Baring Emerging Europe PLC
LEI: 213800HLE2UOSVAP2Y69
Annual Report & Audited Financial
Statements for the year ended 30 September
2019
The Directors present the Annual Financial Report of Baring
Emerging Europe plc (the “Company”) for the year ended 30 September 2019. The full Annual Report and
Accounts can be accessed via the Company’s website, www.beeplc.com,
or by contacting the Company Secretary on 01392 477571.
COMPANY SUMMARY
Baring Emerging Europe PLC (the “Company” or the “Fund”) was
incorporated on 11 October 2002. The
Company is an investment trust quoted on the London Stock Exchange
under the ticker code BEE. As an investment trust, the Company
appoints an Alternative Investment Fund Manager, Baring Fund
Managers Limited (“the AIFM”) to manage its investments.
The AIFM is authorised and regulated by the Financial Conduct
Authority (the “FCA”).
The AIFM has delegated responsibility of the investment
management of the portfolio to Baring Asset Management Limited (the
“Investment Manager”).
FEES
The AIFM receives an investment management fee of 0.8% of the
Net Asset Value of the Company.
INVESTMENT OBJECTIVE
The investment objective is to achieve long-term capital growth,
principally through investment in securities listed on or traded on
an Emerging European securities market. The Company may also invest
in securities listed or traded elsewhere, whose revenues and/or
profits are, or are expected to be, derived from activities in
Emerging Europe.
INVESTMENT POLICY
The Company’s full investment policy is set out below. It
contains information on the policies which the Company follows
relating to asset allocation, risk diversification and gearing, and
includes maximum exposures, where relevant.
BENCHMARK*
The Company’s comparator performance benchmark is the MSCI
Emerging Europe 10/40 Index (the “Benchmark”).
Key Performance Indicators
as at 30 September 2019
KEY PERFORMANCE
INDICATORS |
|
|
Annualised Net Asset
Value Total Return# |
Dividend‡ |
Average Discount
%# |
17.8%
(2018:-2.6%) |
35p (2018:34p) |
11.5%
(2018:11.9%) |
‡ % based on dividend declared for the full year
Highlights
for the year ended 30 September
2019
FINANCIAL HIGHLIGHTS |
2019 |
2018 |
Net asset value per ordinary share
(“NAV”) |
930.81p |
824.76p |
Share price* |
846.00p |
714.00p |
Ongoing charges (based on average
NAV)*‡ |
1.49% |
1.50% |
Gearing Ratio – Gross
basis*‡ |
105% |
106% |
Gearing Ratio – Commitment
basis*‡ |
109% |
109% |
|
|
|
Annualised share price movement |
24.3% |
-3.61% |
Annualised Benchmark movement* |
15.9% |
1.62% |
|
|
|
Discount to NAV per share at year
end |
9.11% |
13.40% |
RETURN (per
ordinary share) |
30 September 2019 |
30 September 2018 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
Return per ordinary
share*‡ |
35.09p |
99.87p |
134.96p |
24.77p |
(51.98)p |
(27.21)p |
Revenue return (earnings) per ordinary share is based on the
return for the year of £4,482,000 (2018: £3,388,000). Capital
return per ordinary share is based on net capital profit for the
financial year of £12,754,000 (2018: net capital loss of
£7,109,000). These calculations are based on the weighted average
of 12,770,923 (2018: 13,677,229) ordinary shares in issue during
the year.
At 30 September 2019, there were
12,439,297 ordinary shares of 10
pence each in issue (2018: 13,135,044) which excludes
3,318,207 ordinary shares held in treasury (2018: 3,318,207 shares
held in treasury). The shares held in treasury are treated as not
being in issue when calculating the weighted average of ordinary
shares in issue during the year. All shares repurchased during the
year were cancelled.
* For definitions, please see Glossary below .
# Alternative Performance Measures.
Chairman’s Statement
I am delighted to present the results for the year ended
30 September 2019, which was a record
year in terms of performance.
In contrast to 2017/18, which was characterised by political
turmoil in two of our most important markets, Russia and Turkey, 2018/19 saw oil poured over troubled
waters, both literally and metaphorically. Russian energy sector
companies ranked amongst the best performing stocks globally,
despite falling oil prices, because of increased focus on
efficiency, cash generation and dividends. Some easing of tensions
between Russia and Ukraine and the lifting of sanctions on
Russian companies EN+ Group (“EN+”) and United Company RUSAL
(“RUSAL”), led to greater focus by investors on economic rather
than political factors. Thanks to the excellent stock picking from
the Investment Manager in Turkey,
Turkish assets performed well as the economy adjusted to tight
liquidity conditions, early signs of recovering domestic demand and
an appreciation of the Turkish Lira. Unusually, it was Poland, normally our dependable ballast, which
had a difficult year because of political intervention and
regulatory pressures.
Performance
The annualised NAV total return over the year was 17.8% compared
to the Benchmark of 15.9%, an all time high for the Company. By
contrast the total return from Developed Europe was 5.1% and from
Global Emerging Markets 3.9%1. The Company’s annualised
NAV total return over three and five years was 13.4% and 10.3%,
compared with the Benchmark of 12.7% and 7.0% respectively. This
supports our Investment Managers’ continued belief in Emerging
Europe’s investment potential, and Russia in particular, given increasing
earnings and dividend flow from undervalued stocks.
Against competitor funds, defined by the Morningstar Emerging
Europe Universe, your Company sits within the 1st quartile over one
year, and within the top decile over three and five
years2.
During the turbulent market conditions of 2017/18, the Board
appreciated the cool headedness and logic applied to the investment
process by the investment team. In 2018/19, this approach has borne
fruit, shown in both absolute and relative performance. On behalf
of the Board and Shareholders, I would like to thank Matthias Siller and his colleagues, Maria Szczesna and Adnan El-Araby, for their
contributions to the success of the Company.
Environmental, Social and
Governance
The Investment Manager incorporates Environmental, Social and
Governance (“ESG”) parameters in their company analysis in order to
account for the improving or deteriorating corporate standards
affecting a company’s value. This enhancement to their investment
process is fully supported by the Board and our shared belief that
ESG can have a profound impact on an investment’s risks and returns
over time.
As we continue to consider the changing needs of our
Shareholders we now are able to show the estimated carbon footprint
of the portfolio. In what remains a carbon intensive region of the
world, we are pleased to demonstrate that our portfolio has a lower
carbon profile than that of the Benchmark. This is a reflection of
opportunities found in Financials, Consumer and Technology
orientated businesses compared with the traditionally carbon
intensive sectors such as Energy, Materials and Utilities.
Carbon emissions data (Scope 1 and 2) is sourced using Barings’
methodology.
Over time, we will look to enhance our approach so as to
continue to capture the benefits that consideration of these
factors brings to the Company.
Discount Management
The discount at the year end was 9.1% compared with 13.4% for
the prior year and the average discount during the year was 11.5%.
During the year, 695,747 shares were bought back and cancelled at
an average price of £7.7 equivalent to a discount on average of
11.7%. The share buybacks added approximately 5.5 pence per share to NAV, accounting for just
under 1% of the total return to Shareholders.
We continue to work to manage the discount by means of:
• greater emphasis on dividends. This has been aided by
improving corporate governance standards within Emerging Europe,
exhibited in the rising dividend pay-out ratios of the companies in
which we invest;
•improving communications both by meetings with Shareholders and
potential investors and by expanding the Company’s media presence
via an improved website and engaging with the press to boost the
Company’s profile; and
•share buybacks.
Taken together, these measures are having the desired effect of
constraining discount volatility and gradually reducing the level
of the discount. Over time, the Board hope these measures will
result in improving the liquidity and attractiveness of the
Company’s shares to a broader range of investors.
Shareholders may recall that, at the end of 2016, the Board
announced that a tender for up to 25% of the equity would be
triggered at the end of the 2020 fiscal year, four years after the
last point at which a tender was triggered, either if the average
discount was higher than 12% during the entire period or the
performance of the Company’s portfolio on a total return basis does
not exceed 1% of the Benchmark annually over that period. With a
year to go, the cumulative average discount was 12.3% with the
average discount for the year falling to 11.5% (2018:11.9%).
Dividends
In respect of the period ended 31 March
2019, the Company paid a dividend of 15 pence per share (2018: 14 pence per share). For the year under review,
the Board recommends a final dividend of 20
pence per share (2018: 20
pence per share). This amounts to a total for the year of
35 pence per share (2018:
34 pence per share), equivalent to a
yield of around 4.1% on the year end share price of 846p This
payment is fully covered in total by the income account, which
produced a net revenue per share of 35.09
pence per share (2017/18: 24.77
pence).
Borrowing
The Company has a borrowing facility of up to US$12 million with State Street Bank and Trust
Company. The facility has been partly used throughout the period
and at the year-end was fully deployed. Given low borrowing costs,
this contributed positively to overall returns.
Directors
Following the retirements of Ivo
Coulson in November 2018 and
of Jonathan Woollett in January 2019, we were pleased to welcome two new
Directors to the Board, Christopher
Granville and Vivien Gould,
after a recruitment process led by Cornforth Consulting. Both bring
a wealth of experience to the Board, in Christopher’s case, of
investment research, and in Vivien’s case, of investment
management. The Board is benefitting from their insightful
contribution to discussions.
