear directly from representatives of the Manager. In general, the Manager will usually be best placed to address queries from shareholders. Clearly, however, it is important for shareholders to be able to communicate directly with the Board when necessary. I have continued to speak regularly with major shareholders over the year but invite any shareholders to contact me or Russell Edey (as Senior Independent Director), or indeed any of the Board, with comments and feedback.

 

Outlook

While the short-term performance of the Fund is obviously pleasing, we are reminded by the Manager that the portfolio remains focused on the long term, in maintaining a disciplined and consistent investment approach across inevitable market fluctuations. We remain optimistic on the longer-term outlook for Emerging Markets, for many of the reasons that were valid when the Fund was launched fully thirty years ago. We expect continued growth from rising working age populations in Emerging Markets, and continuing convergence with higher income countries. We also remain of the view that Emerging Market equities are less efficiently priced than their Developed Markets counterparts, highlighting the utility of a rigorous fundamental research process.

 

Hélène Ploix

Chairman

30th September 2019

 

 

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.

 

Investment 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.

 

The Board believes that the Fund's Manager 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 and Status

The Fund is a closed-ended investment scheme authorised by the Guernsey Financial Services Commission and is listed on the London Stock Exchange.

 

The Fund was incorporated in Guernsey on 7th June 1989 and commenced business on 19th September 1989.

 

Reviews of the Fund's activities are included in the Chairman's Statement and Manager's Review.

 

There has been no significant change in the activities of the Fund during the year to 30th June 2019 and the Directors anticipate that the Fund will continue to operate in the same manner during the current financial year.

 

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 GAM, LLP 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 110 holdings (currently representing some 32 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 142 three years ago to 112 at the end of the 2019 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 and 2019, 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 has participated in securities lending activities with JP Morgan Chase Bank N.A. since 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 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 Board 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 and cyber security

The Fund is also exposed to operational risks such as custody risk and cyber security breaches. 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.

 

The risk represented by breaches in cyber security is carefully monitored by the Manager, Custodian and Administrator with appropriately designed and tested controls

 

Investment policy and process

Inappropriate investment policies and processes may result in under performance against the Fund's peer group. The Board manages these risks by ensuring a diversification of investments and regularly reviewing the portfolio asset allocation and investment process. In addition, certain investment restrictions have been set and these are monitored as appropriate.

 

Investment strategy and share price movements

The objective of the Fund is to achieve long term capital growth and it is exposed to the effect of variations in the price of its investments. A fall in the value of its portfolio will have an adverse effect on shareholders' funds. The Board reviews the Fund's investment strategy and the risk of adverse share price movements at its Board meetings taking into account the economic climate, market conditions and other factors that may have an effect on the sectors in which the Fund invests. There can be no assurances that depreciation in the value of the Fund's investments will not occur but the Board seeks to reduce this risk.

 

Discount to net asset value

A discount in the price at which the Fund's shares trade to net asset value would mean that shareholders would be unable to realise the true underlying value of their investment. As a means of controlling the discount to net asset value the Board has the ability to buy back shares. The Board reviews the Fund's discount to net asset value on a regular basis.

 

Credit and counterparty risk

The failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the Fund suffering a loss.

 

Operational

Failure of the core accounting systems, or a disastrous disruption to the Administrator's or Manager's business, could lead to an inability to provide accurate reporting and monitoring.

 

Loss of Key Personnel

The day-to-day management of the Fund has been delegated to the Manager. Loss of the Manager's key employees could affect investment returns. The Board is aware that GAM, LLP and GIM, LLP recognises the importance of its employees to the success of its business. Its remuneration policy is designed to be market competitive in order to motivate and retain staff and succession planning is regularly reviewed.

 

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 ('FRC') in April 2016, 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 affect 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 35% 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 sufficiently 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.

 

A 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.

 

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.

 

Key Performance Indicators

At their Board meetings the Directors consider a number of performance indicators to help assess the Fund's success in achieving its objectives.

 

The key performance indicators used to measure the performance of the Fund over time are as follows:

 

Net asset value changes over time;

 

Participating Preference Share price movement;

 

A comparison of Participating Preference Share price and net asset value against its peer group;

 

Discount/premium to net asset value.

 

Environmental, Social and Governance Factors

As a bottom-up investor, Genesis' investment approach lends itself naturally to the integration of ESG factors at the company level, as part of the ongoing qualitative judgement of a company's sustainable competitive advantage and persistent capacity to generate sustainable excess returns. Genesis believes the evaluation of ESG factors contributes to a broader and deeper understanding of the strategic direction of a company and allows for a more accurate assessment of the risks and future costs. Genesis pays particular attention to the quality of company management including their alignment of interests with minority investors.