Annual General Meeting
The Board would be delighted to meet Shareholders at the
Company’s Annual General Meeting (“AGM”), to be held at the offices
of the Investment Manager, 20 Old Bailey, London EC4M 7BF, on Thursday, 23 January 2020 at 2.30pm, at which the Investment Manager will give
their customary presentation on the markets and the outlook for the
year ahead. Details can be found in the full Annual Report.
We have decided to remove paper proxies from our voting process
for this AGM and future meetings in favour of a quicker and more
secure method of online voting via our registrars’ website. You can
however request a paper proxy if you wish from our registrars at
the appropriate time.
Outlook
The Board and Investment Manager continue to believe that
Emerging European markets offer a wealth of investment
opportunities at attractive valuations. These investment
opportunities, combined with growing streams of dividend income
plus improving ESG standards which enhance a stock’s long-term
value proposition, should continue to provide Shareholders with
attractive risk adjusted returns.
The heightened volatility of sterling caused by the Brexit
process and the associated uncertainty in the UK increases the
Company’s exposure to exchange rate risks, but we do not expect
Brexit to have a material impact on the business fundamentals of
companies in the Emerging Europe region.
At 30 September 2019, Russia, Poland and Turkey comprised nearly 95% of the portfolio.
These will continue to be important markets for the Company. The
professionalisation of company management and greater commitment to
ESG have contributed to Russia’s strong performance in 2018/19 and,
whilst in some cases (notably in Energy) share prices are more
richly valued, there are interesting opportunities in telecoms,
software and fintech. Poland
should continue to benefit from robust domestic demand, rising real
household incomes and productivity gains. Turkey is on the road to economic recovery
with rising domestic demand, a more stable external financing
framework and falling inflationary pressures.
To date, we have made little use of our authority to invest up
to 15% in other markets because there were more attractive
opportunities in Russia,
Poland and Turkey. However, our Investment Manager now
believes the time has come to take advantage of the mandate’s scope
for geographical diversification within Emerging Europe,
Middle East and Africa (“EEMEA”), including Frontier Markets,
in order to enhance risk adjusted returns.
Frances
Daley
Chairman
5 December 2019
Investment Strategy
Investment Objective
The investment objective is to achieve long-term capital growth,
principally through investment in securities listed on or traded on
an Emerging European securities market. The Company may also
invest in securities of companies listed or traded elsewhere, whose
revenues and/or profits are, or are expected to be, derived from
activities in Emerging Europe.
Investment Policy
The Board has agreed the following investment parameters with
the AIFM in order to meet the investment objective. In normal
market conditions, the portfolio of the Company should consist
primarily of diversified securities listed or traded on Emerging
European securities markets (including over the counter markets).
Equity securities for this purpose include equity-related
instruments such as preference shares, convertible securities,
options, warrants and other rights to subscribe for or acquire, or
relating to, equity securities. The Company may also invest in debt
instruments such as bonds, bills, notes, certificates of deposit
and other debt instruments issued by private and public sector
entities in Emerging Europe.
The Company may from time to time invest in unquoted securities,
but the amount of such investment is not expected to be material.
The maximum exposure to unquoted securities should be restricted to
5% of the Company’s gross assets.
For the purposes of this investment policy the Board has defined
Emerging Europe as the successor countries of the former
Soviet Union, Poland, Hungary, Czechia Republic, Slovakia, Turkey, the States of former Yugoslavia, Romania, Bulgaria, Albania and Greece. There is no restriction on the
proportion that may be invested in each of these countries.
In addition, up to 15% of the gross assets may be invested in
other countries* provided that any investments made are in
companies listed on a regulated stock exchange.
The Company may also invest in other funds in order to gain
exposure to Emerging Europe where, for example, such funds afford
one of the few practicable means of access to a particular market,
or where such a fund represents an attractive investment in its own
right. The Company will not invest more than 15% of its gross
assets in other UK listed investment companies (including
investment trusts).
The maximum value of any one investment should not exceed 12% of
the Company’s gross assets, save with the prior written consent of
the Board. Where excess occurs due to market movement, the
Investment Manager will notify the Board of this and will reduce
the holding to below 12% within six months.
In addition to the above restriction on investment in a single
company, the Board seeks to achieve a spread of risk in the
portfolio through monitoring the country and sector weightings of
the portfolio. There will be a minimum of 30 stocks in the
portfolio.
*The Board currently intends that the “other countries” for the
purposes of the Investment Policy will comprise Bahrain, Egypt, Jordan, Kenya, Kuwait, Lebanon, Mauritius, Morocco, Nigeria, Oman, Qatar,
Saudi Arabia, South Africa, Tunisia and UAE.
Borrowings and Gearing
The Company uses gearing to enhance returns to Shareholders. In
order to provide a mechanism to gear the portfolio the Board has
authorised the Investment Manager to invest in long only
derivatives in Polish, Russian and Turkish index futures where
feasible. The Investment Manager has discretion to operate with an
overall exposure of the portfolio to the market of between 90% and
110%, to include the effect of any derivative positions.
Discount control mechanism
In 2016, the Board decided that it was in the Company’s best
interests to take steps to address the long-term viability of the
Company’s approach to discount management. With effect from
1 June 2017, the Board approved the
introduction of a policy to offer Shareholders a tender of up to
25% of the Company’s shares over the four-year period from
1 October 2016 to 30 September 2020 in the event that certain
events are triggered. These events being:
i. the average daily Discount to NAV (‘cum-income’) exceeds 12%
as calculated with reference to the trading of the share over the
four year period immediately preceding each relevant publication
date of the Company’s financial results (the “New Calculation
Period”), provided that the first New Calculation Period will be
the period between 1 October 2016 and
30 September 2020. (Discount to NAV,
for discount management purposes, was previously calculated with
reference to the 365 day period prior to the publication of the
Company’s results for the financial year);
ii. the performance of the Company’s portfolio on a total return
basis does not exceed its Benchmark (being the MSCI Emerging Europe
10/40 Index) by an average of 100 basis points per annum over the
New Calculation Period.
Please refer to the Shareholder circular dated 15 December 2016 for further details and
definitions.
In addition, and in order to reduce the discount, the Board,
authorises shares to be brought on the market from time-to-time
where the share price is quoted at a discount to NAV.
Principal Risks and Uncertainties
The Company is exposed to a variety of risks and uncertainties.
The Board, through delegation to the Audit Committee, has
undertaken an assessment and review of the principal risks
facing the Company, together with a review of any new risks which
may have arisen during the year, including those risks which would
threaten the Company’s business model, future performance, solvency
or liquidity.
The Audit Committee regularly (on a six-monthly basis) reviews
the risks facing the Company by maintaining a detailed record of
the identified risks against an assessment of the likelihood of
such risks occurring and the severity of the potential impact of
such risks. This enables the Board to take action and develop
strategies in order to mitigate the effect of such risks to the
extent possible. An analysis of financial risks can be found in
note 18 to the Financial Statements below.
Information about the Company’s internal control and risk
management procedures can be found in the Audit Committee Report
below. The principal financial risks and the Company’s policies for
managing these risks and the policy and practice with regard to
financial instruments are summarised in note 18 to the Financial
Statements.
The Board has identified the following as being the principal
risks and uncertainties facing the Company:
Risk |
Mitigation |
Investment and
strategy
There can be no guarantee that the investment objective will be
achieved. |
The Investment Manager
has in place a dedicated investment process which is designed to
maximise the changes of the investment objective being achieved.
The Board reviews regular investment reports from the Investment
Manager to monitor performance against its stated objective and
regularly reviews that strategy. All of the Company’s investments
are listed on recognised stock exchanges and the liquidity of
individual investments is monitored by the Investment Manager and
the Board. |
Adverse market
conditions
Emerging markets subject to volatile geo-political and socio
economic movements as well as possible imposition of selective
sanctions. This may have an impact on the liquidity of individual
investments. |
It can be argued that
the most effective method of protecting the Company from the
effects of country specific or individual stock risks is to hold a
geographically diversified portfolio spread across a diversified
portfolio of stocks. The Company holds 46 stocks in 9 countries and
the AIFM has the ability, where necessary, to diversify the
portfolio into other regions. The AIFM has a clear investment
strategy as set out below. Whilst recognising there will be periods
when this strategy underperforms the Benchmark and peer group, the
Board monitors performance at each Board meeting and reviews the
investment process throughout the year. The Investment Manager’s
own internal compliance functions provide robust checks that the
Investment Manager complies with the investment mandate. |
Size of the
Company
The size of the Company could become sub optimal as share buy-backs
reduce the Company’s market capital. |
The Investment Manager discusses and
agrees with the Board prior to making any buybacks. The Manager and
Corporate Broker are in regular contact with major institutional
investors and report their views to the Board on a regular
basis. |
Share price
volatility and liquidity/marketability risk
The shares of the Company are traded freely and are therefore
subject to the influences of supply and demand and investors’
perception to the markets the Company invests in. The share price
is therefore subject to fluctuations and like all Investment Trusts
may trade at a discount to the NAV. |
The Board seeks to
narrow the discount by undertaking measured buybacks of the
Company’s shares. The Company and Investment Manager works with the
broker to seek to increase demand for the Company’s shares.
The Board has committed to an increased focus on dividend yield to
further enhance the appeal of investing in the Company to increase
demand for shares.