 

The Genesis investment team assesses ESG factors, including climate-related risks and opportunities, in the context of materiality, mindful of the Sustainability Accounting Standards Board framework. Sector Specialists are responsible for assessing the materiality and relevance of ESG factors in their respective sectors and providing an ESG framework to the team. Each portfolio manager is individually responsible for the integration of the relevant ESG factors into their investment analysis of a company, before investing in a company and throughout the investment period.

 

Signed on behalf of the Board

Hélène Ploix

30th September 2019

 

Manager's Review

 

Investment Environment

We believe that we can best deliver excellent long-term investment performance by working as a team to make investments in quality businesses at attractive prices. Our investment process is structured to enable a cohesive team of experienced Portfolio Managers to generate fundamental research insights and, subject to rigorous challenge, express those insights in client portfolios. Although the average holding period for positions in the Fund is long (in excess of five years), we have in the past been decisive when market conditions have presented compelling valuation opportunities. Volatility in the Fund's financial year - particularly in the fourth quarter of 2018 - was one such occasion. We capitalised on this environment to add several new positions in China which were previously not competitive relative to the wider portfolio. This reorientation of the portfolio has become one of the key drivers to performance in the second half of the Fund's financial year. In the current volatile market conditions, the Fund's NAV outperformed the MSCI EM (TR) Index over the 12-month period, gaining 9.0% in sterling terms (adjusted for dividends paid) compared to a rise of 5.4% for the index.

 

We want to take this opportunity to remind shareholders that while it is always pleasing to generate strong short-term relative performance, we remain focused on the long term. Our philosophy and process have not changed. Rather than focusing our efforts on short-term investment outcomes, which we cannot control, we focus our efforts on what we can: our investment process and the quality of our investment decisions. This allows us to maintain a disciplined, consistent investment approach despite inevitable fluctuations in performance.

 

Performance

Our Chinese positions were the standout contributors to relative performance over the period, driven largely by the performance of three portfolio holdings: the baijiu producer Wuliangye Yibin (up 61% in GBP), insurer AIA (up 30%) and New Oriental Education (up 74%), which was introduced to the portfolio towards the end of 2018. Further value was added from our positions in Brazil, where investment bank BTG Pactual (up 204%) was one of several notable outperformers. In aggregate, the portfolio's Brazilian holdings rose 80% against a 45% gain by MSCI Brazil. Our exposure to private banks in India also bore fruit with HDFC Bank rising 22% and Axis Bank posting a 63% gain over the period. We also added value in South East Asia with the portfolio's overweight exposure in the strong Thai market joining stock performance gains in Indonesia, from Bank Central Asia (up 49%) and Semen Indonesia (up 41% since purchased in August last year).

 

Our investments in a number of Turkish companies resulted in an overweight exposure in a market that has lost credibility over the past twelve months and this was the biggest detractor from relative performance. The portfolio lost further value in South Africa, although this was due to the performance of the mostly non-domestic health care provider Mediclinic (down 41%); and two frontier markets in the portfolio, Nigeria and Vietnam, also underperformed. Despite a 20% gain by Sberbank, a top five portfolio holding, Russia was also a detractor as the large Russian energy SOEs in the benchmark, which we do not hold in the portfolio, had a strong period.

 

Substantial gains were generated in three sectors - financials, consumer and IT - all through stock performance. In financials, notable returns were derived from holdings located across a variety of markets. Joining those stocks noted above from China, India, Indonesia and Russia were BB Seguridade (up 53%) and Itau (up 59%) in Brazil, Commercial International Bank (up 21%) in Egypt and OTP (up 16%) in Hungary. It was a similar story in the consumer sectors where Universal Robina (Philippines), CP All (Thailand), Kimberly Clark (Mexico), Jeronimo Martins (Poland) and Heineken assisted the strong performing Chinese consumer names. Value was also added in IT from a combination of being underweight in both Taiwanese tech hardware and, for the first six months, Chinese internet, and also from the strong performance by the Brazilian software companies Linx (up 112%) and TOTVS (up 70%). However, these gains were partially offset from being underweight in the strong energy sector where several SOEs, which are generally not invested in for governance reasons, outperformed.