In addition, as set out on below, the Company has offered investors
the ability to realise their investment in the Company at NAV less
costs should the Company not meet targets relating to average
discount or performance over a four year period. |
Loss
of assets
The portfolio includes investments held in a number of
jurisdictions and there is a risk of a loss of assets. |
The Investment Manager
and Administrator have systems in place for executing and settling
transactions and for ensuring assets are safe. In addition, the
Company uses an internationally recognised Custodian and sub
Custodians and receives regular reports of assets held, which are
reconciled by the Administrator. The operation of the Custodian is
overseen and reviewed by the Depositary which reports regularly to
the Board. |
Engagement of third party service providers
The Company out sources all of its operations to third parties and
is therefore reliant on those third parties maintaining robust
controls to prevent the Company suffering financial loss or
reputation as damage. |
The
Company operates through a series of contractual relationships with
its service providers.
The Board reviews the performance of all service providers both in
Board meetings and in the Management Engagement Committee meeting,
where the terms on which the service providers are engaged are also
reviewed.
The Audit Committee also receives internal controls reports from
key service providers.
The Board assesses whether relevant controls have been operating
effectively throughout the period. |
Investment Manager
Management Arrangements and Fees
Baring Fund Managers Limited acts as the AIFM of the Company
under an agreement terminable by either party giving not less than
six months written notice. Under this agreement the AIFM receives a
fee which is calculated monthly and payable at an annual rate of
0.8% of the NAV of the Company, together with any applicable value
added tax thereon and any out of pocket expenses incurred by the
AIFM.
There is no performance fee for the AIFM.
The AIFM has delegated the investment management of the
portfolio to Baring Asset Management Limited (the “Investment
Manager”).
Details of the Investment Manager
The Investment Manager has a team of fund managers who are
responsible for the management of the investment portfolio.
Matthias Siller, Head of
Europe, Middle East and Africa (“EMEA”) at the Investment Manager, is
the lead manager and Adnan El-Araby and Maria Szczesna as co-backup managers. Matthias
is supported by the wider EMEA Equity Team, which comprises seven
experienced investment professionals all of whom have research
responsibilities as well as the broader emerging equity
professionals based in London,
Hong Kong and Taiwan, utilising their diverse local
knowledge and experience. The team also draws further support from
the rest of the broader equity platform at the Investment Manager,
especially the knowledge, expertise and coverage of our three
global sector teams: Healthcare, Resources and Technology.
Matthias joined the Investment Manager in 2006 and was appointed
Head of EMEA Equities Team in 2016. Matthias is also lead manager
for the Company. He began his career in fund management at
Raiffeisen Zentralbank Austria in 1997 as a Market
Maker/Proprietary Trader in Central & Eastern European Equities
and Derivatives. He joined Bawag – PSK Invest as an EMEA equity
portfolio manager in 2001 and moved to Raiffeisen Capital
Management in 2003, where he was a portfolio manager for Central
& Eastern European Equities. Matthias has a Masters degree from
Vienna University in Economics
& Business Administration. Matthias was awarded the CFA
designation in 2006 and speaks fluent German.
Maria is an investment manager in the EMEA & Global Frontier
Markets Equity Team. She is responsible for Financials and Consumer
Staples in the region. Maria joined the Investment Manager in 2006
from the Polish Embassy in London,
where she worked for three years as an economist. Prior to this,
Maria worked in corporate finance at Ernst & Young and BRE
Corporate Finance (part of Commerzbank Group) in Warsaw. She holds an MA in Economics from the
Warsaw School of Economics and was awarded the CFA designation in
2008. Maria is fluent in Polish.
Adnan is an investment manager in the EMEA & Global Frontier
Markets Equity Team. His primary responsibilities are focused on
the Technology and Resources (O&G, M&M, Agriculture)
sectors within the EMEA region. Adnan joined Barings in 2010 from
Legg Mason Capital Management, where he was an investment analyst.
He holds a B.Comm degree from St. Mary’s University, Canada and was awarded the CFA designation in
2006. Adnan is fluent in Arabic.
Report of the Investment Manager
HIGHLIGHTS
Our investment philosophy is based on the belief that equity
markets are inefficient. We believe these inefficiencies are
greatest at the stock level and that over the long-term stock
selection can add value in all equity asset classes. Our
disciplined bottom-up stock selection process incorporating ESG
analysis, macro considerations and a risk-aware portfolio
construction process, enables us to manage stock-specific risks and
mitigate volatility inherent in equity markets.
Key Differentiators |
|
Depth of resource |
We have a large and experienced team
of emerging markets investment professionals producing proprietary
and differentiated company research which drives our stock
selection. |
Five year research
horizon |
Our research horizon is five years,
where we believe market inefficiency is more pronounced, allowing
us to readily identify companies with unrecognised growth
potential. |
Incorporation of top-down macro
considerations into a bottom-up process |
We capture macro risks within our
investment process via our unique cost of equity*, incorporating
these risks into our valuation of equities and setting of price
targets. |
Integration of ESG |
ESG is fully embedded into our
investment process, influencing both the qualitative assessment and
final cost of equity used to set price targets. |
Proprietary portfolio
construction tools |
We believe the key to delivering
high risk-adjusted returns is through company stock selection and
robust risk management. We achieve this through the use of our
proprietary in-house portfolio construction tools. |
INVESTMENT PERFORMANCE
We are pleased to report that the performance of your Company
lifted the Company share price to new all-time highs (dividend
reinvested basis) led by a wealth of investment opportunity within
the region.
During 2019 Emerging European markets enjoyed both strong
absolute and relative performance compared to the recent past.
This was against a challenging backdrop where volatility
increased substantially in response to political and macroeconomic
factors. In addition, Emerging European currencies, stock markets
and sectors behaved in a diverse manner, providing a highly
uncorrelated investment universe which exhibited examples of both
stellar performance and pronounced weakness. This provided a
fertile hunting ground from which to unearth mispriced companies in
which to invest. Against this background, your portfolio benefitted
from being broadly diversified, delivering an increase in the
Company’s NAV of 17.8% (including dividends), against a benchmark
performance of 15.9%.
Russia
Building on a strong 2018, last year saw a continuation of the
Russian equity market’s positive performance. Remarkably, this
development took place against a backdrop of sharply falling oil
prices, challenging the notion that the Russian equity market’s
performance hinges on oil and oil alone. Importantly, we recognise
recent developments have been driven by marked improvements in
management performance toward ESG policy within the Russian private
sector, and, to an increasing degree, state owned enterprises.
Economic and Political Background
In the context of Russia’s often headline-grabbing foreign
policy of recent years, a comparably uneventful year brought a
visible reduction in the country’s risk premium, (the additional
return premium investors require to take elevated risk), as
investors’ attention rested on economic developments. We deem the
appreciation of the Russian Rouble a prominent indicator of the
increasing appeal of Russian assets, especially in a global
environment that mostly saw depreciating Emerging Markets’
currencies when faced against a stubbornly elevated USD. While
cynics might remark on the short memory of financial markets, we
draw a more constructive picture. The release of 35 Ukrainian
prisoners under the terms of a prisoner swap in September 2019, amongst them the renowned film
maker Oleg Sentsov, one of the most
famous political prisoners in Russia, and the revival of the so-called
Steinmeier formula (calling for OSCE-supervised elections to be
held in the separatist-held territories of Eastern Ukraine), could well signal an
improvement in the relations between Russia and Ukraine, and henceforth the European Union. In
addition, overall investor sentiment has been helped by the US
Treasury’s Office of Foreign Asset Control (OFAC) decision to lift
the sanctions regime on Russian companies EN+ and Rusal. This
resulted from an agreement, made in January
2019, with Oleg Deripaska,
the former majority shareholder of these companies, to reduce his
direct and indirect shareholding stake and sever his control.
Russia also saw a continuing
trend of high profile, strategic energy deals. Examples include the
USD 21bn Arctic Liquefied Natural Gas
(LNG) 2 project conducted by Russia’s Novatek and its partners
CNOOC of China and Mitsui of
Japan. Arctic LNG2 is key to
Russia’s ambition of growing to be the dominant global player in
LNG, a cleaner energy source. This is especially prevalent in the
context of the current energy transition sought by the European
Commission, representing a readily accessible alternative to reduce
greenhouse gas emissions and help combat global warming.
A major boost to growth will likely come from government-led
investment. Public capital expenditure shrank by some 5-10%
year-on-year in the first half of 2019 due to slippage in the
realisation of large-scale infrastructure works known as the
National Projects.
We expect the pace of National Project spending to pick up in
2020, with the positive growth effect likely to be enhanced by the
announced spending of USD 15bn from
the National Welfare Fund in 2020-22 on public investments and
export credits. In addition to higher government investment, faster
growth should also result from lower inflation and a broader easing
of monetary and fiscal policy. This points in particular to an
improvement of the lacklustre domestic household demand growth seen
in 2019.
Company Weighting Versus Comparator
Benchmark by Country
at 30 September 2019
Country of operation |
Company |
Benchmark* |
Czechia |
1.4% |
2.6% |
Greece |
3.4% |
5.5% |
Hungary |
2.3% |
5.1% |
Poland |
17.4% |
17.5% |
Russia |
64.3% |
58.9% |
Turkey |
12.5% |
10.4% |
Romania |
2.7% |
0.0% |
Ukraine |
0.7% |
0.0% |
Kuwait |
0.8% |
0.0% |
Net Current Liabilities |
-5.5% |
0.0% |
Total |
100.0% |
100.0% |
*Includes rounding differences. Source: Barings, MSCI
Investment Strategy
Companies within Russia’s energy sector, a consistent core
portfolio component, rank amongst the best-performing stocks, not
just within Emerging Europe, but also globally. These companies
have been able to deliver almost 100% returns in USD over the past
10 years, standing in stark contrast to global peers and the oil
price which provided negative returns over the same period (as
measured by the Bloomberg World Oil & Gas Index). Notably, the
sector saw a major step change in composition as Gazprom saw a
substantial rise in its index weighting as the company continues to
consolidate its place as the world’s largest gas producer. Gazprom
had previously long lagged behind its peers in Russia’s private
sector but, following what we recognise to be substantial
improvements in the company’s corporate governance, the company has
made significant strides to increase its dividend distribution to
minority shareholders, made possible by a renewed focus on
efficiency and cash generation. This culminated in one of the
strongest performances of any large cap stock globally and saw
Gazprom’s share price climb by more than 50% in USD terms. We took
profits in LNG gas producer Novatek, as the company responded to
developments within their highly successful Yamal project which saw
the company move closer to our target price
Outside the Energy sector we invested in Russian
telecommunication company Mobile Telesystems (MTS), a key
beneficiary of Rouble strength where we recognise the ongoing
margin repair on the Russian telco market. In the materials sector
we introduced a position in Polyus, one of the largest producers of
gold globally, boasting a vast, easily accessible resource base.
While this increased our exposure to precious metals, this was
partially offset by a reduction in our holding in Alrosa, a diamond
producer widely recognised in carat production terms as a peer to
De Beers, following strong share price appreciation.
Turkey
In what was a challenging economic backdrop, Turkish assets were
volatile, but performed well over the course of the year. The
potential of Turkish companies remains substantial, supported by
the country’s young population and solid education system,
underpinning the economy to generate growth and attract foreign
investment. With valuations remaining attractive and well below
long-term averages, assets prices stand to benefit considerably
from falling inflation expectations.
Near term political challenges remain prevalent and there
continues to be little reason to believe that the substantial
political risk premium incorporated into Turkish asset prices is
likely to wane any time soon. Our view, however, remains positive
as we take note of the recent macroeconomic improvements.
Economic and Political Backgrounds
After the turbulent events of summer 2018 which saw the Turkish
market transition through a period of stress as inflationary
pressures and political interference undermined the Turkish Lira,
the Turkish Central Bank, committed to reigning in inflationary
pressures, maintained elevated interest rates of 24.5%. This
orthodox approach led to a substantial fall in inflation
expectations, returning initiative to Turkish policy makers. While
the resulting tight domestic conditions brought a rapid contraction
in economic activity, we note that the highly flexible Turkish
economy was able to effectively adjust and, by mid-2019, tentative
signs of recovering domestic demand became visible. Importantly,
the current account deficit, (a measurement of a country’s trade
where the value of the goods and services it imports exceeds the
value of the products it exports), reversed sharply as a
significantly weakened Lira caused imports to fall while exports
remained solid. Furthermore, the Central Election Commission’s
decision to declare the opposition’s close win in the May 2019 municipality election in Istanbul void on dubious grounds felt like yet
another setback – only to become a galvanising moment in Turkey’s
history of civil society as a revote confirmed the victory of the
charismatic Ekrem Imamoglu in
dramatic fashion, and placed him in office as mayor of Turkey’s
largest metropolis and economic centre.
Investment Strategy
Following rapid developments on the ground in Turkey, representatives of the team visited
Ankara and Istanbul where we met with government
institutions, management teams and visited operational facilities
to gain insight into the state of the Turkish economy. The outcome
of the trip resulted in a change to our strategy, substantially
increasing our exposure to Turkish stocks. While political noise
remained elevated, underlying economic trends soon started to
reflect tentative signs of recovery as external financing
stabilised and falling inflationary pressures resulted in the
substantial appreciation of the Turkish Lira. This led to the
significant appreciation in a number of companies within the
portfolio which were able to effectively adapt to the dynamic
landscape. Within the banking sector our attention was focused on
Yapi Kredi Bank, where we saw
substantially better valuation levels compared to its private
sector peers Garanti and Akbank. Mobile telephony and internet
service provider Turkcell, at times during the year ranking amongst
the largest portfolio holdings, was sold eventually on the back of
significant stock price appreciation. Turkcell operates with an
impressive 50% market share, and was able to effectively utilize
its position to maintain strong pricing power amidst the elevated
inflationary environment to deliver robust top line growth. New
additions to the portfolio included Arcelik, the leading European
white goods producer, car manufacturer TOFAS and the country’s
largest refiner, Tupras, all of which were notable contributors to
performance.
Poland
Historically Poland has been a
much needed safe haven within Emerging Europe. However, the stock
market endured a difficult year, owing mainly to increasing
political intervention and regulatory pressures. Furthermore,
concerns over dwindling export growth in Europe, driven largely by the German auto
industry, had a detrimental effect on the currency. In sharp
contrast, the domestic economy remains resilient, being less
dependent on exports than other Central European states. We expect
that the ongoing tribulations within the financial system will
eventually allow for consolidation and higher profitability
levels.
Economic and Political Background
The Polish economy continues to benefit from robust domestic
demand, supported by rapidly rising real household incomes while
ongoing productivity gains and falling transport fuel prices have
kept inflationary pressures at bay. This has attracted an influx of
labour from the Ukraine and
Belarus who have taken jobs in
labour intensive sectors such as construction and agriculture.
Additionally, the conservative government’s introduction of its
flagship social transfer programme – the 500 Polish Zloty child
allowance – was followed by a host of further fiscally expansive
measures aimed primarily at pensioners and families in the run-up
to the October 2019 parliamentary
elections. While these measures were designed to keep the PiS in
power, strong economic growth and improved tax collection has
boosted tax revenues while prudently managed public finances have
enabled the government to give back, albeit at the expense of
spending in other areas of the economy. Elsewhere, Swiss Franc
mortgages, actively sold in Poland
predominantly during the years 2006-2009, have proven to be a
source of constant headache for Polish banks’ management. While of
decent credit quality, the mortgages have attracted the attention
of regulators and, have become subject of litigation risk,
supported by an EU court ruling. While a forced conversion of CHF
mortgage books to Polish Zloty denomination would cost the banking
sector up to PLN 20bn, we believe the Polish banking sectors’ high
capitalisation levels would be able to absorb the losses, and with
the help of the regulator, allow them to mitigate its impact.
Overall, the events of the last year have brought us closer to a
resolution in this ongoing saga.
Investment Strategy
While in Central Europe the
portfolio suffered from substantial stock price declines in various
Polish stocks, we remain vigilant as valuations are approaching
multi year lows and the overall damage inflicted by regulatory
developments in the banking sector has been limited. Amid this
environment, one key inclusion to our portfolio in Poland was CD Projekt, one of the world’s most
successful computer game producers. We believe the company has the
ability to expand and diversify its current franchises to become a
multi-title producer.
Greece
An early parliamentary election in Greece led to a resounding victory of the
conservative New Democracy (a centre-right political party in
Greece) under Kyriakos Mitsotakis, ending the leftist Syriza
party’s four-year tenure in power.
After a prolonged period of underwhelming news flow and a
generally volatile market backdrop, the outlook for the Greek
banking sector has started to improve, aided by a new found
confidence in the country’s economic development. At the centre of
investors’ attention stand the large portfolios of non-performing
loans on Greek banks’ balance sheets. A number of these loans were
collateralised against real estate and therefore carry an intrinsic
value that could be realised via foreclosure. Not surprisingly,
much of this collateral is made up of the businesses and primary
residences of ordinary Greeks, thus creating a politically charged
stumbling block for the banking sector in their pursuit to release
the necessary liquidity to re-start lending to the Greek economy.
As plans for a potential carve-out and subsequent sale of
non-performing loans emerged, investor attitudes improved,
evidenced in the pronounced performance of the sector on the
Athens stock exchange. Making use
of the pronounced volatility over the course of the year we
increased our investment in the Greek banking sector and added
Alpha Bank to our existing holding
of National Bank of Greece.
Romania
Romanian economic growth has historically benefitted from
substantial inflows of foreign direct investment over previous
years as the country’s private sector’s ability to channel funding
from the EU has steadily increased. However, rapidly growing
household consumption and short-sighted fiscal policies pursued by
the Social-Democrat government, led to overheating in the economy
by late 2018. This was evident in worrying signs of inflationary
pressures, a rapidly expanding twin deficit (current account and
budget) and even a thinly-veiled attempt to influence the Central
Bank’s independence. This situation was exacerbated by an attempt
by the government to plug the financing gap by introducing
draconian banking taxes, resulting in a sharp drop in asset prices
as banks signalled their inability to conduct profitable business
under the proposed levies. Ultimately, the Finance Ministry
recognised the lobbying of the banking industry and adopted a
lighter approach, finding a compromise between sustaining
profitable growth potential for the sector and fiscal
contributions. Looking ahead we are of the opinion that the
upcoming presidential elections (autumn 2019) and parliament
elections (2020) will pave the way for the reform orientated,
liberal-led government. Following the positive developments, we
added to our holding in BRD, Société Générale’s Romanian subsidiary
and one of the Balkan country’s largest banks.