 

Portfolio Activity

There was considerable activity in China during the period. Weakness in certain sectors around the end of 2018 and beginning of 2019 presented opportunities to introduce a number of new holdings including New Oriental Education, Momo, Focus Media and Sunny Optical. We initiated a position in Tencent at the end of a twelve-month review period: the portfolio's largest holding, Naspers, had outperformed Tencent by 15% in the first half of 2019 due to various factors, including the unbundling of its video entertainment business, MultiChoice, and the upcoming listing of its international internet assets in Amsterdam. The discount between the two narrowed and reached a level attractive enough to initiate a switch and hold Tencent directly. There were notable additions to three existing Chinese positions, internet companies Alibaba and 58.com and baijiu company Wuliangye, the latter as its share price fell during the second half of 2018 and early in 2019. There was also plenty of sales activity in China with seven holdings exiting the portfolio including China Overseas Land and Investment and Yum China. Some profits were also taken in Wuliangye in April as its share price rallied by over 100% from its lows seen just three months earlier.

 

Purchase activity elsewhere included increases in the Russian holdings Sberbank and Yandex, increases in Naver during weakness in the South Korean market, and initiation of three new positions: Amorepacific, Kangwon Land and SK Hynix. Elsewhere, opportunities to build a meaningful position in Gruma (Mexico) on share price weakness were taken and Semen Indonesia was reintroduced following a fall in the Indonesian cement price and a positive change in industry dynamics. We also added to Mediclinic as its share price continued to fall in the final quarter of 2018.

 

In Brazil and India, a number of holdings were reduced following strong relative share price performance. In Brazil, the bank Itaú was trimmed following the Brazilian market rally around the time of Bolsonaro's convincing election victory in October, while GPA, Rumo and Ultrapar all exited the portfolio. In India, we trimmed the IT services company Infosys and banks Axis and Kotak Mahindra. Elsewhere, several other holdings from the financials sector were reduced including BCA (Indonesia) and Korean insurer Samsung Fire & Marine. Overall, there was net selling worth 6% of the portfolio in financials. We also trimmed the IT hardware giants TSMC (Taiwan) and Samsung Electronics (South Korea) and also Heineken and Central Pattana (Thailand). At the end of the period, there were 112 holdings in the portfolio, with 18 new positions and 33 positions exited.

 

30th Anniversary and Outlook

The end of the Fund's financial year marked the 30th anniversary for the Fund and our business. We believe that our longevity is down to four factors which we feel are difficult to replicate and sustain together: The first is our sophisticated and aligned institutional clients, including the shareholders of GEMF throughout the entire period. The second is our structure as an owner-managed single-strategy house, which allows us to focus. The third is our rigorous fundamental research process uniquely suited to our EM specialisation. And the fourth pillar is our diverse team of skilled and experienced professionals that, through collaboration, acts with greater wisdom than any of us could alone.

 

We have established a strong reputation and long-term relationships with corporate management teams across the EMs, a network of insightful expert contacts, and a database of notes and models built up over 30 years. We can see whether the companies have delivered against their stated strategies over long periods of time, which is particularly useful in assessing the reputation and alignment of controlling shareholders. We have worked hard to institutionalise the lessons from both our successes and failures. We observe that many investors end up relearning the same lessons by making the same mistakes as their predecessors, and we seek to use our experience to avoid these pitfalls.

 

We remain optimistic on the long-term outlook for the Fund for many of the reasons that were valid 30 years ago. One reason for this optimism stems from the four pillars of our success noted above. Additionally, we remain convinced of the investment opportunity in EMs: first, we expect continued growth from rising working age populations and continuing economic convergence with higher income countries; and second, EM equities are less efficiently priced versus their DM counterparts. Over the past 30 years, we have delivered almost 300 basis points of annual relative performance gross of fees. We have every intention of matching that in the coming years.

 

Genesis Investment Management, LLP

September 2019

 

 

Statement of Directors' Responsibilities

 

The Directors are responsible for preparing the Annual Report and 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 are required to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU and applicable law.

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Fund and of its profit or loss 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, relevant and reliable;

 

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 that are sufficient to show and explain the Fund's transactions and disclose with reasonable accuracy at any time the financial position of the Fund and enable them to ensure that its 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 are responsible for the maintenance and integrity of the corporate and financial information included on the Fund's website. Legislation in the Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The Directors who hold office 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 or herself aware of any relevant audit information and to establish that the Fund's auditor is aware of that information.

 

Responsibility statement of the Directors in respect of the Annual Financial Report

 

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

 

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

 

the strategic report includes a fair review of the development and performance of the business and the positon of the issuer, together with a description of the principal risks and uncertainties that they face.

 

The Directors consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Fund's position and performance, business model and strategy.