Eastern
Europe
Elsewhere, Global IT services giant DCX Technology’s take-over
offer for the Central and Eastern European IT outsourcing services
specialist, and long-term conviction holding, Luxoft allowed us to
exit our position after a substantial stock price increase. This
development provides an insight into the competitive advantage of
the region’s service sector. Eastern
Europe boasts a talent pool of a well-educated, reliable and
flexible software engineers successfully competing on a global
level in increasingly complex and fast growing applications such as
autonomous driving or fintech. While the Emerging European export
success story is often reduced to industrial manufacturing or
commodities sectors, Luxoft’s buyout serves as a reminder of the
high value added capabilities of Emerging European IT &
software companies.
Middle
East, North & Sub-Saharan Africa
Middle Eastern and North African markets remained largely muted
over the course of the year. Of note, was the inclusion of
Saudi Arabia into the MSCI
Emerging Markets Index completing a two-stage inclusion process
that began in May 2019 and ended in
August 2019. This reclassification
attracted both passive and active inflows as investors took note of
the opportunity the market offers, supported by structural reform,
social change and ambitious infrastructure plans. Furthermore, the
much anticipated IPO of Saudi Aramco, Saudi Arabia’s national
petroleum and natural gas company and one of the largest companies
in the world by revenue, is expected to be listed in the near term.
The sheer size of this initial offering, poised to be the largest
IPO in history by size, and the potential for related liquidity
effects (namely outflows from other stocks) have already made a
significant impact on investor attitudes.
The Company’s engagement in the extended geographical mandate of
the Middle East, North and
Sub-Saharan Africa remains limited, as we have continued to find an
abundance of significant investment opportunities within our core
markets. In our view it is important to underscore that
Turkey, Greece and especially Russia (on a combined level representing in
excess of 80% of our portfolio) rank amongst the best performing
equity markets globally over the last 12 months, justifying the
allocation of the largest part of our funds to those markets. Over
the medium term we remain positive on the potential for the
Middle East, North Africa and Sub-Saharan stock
markets.
LEVERAGE
The Company has made use of a gearing facility of up to 10% of
NAV for the entire year, as part of its strategy to increase
returns. While elevated US interest rates have increased the
overall interest payment costs of the facility, we consider the
attractive valuation, earnings growth outlook and underlying
dividend yield of Emerging European Equity markets an adequate
opportunity set to successfully support the continued employment of
our gearing strategy.
OUTLOOK
The positive performance of various Emerging European stock
markets over the last year is reflected in the increasing attention
investors pay to local company specific factors rather than global
developments. This continuing trend may well mark an important
moment in investors’ perception of Emerging European markets, where
political risk considerations have overshadowed an improving
corporate climate. These developments in our view have also been
supported by changing investor attitudes towards sustainability and
investing effectively for the long term. By incorporating ESG key
parameter in our company analysis, we are able to engage management
and clearly define expectations and enhance accountability.
Additionally, by engaging directly, investors are able to gain
valuable insight towards a company’s attitudes toward governance,
thus unearthing risks not apparent from traditional analysis. This
serves to further contextualise investment decisions and support
the long term stability and profitability goals of the Company.
The overall growth profile of Emerging Europe remains very
attractive in our view, especially considering the region’s low
valuations and idiosyncratic opportunities such as cheap
currencies, falling real interest rates and strong corporate and
sovereign balance sheets. We also note the substantial
opportunities we see in the consumer space, export industries and
technology as rising household income levels and infrastructure
investment lay the foundation for sustainable growth and the
attraction of foreign investment.
Politically, we do observe some constructive changes in the
state of civil societies and inherent institutional strength,
challenging the uninspiring traditional notion of the region. These
changes can often be seen in the most testing of environments. The
election of former comedian Volodymyr
Zelensky as Ukrainian President, the return of former
economy minister and AK Party founding member Ali Babacan to the
political fray in Turkey, and
various local and national election results across the region are
indicative of the development of these ongoing political
processes.
We believe that Emerging Europe has now realised the largest
portion of the increase in dividend pay-out ratios, a key driver of
revenue generation in recent years: leading to what we believe is a
normalisation in dividend growth within the region. Looking ahead,
we believe a supporting factor to the portfolio’s revenue
generation capability will be the performance of Emerging European
currencies as they respond to growing foreign investment and the
relative strengths of their economies globally.
We acknowledge the strong performance delivered by Russian
energy companies in particular and recognise that, in some cases,
share prices have edged closer to full valuation. This, we believe,
presents an opportunity to explore a larger degree of stock picking
opportunities in other sectors and markets, also including the
extended geographical mandate of the Middle East, North
Africa and Sub-Saharan Africa. This should also benefit the
portfolio’s resilience to volatility as this expansion into
different markets offers further diversification benefits, and
supports our objective to generate higher risk-adjusted
returns.
Review of Top Ten Holdings
at 30 September 2019
Holding |
Sector |
Market value £’000 |
% of investment portfolio |
End weighting
relative to Benchmark |
Company
comment |
Sberbank |
Financials |
12,058 |
10.4 |
Overweight |
Russia’s
largest bank, successful implementation
of modernisation strategy offers scope for further
improvement of profitability. |
Gazprom |
Energy |
11,627 |
10.0 |
Overweight |
Russia's largest oil
and gas producer, offering substantial dividend distribution. |
Lukoil |
Energy |
9,404 |
8.1 |
Underweight |
High yielding Russian
oil stock with potential for further dividend growth. |
Novatek |
Energy |
6,657 |
5.7 |
Underweight |
Largest independent
gas producer in Russia. Liquified Natural Gas strategy provides
significant growth potential. |
X5 Retails Group |
Consumer Staples |
6,106 |
5.3 |
Overweight |
One of the leading
Russian supermarket chains, benefitting from expansion and
consumption growth. |
PZU |
Financials |
4,828 |
4.2 |
Overweight |
Largest Polish
insurer. Its capital base allows for substantial dividend payout
ratios. Enlarging client base via strategic stakes in Polish
banking sector. |
Polyus |
Materials |
3,447 |
3.0 |
Overweight |
One of the largest
producers of gold globally, boasting a vast, easily accessible
resource base. |
Mobile
Telesystems |
Communication
Services |
3,420 |
3.0 |
Overweight |
Russian
telecommunication company and key beneficiary of the ongoing margin
repair of the sector. |
KGHM Polska Miedz |
Materials |
3,367 |
2.9 |
Overweight |
Largest European
copper miner. Core Polish operations' efficiency improving. |
VakifBank |
Financial |
3,363 |
2.9 |
Overweight |
One of Turkey’s
largest banks which has seen a strong turnaround following
management efforts to upgrade operations and deliver on strategic
goals. |
|
|
|
55.5 |
|
|
Investment Portfolio
at 30 September 2019
|
Holding |
Primary country of
listing or investment |
Market value £’000 |
% of
investment
portfolio |
1 |
Sberbank |
Russia |
12,058 |
10.41 |
2 |
Gazprom |
Russia |
11,627 |
10.04 |
3 |
Lukoil Holdings |
Russia |
9,404 |
8.12 |
4 |
Novatek |
Russia |
6,657 |
5.75 |
5 |
X5 Retails Group |
Russia |
6,106 |
5.27 |
6 |
PZU |
Poland |
4,828 |
4.17 |
7 |
Polyus |
Russia |
3,447 |
2.98 |
8 |
Mobile
Telesystems |
Russia |
3,420 |
2.95 |
9 |
KGHM Polska Miedz |
Poland |
3,367 |
2.91 |
10 |
VakifBank |
Turkey |
3,363 |
2.90 |
11 |
AO Tatneft |
Russia |
3,215 |
2.78 |
12 |
PKO Bank Polska |
Poland |
3/097 |
2.67 |
13 |
Mail.Ru |
Russia |
3,058 |
2.64 |
14 |
Yapi Kredi |
Turkey |
2,685 |
2.32 |
15 |
Yandex |
Russia |
2,627 |
2.27 |
16 |
Santander Bank
Polska |
Poland |
2,527 |
2.18 |
17 |
CD Projekt |
Poland |
2,417 |
2.09 |
18 |
National Bank of
Greece |
Greece |
2,417 |
2.09 |
19 |
Bank Pekao |
Poland |
2,192 |
1.89 |
20 |
Norilsk Nickel |
Russia |
2,013 |
1.74 |
21 |
Tupras |
Turkey |
1,899 |
1.64 |
22 |
OTP Bank |
Hungary |
1,842 |
1.59 |
23 |
TCS |
Russia |
1,763 |
1.52 |
24 |
Globaltrans |
Russia |
1,731 |
1.50 |
25 |
BCA Transilvania |
Romania |
1,711 |
1.48 |
26 |
CCC |
Poland |
1,672 |
1.44 |
27 |
Komercni Banka |
Czechia |
1,631 |
1.41 |
28 |
Detsky Mir |
Russia |
1,504 |
1.30 |
29 |
Turk
Telekomunikasyon |
Turkey |
1,484 |
1.28 |
30 |
Alpha Bank |
Greece |
1,466 |
1.27 |
31 |
Mosco Exchange |
Russia |
1,454 |
1.26 |
32 |
Alrosa |
Russia |
1,449 |
1.25 |
33 |
Ulker Biskuvi
Sanayi |
Turkey |
1,366 |
1.18 |
34 |
LSR |
Russia |
1,362 |
1.17 |
35 |
Tofas Turk Otomobil
Fabri |
Turkey |
1,167 |
1.01 |
36 |
Arcelik |
Turkey |
1,123 |
0.97 |
37 |
Human Soft |
Kuwait |
958 |
0.83 |
38 |
MD Medical |
Russia |
890 |
0.77 |
39 |
MHP |
Ukraine |
820 |
0.71 |
40 |
MOL Hungarian &
Gas |
Hungary |
795 |
0.69 |
41 |
Turkcell Iletisim
Hizmetleri |
Turkey |
785 |
0.68 |
42 |
Sphera Franchise |
Romania |
725 |
0.63 |
43 |
EN+ Group
International |
Russia |
720 |
0.62 |
44 |
BRD-Groupe Societe
General |
Romania |
691 |
0.60 |
45 |
Migros Ticaret |
Turkey |
335 |
0.29 |
46 |
DP Eurasia |
Turkey and Russia |
223 |
0.19 |
|
|
|
|
|
|
Total
investments(gross assets) |
|
122,091 |
105.44 |
|
Net current
liabilities |
|
(6,305) |
(5.45) |
|
Net assets |
|
115,786 |
100.0 |
Investment Process
We believe that equity markets are inefficient and that
consistently applied fundamental bottom-up company analysis can
identify mispriced opportunities. Fundamental research is the
cornerstone of our approach in which we identify mispriced
investment opportunities which possess Growth at a Reasonable Price
(“GARP”) characteristics. GARP investing incorporates elements of
growth and value investing, focusing on companies which have
sustainable growth potential but do not demand a high valuation
premium.
To each company we research, we apply a consistent, analytical
and qualitative framework applied through our Company Scorecard
(see below) which focuses on three factors: Growth, Valuation and
Quality. By applying a consistent research approach we can evaluate
companies and determine relative attractiveness across countries
and sectors within the region.
Consistent Company Scorecard
The company scorecard creates a
consistent research approach and helps managers to evaluate
companies and determine relative attractiveness across geographies
and sectors
GROWTH |
VALUATION |
QUALITY |
Unrecognised growth,
typically identified on a five year horizon where market
inefficiency is more pronounced |
Price targets achieved by
discounting long term earnings forecasts using an appropriate
cost of equity and a target PE |
Qualitative assessment provides a
level of certainty as our research horizon is five years |
• Historical – last
three-years’ net earnings growth |
• Our Valuation Method – five
years discounted by COE to set price target and determine
upside |
• Franchise – competitive
advantage, efficiency, stability |
• Near-term – next 12-months’
net earnings growth |
• Earnings based – next 12
month forward P/E multiple |
• Management – competence,
commitment and alignment with shareholder Interest |
• Long-term – next
five-years’ net earnings growth |
• Return based valuation –
P/B relative to ROE and P/B relative to cost of capital |
• Balance sheet – cash flow,
working capital, capital structure analysis |
COMPANY SCORE
[1-5] |
Each of the above
nine factors are scored 1-5 and equally weighted |
KEY INPUTS |
Company fundamentals including
proprietary financial forecasts |
Sector / industry / macro trends and
outlook |
ESG considerations |
Each company is rated on a scale of
1-5, with a 1 score being the most favourable and a 5 score, the
least attractive.
While focused on company analysis, our investment process does
also factor in the effects of macro influences such as the economic
outlook and political change as well as ESG issues. We integrate
these considerations through our unique cost of equity when we
value companies.
Integrating Macro - Cost of Equity
Used in Equity Valuation
A company’s equity value is discounted by a company-specific
cost of equity to determine a price target and upside from current
market prices
|
“SYSTEMATIC RISK” |
“IDIOSYNCRATIC RISK” |
|
Risk
inherent to the entire market |
Risk that
is particular to a company |
Cost of Equity (Discount Rate)
= |
Risk Free Rate + |
Equity Risk Premium + |
Stock Specific Risk + |
ESG |
|
Reflecting: |
Reflecting: |
Reflecting: |
Reflecting: |
|
• Country economic factors |
• Economic classification |
• Sector risk |
• Our assessment of ESG |
|
|
• Political risk |
• Regulatory risk |
Can add ( -1% to 2% to
COE)* |
|
|
• Social risk |
• Business model cyclicality |
|
|
|
• Credit risk |
• Earnings volatility and
visibility |
|
|
|
|
• Balance sheet structure |
|
|
|
|
Can add (0 to 2% to
COE)* |
|
Allows price target comparisons
across sectors and geographies
We consider ESG factors among some of the most important
variables that can impact an investment’s risks and returns over
time. As part of our overall commitment to delivering attractive
returns, we endeavour to construct portfolios that meet our
clients’ risk-return requirements and this includes incorporating
ESG criteria into our investment process. At the Investment
Manager, ESG considerations influence both the company score we
allocate to the companies we research and the cost of equity in
order to capture the specific risks and inherent attractions
highlighted by the company’s own ESG approach. As part of our
initial and ongoing analysis, our investment professionals meet
with management teams, visit operational facilities and analyse
industry competitors to better understand potential risks,
including ESG-related issues. This analysis assists in the
formation of our assessments where we look for signs of improvement
or deterioration, relying on our own research, rather than taking
static recommendations from “ESG Specialists”. Our assessment is
based on the evaluation of nine key topics in order to arrive at a
view on the company with the rating based on how the company is
refining their focus on these areas.
We take the ideas generated through our research processes to
construct a portfolio which targets superior risk-adjusted returns.
Risk management is central to our investment process and as part of
our portfolio construction and risk management process we employ a
range of proprietary tools and models to fully identify all risks
within our portfolio.
*For definitions, please see Glossary below
Incorporating ESG as part of our
fundamental research due diligence
A dynamic assessment of ESG is integrated in all aspects of our
fundamental research process
Our ESG Approach |
ESG considerations influence both
the equity valuation and company scorecard |
|
Factors Considered |
Nine Key Topics |
In-House Evaluation |
We make our own assessments
informed by in-house knowledge and research, aided by external
data |
Franchise –
Sustainability of the Business Model |
• Employee Satisfaction |
Dynamic Assessment |
Signs of improving or
deteriorating ESG factors – rather than “static assessments” –
drive our analysis |
• Resource Intensity |
• Traceability/ Security in Supply
Chain |
Management –
Corporate Governance Credibility |
• Effectiveness of Supervisory/
Management Boards |
• Credibility of Auditing
Arrangements |
• Transparency & Accountability
of Management |
Hidden Risks – On
Balance Sheet |
• Environmental Footprint |
• Societal Impact of
Products/Services |
• Business Ethics |
UNFAVOURABLE |
NOT IMPROVING |
IMPROVING |
EXEMPLARY |
ESG factors are rated
based on how the company is refining their focus on the above
factors, and given a score which impacts Cost of Equity |
We take a multi-layered approach to fully understand how each
position contributes to the stock specific and factor risk within
the portfolio. This begins with our fundamental bottom-up research
to identify all potential risks associated with each individual
company. In addition our proprietary cost of equity aims to capture
not only stock specific risk, including ESG, but also systematic
risk to ensure that the expected return fully compensates for any
potential risks.
In considering ideas for potential inclusion into our
portfolios, the investment manager considers two key questions:
1. How does the investment decision impact the portfolio’s
expected return?
2. How does the investment decision impact the portfolio’s risk
characteristics?
The assessment of the risk and return profile of the fund is
aided by the use of our proprietary portfolio construction tools.
This approach assists in pre-trade analysis to identify which
companies have the greatest scope to improve the risk and return
characteristics of the portfolio while additionally aiding position
sizing. Furthermore, these tools also empower our portfolio
managers to minimise unintended factor risk while maximizing the
stock specific risk contribution to ensure that our bottom up ideas
drive investment performance. Once invested, our investment
professionals continue to monitor each company to ensure that our
conviction remains intact and that an investment’s risk and return
profile remains attractive relative to other opportunities
available in the market.
Baring Asset Management Limited
5 December 2019
Corporate Review
The Strategic Report above and the Audited Financial Statements
has been prepared in accordance with the requirements of Section
414 of the Companies Act 2006 and best practice. Its purpose is to
provide information to the shareholders of the Company and help
them to assess how the Directors have performed their duty to
promote the success of the Company, in accordance with Section 172
of the Companies Act 2006.
Dividend Policy
The Company will aim to at least maintain a dividend
year-on-year and will pay income from capital when considered
appropriate by the Board. The Board anticipates paying out up to
one per cent. per annum of NAV from capital. The Board believes
that this is a sustainable policy that should improve the Company’s
appeal amongst investors.
Dividend
The Board recommends a final dividend of 20 pence per share. Subject to Shareholder
approval at the AGM, the recommended annual dividend will be paid
on 14 February 2020 to Shareholders
on the register at the close of business on 10 January 2020. The shares will be marked
ex-dividend on 9 January 2020.