 

Signed on behalf of the Board

Hélène Ploix

30th September 2019

 

 

 

Statement of Financial Position

as at 30th June 2019

 

 

2019

2018

 

$'000

$'000

ASSETS

 

 

Current assets

 

 

Financial assets at fair value through profit or loss

1,290,592

1,383,056

Amounts due from brokers

2,079

2,375

Dividends receivable

2,512

4,287

Other receivables and prepayments

193

204

Cash and cash equivalents

19,487

25,260

TOTAL ASSETS

1,314,863

1,415,182

 

 

 

LIABILITIES

 

 

Current Liabilities

 

 

Amounts due to brokers

1,938

3,649

Capital gains tax payable

6,140

1,239

Payables and accrued expenses

1,525

1,828

TOTAL LIABILITIES

9,603

6,716

TOTAL NET ASSETS

1,305,260

1,408,466

 

 

 

EQUITY

 

 

Share Premium

6,291

134,349

Capital reserve

1,242,603

1,217,468

Revenue account

56,366

56,649

TOTAL EQUITY

1,305,260

1,408,466

 

 

 

NET ASSET VALUE PER PARTICIPATING PREFERENCE SHARE*

$10.75

$10.44

 

*Calculated on a closing number of 121,466,754 Participating Preference Shares outstanding (2018: 134,963,060).

The decrease in Share premium is due to the repurchase and cancellation of the Fund's own shares.

 

Signed on behalf of the Board of

Genesis Emerging Markets Fund Limited

Hélène Ploix

Russell Edey

30th September 2019

 

 

Statement of Comprehensive Income

for the year ended 30th June 2019

 

 

2019

2018

 

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

40,985

-

40,985

97,475

-

97,475

Net exchange gains

171

-

171

561

-

561

Dividend income

-

30,562

30,562

-

36,468

36,468

Interest income

-

467

467

-

226

226

Securities lending income

-

230

230

-

618

618

TOTAL INCOME

41,156

31,259

72,415

98,036

37,312

135,348

EXPENSES

 

 

 

 

 

 

Management fees

(9,320)

(2,330)

(11,650)

(11,088)

(2,795)

(13,883)

Custodian fees

-

(984)

(984)

-

(1,215)

(1,215)

Transaction costs

(1,814)

-

(1,814)

(1,726)

-

(1,726)

Directors' fees and expenses

-

(379)

(379)

-

(366)

(366)

Administration fees

-

(284)

(284)

-

(318)

(318)

Audit fees

-

(48)

(48)

-

(52)

(52)

Legal and professional fees

-

(789)

(789)

-

(77)

(77)

Other expenses

-

(196)

(196)

-

(203)

(203)

TOTAL OPERATING EXPENSES

(11,134)

(5,010)

(16,144)

(12,814)

(5,026)

(17,840)

OPERATING PROFIT

30,022

26,249

56,271

85,222

32,286

117,508

FINANCE COSTS

 

 

 

 

 

 

Bank charges

-

(14)

(14)

-

(19)

(19)

TOTAL FINANCE COSTS

-

(14)

(14)

-

(19)

(19)

 

 

 

 

 

 

 

TAXATION

 

 

 

 

 

 

Capital gains tax

(4,887)

-

(4,887)

(202)

-

(202)

Withholding taxes

-

(3,439)

(3,439)

-

(4,110)

(4,110)

TOTAL TAXATION

(4,887)

(3,439)

(8,326)

(202)

(4,110)

(4,312)

 

 

 

 

 

 

 

PROFIT AFTER TAX FOR THE YEAR ATTRIBUTABLE TO PARTICIPATING PREFERENCE SHARES

25,135

22,796

47,931

85,020

28,157

113,177

TOTAL COMPREHENSIVE INCOME

25,135

22,796

47,931

85,020

28,157

113,177

EARNINGS PER PARTICIPATING PREFERENCE SHARE (BASIC AND DILUTED)*

$0.20

$0.19

$0.39

$0.63

$0.21

$0.84

 

* Calculated on an average number of 123,204,635 Participating Preference Shares outstanding (2018: 134,963,060).