Buyback Programme
During the period from 1 October
2018 to the year ended 30 September
2019, the average discount was 11.54% (2018: 11.90%).
During the year ended 30 September
2019, 695,747 shares were repurchased at a cost of
£5,293,000 (893,935 shares were repurchased during the year ended
30 September 2018 at a cost of
£6,578,000). All shares repurchased during the year were
cancelled.
Continuing Appointment of the
Alternative Investment Fund Manager
The Board keeps the performance of the AIFM under continual
review. The Management Engagement Committee conducts an annual
appraisal of the AIFM’s performance and makes a recommendation to
the Board about the continuing appointment of the AIFM. As the AIFM
has delegated the portfolio management function to the Investment
Manager, the performance of the Investment Manager is also
regularly reviewed. The annual review of the performance of the
Investment Manager includes consideration of:
• Overall performance and performance compared with Benchmark
and peer group;
• investment resources dedicated to the Company;
• investment management fee arrangements compared with the peer
group; and
• marketing effort and resources provided to the Company.
It is the opinion of the Board that the continuing appointment
of the AIFM, on the terms agreed, is in the best interests of
Shareholders as a whole. The Board is of the view that the AIFM has
managed the portfolio well in accordance with the Board’s
expectations and has delivered good returns.
Viability Statement
In accordance with provision C.2.2 of the UK Corporate
Governance Code, the Directors have assessed the prospects of the
Company over a longer period than the 12 months required by the
“Going Concern” provision. The Board conducted this review for a
period of five years, which was selected because it was considered
to be a reasonable time horizon in the context of the Company’s
investment portfolio and cost base. The Board also regularly
considers the strategic position of the Company including investor
demand for the Company’s shares and a five year period is
considered to be a reasonable time horizon for this.
The Directors have carried out an assessment of the Company’s
principal risks and its current position. The principal risks faced
by the Company and the procedures in place to monitor and mitigate
them are detailed above. As the Company’s portfolio consists of
shares which are listed on regulated markets, many of which are
highly liquid, funds can be raised to meet the Company’s
liabilities as they fall due. It has been reported by the
Investment Manager that the portfolio has sufficient liquidity to
meet all requirements with approximately 95% of the portfolio able
to be liquidated within five days. The Company has no long term
debt. At 30 September 2019, the
Company had fully drawn down its US$12
million loan facility with State Street Bank and Trust
Company. As a result of which the Company’s portfolio was 5.99%
geared. This exposure does increase risk but is carefully monitored
by the Board and in any event is limited to 10% of gross assets.
The interest cost of the loan is covered 19 times by the revenue
surplus. On the basis of the current portfolio yield, the Directors
expect the Company to continue to generate a revenue surplus.
As explained in the full Annual Report and Accounts, the
Directors have announced to Shareholders that a tender offer of 25%
of the shares in issue at 30 September
2020 will be made if certain targets are not met. If a
tender is made, the Company will continue to remain viable
with the resultant reduction in shares in issue.
Based on the above assessment, the Directors confirm that they
have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities over the five year
period to December 2024.
Environmental, Human Rights, Employee,
Social and Community Issues
Since the Company does not have any employees, the day-to-day
management of these areas is delegated to the AIFM. As an
investment trust, the Company has no direct impact on the community
or the environment, and as such has no environmental, human rights,
social or community policies.
Environmental, Social and Governance factors are considered by
the Investment Manager as part of its investment process. Further
information can be found in the Chairman’s Statement and the
Investment Manager’s Report above.
This Strategic Report has been approved by the Board and signed
on its behalf by:
Frances
Daley
Chairman
5 December 2019
Board of Directors
FRANCES DALEY FCA, MCSI –
Chairman
NADYA WELLS – Non-Executive
Director and Senior Independent Director (“SID”)
CALUM THOMSON FCA – Non-Executive
Director and Audit Committee Chairman
CHRISTOPHER GRANVILLE –
Non-Executive Director
VIVIENE GOULD – Non-Executive
Director
Report of the Directors
The Directors of the Company are pleased to present their Report
and the Audited Financial Statements of the Company for the year
ended 30 September 2019.
In accordance with the Listing Rules and the Disclosure,
Guidance and Transparency Rules, the reports within the Corporate
Governance section of the Annual Report and Financial Statements
should be read in conjunction with one another, and the Strategic
Report. As permitted, some of the matters normally included in the
Directors’ Report have instead been included in the Strategic
Report (above) as the Board considers them to be of strategic
importance.
Status
The Company is registered as a public limited company under the
Companies Act and as an investment trust company under Section 833
Of the Companies Act 2006. It is a member of the Association of
Investment Companies (“AIC”).
In the opinion of the Directors, the Company has conducted its
affairs during the period under review, and subsequently, so as to
maintain its status as an investment trust for the purposes of
Chapter 4 of Part 24 of the Corporation Tax Act 2010. The Company
has obtained written approval as an investment trust from HM
Revenue & Customs for all accounting periods up to the year
ended 30 September 2013 and has made
a successful application under Regulation 5 of the Investment Trust
(Approved Company) (Tax) Regulations 2011 for investment trust
status to apply to all accounting periods starting on or after
1 October 2013 subject to the Company
continuing to meet the eligibility conditions contained in Section
1158 of the Corporation Tax Act 2010 and the ongoing requirements
outlined in Chapter 3 of Part 2 of the Regulations.
The Company is managed by external parties in respect of
investment management, custodial services and the day-to-day
accounting and company secretarial requirements.
Directors
The Directors in office at the date of this Report and the dates
of their appointment are shown above and in the full Annual Report,
together with their full biographies.
Ivo Coulson and Jonathan Wollett tendered their resignation as
Directors of the Company on 30 November
2018 and 10 January 2019
respectively. Following these resignations, the Nomination
Committee initiated a search for replacement Board members, with
the assistance of an independent external executive search agency,
Cornforth Consultancy. Consequently, the Nomination Committee
recommended, and the Board approved the appointment of Christopher Granville to the Board with effect
from 30 November 2018 and the
appointment of Vivien Gould to the
Board with effect from 11 March
2019.
In accordance with the policy adopted by the Board, all the
Directors will retire and seek re-election at the Company’s
forthcoming AGM. Vivian Gould will
seek election at the AGM.
There were no contracts or arrangements subsisting during or at
the end of the financial year in which any Director is or was
materially interested, including with the AIFM.
The Board considers that, following recent performance
evaluations, all of the current Directors contribute effectively
and have the skills and experience relevant to the future of the
Company. The Board therefore believes that it is in the best
interests of the Shareholders that each Director is
elected/re-elected.
The Board will consider the appropriateness of a policy on the
tenure of the Chairman in view of the requirements of the new
Association of Investment (“AIC”) Code of Corporate Governance.
Indemnity of Directors
Pursuant to the Articles and pursuant to the Companies Act, the
Directors are indemnified against any liability. There are no other
qualifying third-party indemnity provisions in place. In addition,
the Company has procured Directors’ and Officers’ liability
insurance.
Diversity
The Board of Directors of the Company comprises of three females
and two males.
The Company’s diversity policy acknowledges the benefits of
greater diversity, including gender diversity. The Board is
committed to ensuring that the Company’s Directors bring a wide
range of skills, knowledge, experience, backgrounds and
perspectives.
Whilst the Board has adopted a diversity policy, which
recognises the importance and benefits of greater diversity
including that of gender, it does not consider that it would be
appropriate to set diversity targets as all Board appointments are
made on merit, in the context of skills, knowledge and experience
required for the effectiveness of the Board, and against objective
criteria.
Share Capital
As at 30 September 2019, the
Company’s total issued share capital was 15,757,504 ordinary shares
(30 September 2018: 13,135,044), of
which the Company held 3,318,207 ordinary shares in treasury. The
shares held in treasury are treated as not being in issue when
calculating the weighted average of ordinary shares in issue during
the year. All shares repurchased during the year were cancelled.
All of the Company’s ordinary shares in circulation are listed on
the premium listing segment of the London Stock Exchange and each
ordinary share carries one vote.
The rights attached to the Company’s shares are set out in the
Company’s Articles of Association. The Company’s ordinary shares
are freely transferable. However, the Director may refuse to
register a transfer of shares which are not fully paid nor where
the instrument of transfer is not duly stamped or shown to be
exempt from stamp duty. The Directors may also decline to register
a transfer of an uncertificated share in the circumstances set out
in the uncertificated securities rules, and where the number of
joint holders to whom the uncertificated share is to be transferred
exceeds four. There are no restrictions on the voting rights of the
Company’s shares.
Amendments to the Company’s Articles of Association and the
giving of authority to issue or buy back the Company’s shares
requires an appropriate resolution to be passed by
Shareholders.
There are no restrictions on voting for the holders of ordinary
shares, who are entitled to attend and vote at a shareholder
meeting.
Share Issues
At last year’s Annual General Meeting (“AGM”), the Directors
were granted authority to allot ordinary shares up to an aggregate
nominal amount of £65,137.88 (being 5% of the issued ordinary share
capital).
This authority is due to expire at the Company’s AGM on
23 January 2020. The Company has not
issued any shares under this authority. Proposals for the renewal
of this authority are set out in the full Annual Report and
Accounts
Treasury Shares
Shares brought back by the Company may be held in treasury, from
where they could be re-issued at a premium to NAV quickly and cost
effectively. This provides the Company with additional flexibility
in the management of its capital bases. No shares were purchased
for treasury during the year or since the year end. The Company
holds 3,318,207 ordinary shares in treasury.