 

The total column of this statement represents the Fund'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 2019

 

 

2019

 

Share

Capital

Revenue

 

 

Premium

Reserve

Account

Total

 

$'000

$'000

$'000

$'000

 

 

 

 

 

Balance at the beginning of the year

134,349

1,217,468

56,649

1,408,466

Repurchase and cancellation of the Fund's own shares

(128,058)

-

-

(128,058)

Total Comprehensive Income

-

25,135

22,796

47,931

Dividends paid in the year

-

-

(23,079)

(23,079)

Balance at the end of the year

6,291

1,242,603

56,366

1,305,260

 

 

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

 

 

Statement of Cash Flows

for the year ended 30th June 2019

 

 

2019

2018

 

$'000

$'000

OPERATING ACTIVITIES

 

 

Dividends and interest received

32,804

34,490

Securities lending income received

230

830

Taxation paid

(3,425)

(4,111)

Purchase of investments

(459,382)

(495,885)

Proceeds from sale of investments

591,416

491,329

Bank charges paid

(14)

(19)

Operating expenses paid

(16,436)

(18,099)

 

 

 

NET CASH FLOW FROM OPERATING ACTIVITIES

145,193

8,535

 

 

 

FINANCING ACTIVITIES

 

 

Dividends paid

(23,079)

(18,895)

Repurchase and cancellation of the Fund's own shares

(128,058)

-

NET CASH OUTFLOW FROM FINANCING ACTIVITIES

(151,137)

(18,895)

 

 

 

Effect of exchange gains on cash and cash equivalents

171

561

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

(5,773)

(9,799)

Net cash and cash equivalents at the beginning of the year

25,260

35,059

 

 

 

NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

19,487

25,260

 

 

 

Comprising:

 

 

Cash and cash equivalents

19,487

25,260

 

 

Notes to the Financial Statements

for the year ended 30th June 2019

 

1.   Summary of Significant Accounting Policies

 

Basis of Preparation

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

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. 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.

 

New standards, amendments and interpretations effective from or after 1st July 2018

 

The following standard amendment has been issued and is expected to be relevant to the Fund with effective dates on or after 1stJuly 2018:

 

·      Amendments to IFRS 9, Prepayment Features with Negative Compensation (effective for periods beginning on or after 1st January 2019)

 

New standards, amendments and interpretations issued but not yet effective

 

The following standard has been issued and is expected to be relevant to the Fund in future periods, with effective dates on or after 1st July 2019:

 

·      IFRS 16 - Leases (effective for annual periods beginning on or after 1st January 2019).

 

The Directors are currently reviewing these standards, however they do not believe their adoption will have a significant impact on the financial statements.

 

Early adoption of standards

 

The Fund did not early adopt any new or amended standards/interpretations for the year ended 30th June 2019.

 

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.

 

 

2019

2018

 

$'000

$'000

Capital return

25,135

85,020

Revenue return

22,796

28,157

Profit after tax for the year attributable to Participating Preference Shares

47,931

113,177

 

 

 

Weighted average number of Participating Preference Shares outstanding

123,204,635

134,963,060

Capital earnings per Participating Preference Share

$0.20

$0.63

Revenue earnings per Participating Preference Share

$0.19

$0.21

Basic earnings per Participating Preference Share - basic and diluted

$0.39

$0.84

 

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. Related parties also include key management personnel and entities under common control of the Manager.

 

(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% (2018: 0.95%) 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 affiliated investment companies do not charge a separate management fee to the Manager. The management fees for the year were $11,650,000 (2018: $13,883,000).

 

(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 $284,000 and charged by JP Morgan Administration Services (Guernsey) Limited (2018: $318,000).

 

(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 0.08% (2018: 0.09%) per annum of the average Net Assets of the Fund. Custodian fees for the year were $984,000 (2018: $1,215,000).

 

(d) Securities lending fees

The Fund generated gross income of $287,000 (2018: $772,000) from securities lending transactions during the year. Commissions amounting to $57,000 (2018: $154,000) 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 $255,000 (2018: $281,000). 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 Investment Management, LLP (previously 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 (2018: nil). The Genesis Smaller Companies SICAV was placed into liquidation on 14th December 2017.

 

 

2019

 

Subscriptions

Redemptions

 

$'000

$'000

Genesis Smaller Companies SICAV

-

-

 

 

 

 

2018

 

Subscriptions

Redemptions

 

$'000

$'000

Genesis Smaller Companies SICAV

-

10,229

 

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 2019.

 

Annual Results

 

This Annual Results announcement does not constitute the Company's statutory accounts for the years ended 30th June 2019 and 30th June 2018 but is derived from those accounts. Statutory accounts for the year ended 30th June 2018 have been delivered to the Guernsey Financial Services Commission. The statutory accounts for the year ended 30th June 2019 and the year ended 30th June 2018 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 Monday, 4th November 2019.

 

The Annual Financial Report for the year ended 30th June 2019 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:

 

Nick Archer

Genesis Investment Management, LLP

020 7201 7200

 

J.P. Morgan Administration Services (Guernsey) Limited

Company Secretary

01481758 620

 

30th September 2019

 

 

[END]

 


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