Purchase of Own Shares
At last year’s AGM, the Directors were authorised to make market
purchase of up to 14.99% of each of the Company’s ordinary shares,
amounting to 1,952,833 shares. Since the AGM held on 10 January 2019 and the year end, the Company
brought back 519,002 ordinary shares with a nominal value of
0.10 pence per share, and at a total
cost of £4,035,098under this authority. As at 30 September 2019, the remaining authority for
the purchase of own shares is 1,433,831 shares. A total of
3,318,207 ordinary shares are held in treasury, representing 21.08%
of the issued share capital at 5 December
2019.
The authority will expire at the next AGM when a resolution for
its renewal will be proposed.
Substantial Shareholdings
Information on major interests in shares provided to the Company
under the Disclosure, Guidance and Transparency Rules are published
via a Regulatory Information Service.
The Company has received notification of the following
disclosable interests in the voting rights of the Company:
|
|
At 30 September
2019 |
Shareholder |
Number of Ordinary
shares notified |
% Interest in share
capital |
City of London Investment Management
Company Limited |
2,926,546 |
23.4% |
Lazard Asset Management LLC, New
York, United States of America |
1,096,747 |
6.7% |
City of Bradford Metropolitan
District Council |
925,158 |
5.6% |
The Company has been informed that, since the year end, City of
London Investment Management Company Limited has increased its
holding in the Company to 25.3% (3,143,213 shares).
Corporate Governance
The statement of Corporate Governance, forms part of this report
by reference. The Directors have prepared a statement on how the
principles and recommendations of the AIC Corporate Governance Code
have been applied. This forms part of this report by reference.
This can be found in full in the Annual Report and Accounts.
Going Concern
The Directors believe that, having considered the Company’s
investment objectives, risk management policies, capital management
policies and procedures, nature of the portfolio and expenditure
projections, the Company has adequate resources and an appropriate
financial structure in place to continue in operational existence
for the foreseeable future. The assets of the Company consist
mainly of securities which are readily realisable. For these
reasons, they consider that there is reasonable evidence to
continue to adopt the going concern basis in preparing the
accounts.
Requirements of the Listing Rules
Listing Rule 9.8.4 requires the Company to disclose specific
information in a single identifiable section of the Annual Report.
The Directors confirm that there are no disclosures to be made
under the Listing Rule 9.8.4.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the
operations of the Company, nor does it have responsibility for any
other emission producing sources under the Companies Act 2006
(Strategic Report and Directors’ Report) Regulations 2013.
Conflict of Interest
The Articles of Association permit the Board to consider and if
it sees fit, to authorise situations where a Director has an
interest that conflicts, or may conflict, with the interests of the
Company. There is a formal process for the Board to consider
authorising such conflicts, whereby the Directors who have no
interest in the matter decide whether to authorise the conflict and
conditions to be attached to such authorisations.
Companies Act 2006 Disclosures
In accordance with Section 992 of the Companies Act 2006 the
Directors disclose the following information:
• the Company’s capital structure is summarised below, voting
rights are summarised in the full Annual Report and Accounts, and
there are no restrictions on voting rights nor any agreement
between holders of securities that result in restrictions on the
transfer of securities or on voting rights;
• there exist no securities carrying special rights with regard
to the control of the Company;
• details of the substantial shareholders in the Company are
listed above;
• the Company does not have an employees’ share scheme;
• the rules concerning the appointment and replacement of
Directors, amendment of the Articles of Association and
powers to issue or buy back the Company’s shares
are contained in the Articles of Association of the Company and the
Act;
• there are no agreements to which the Company is party to that
may affect its control following a takeover bid; and
• there are no agreements between the Company and its Directors
providing for compensation for loss of office that may occur
because of a takeover bid.
The Board recognises the requirement under Section 417(5) of the
Act to detail information about environmental matters (including
the impact of the Company’s business on the environment), any
Company employees and social and community issues; including
information about any policies it has in relation to these matters
and effectiveness of these policies. As the Company has no
employees or policies in these matters this requirement does not
apply. Notwithstanding, the AIFM takes into account these
considerations when making investment decisions and determines its
voting instructions at investee company meetings accordingly. Full
details are set out in the full Annual Report and Accounts.
Financial risk management
The principal financial risks and the Company’s policies for
managing these risks are set out in note 18 to the Financial
Statements.
Auditor
Whilst the majority of Shareholders voted for the re-appointment
of KPMG LLP as the auditors at the Company’s Annual General Meeting
held on 10 January 2019 there were
some votes against. In the light of Shareholder votes against, and
given that KPMG LLP had been auditors to the Company since its
inception in 2002, the Board tasked the Audit Committee to
undertake an audit tender to replace them a year earlier than had
been the original intention.
Following a competitive audit process, the Board appointed BDO
LLP, to fill the casual vacancy in place of KPMG LLP with effect
from 14 June 2019. A resolution to
appoint BDO LLP as auditor will be proposed at the forthcoming
AGM.
The Board takes this opportunity to express its appreciation to
KPMG LLP for their long service to the Company.
Further information on the audit tender can be found in the
Audit Committee report in the full Annual Report and Accounts.
Audit Information
The Directors who held office at the date of approval of this
report confirm that, so far as they are aware, there is no relevant
information which the Company’s auditor is unaware. Each Director
has taken all reasonable steps that she or he ought to have taken
as a Directors to make himself or herself aware of any relevant
audit information and to establish that the Company’ auditor is
aware of that information.
Annual General Meeting
The AGM will be held on Thursday, 23
January 2020 at 2.30pm at the
offices of the Investment Manager (20 Old Bailey, London EC4M 7BF). The formal notice of the AGM
is set out in the full Annual Report and Accounts. Separate
resolutions are proposed for each substantive issue.
A full explanation of the resolutions being proposed at the AGM
may be found in the full Annual Report and Accounts.
The Board considers that all the resolutions to be put to the
meeting are in the best interests of the Company and its
shareholders as a whole. The Board unanimously recommends that you
vote in favour of them, as those Directors (Frances Daley and Calum
Thomson) who hold shares in the Company, intend to do
so.
Post Balance Sheet Events
There are no post balance sheet events to report.
Link Company Matters Limited
Secretary
5 December 2019
Statement of Directors’
Responsibilities in Respect of the Annual Report and the Financial
Statements
The Directors are responsible for preparing the Annual 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 UK
Accounting Standards and applicable law, including FRS 102 “The
Financial Reporting Standard applicable in the UK and Republic of
Ireland”.
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 Company and of the profit or
loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgments and estimates that are reasonable and
prudent;
• state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
• assess the Company’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 Company or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. 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 Company and
to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance Statement
that comply with that law and those regulations.
The financial statements are published on the Company’s website:
www.beeplc.com, which is maintained by the Investment Manager. The
maintenance and integrity of the website maintained by the
Investment Manager is, so far as it relates to the Company, the
responsibility of the Investment Manager. Legislation in the UK
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Responsibility Statement of the
Directors In Respect of the Annual Report
Each of the Directors, whose names are listed above, confirm to
the best of each person’s knowledge:
• 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 Company; and
• the Strategic Report includes a fair review of the development
and performance of the business and the position of the issuer,
together with a description of the principal risks and
uncertainties that they face.
We consider the Annual Report and Audited Financial Statements,
taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
For and on behalf of the Board
Frances
Daley
Chairman
5 December 2019
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the
Company’s statutory accounts for the year ended 30 September 2019 but is derived from those
accounts. Statutory accounts for the year ended 30 September 2019 will be delivered to the
Registrar of Companies in due course. The Auditors have reported on
those accounts; their report was (i) unqualified, (ii) did not
include a reference to any matters to which the Auditors drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under Section 498 (2) or (3) of
the Companies Act 2006. The text of the Auditors’ report can be
found in the Company’s full Annual Report and Accounts on the
Company’s website at www.beeplc.com.
Income Statement
(incorporating the Revenue Account*) for the year ended
30 September 2019
|
|
Year ended 30 September 2019 |
Year ended 30 September 2018 |
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Notes |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Gains on investments
held at fair value through profit or loss |
9 |
- |
14,126 |
14,126 |
- |
(6,081) |
(6,081) |
Foreign exchange
losses |
|
- |
(371) |
(371) |
- |
(31) |
(31) |
Income |
2 |
6,315 |
- |
6,315 |
5,036 |
- |
5,036 |
Investment management
fee |
3 |
(173) |
(693) |
(866) |
(185) |
(750) |
(935) |
Other expenses |
4 |
(765) |
- |
(765) |
(836) |
- |
(836) |
Return on ordinary
activities |
|
5,377 |
13,062 |
18,439 |
4,015 |
(6,862) |
(2,847) |
Finance costs |
5 |
(77) |
(308) |
(385) |
(62) |
(247) |
(309) |
Return on ordinary
activities before taxation |
|
5,300 |
12,754 |
18,054 |
3,953 |
(7,109) |
(3,156) |
Taxation |
6 |
(818) |
- |
(818) |
(565) |
- |
(565) |
Return for the
year |
|
4,482 |
12,754 |
17,236 |
3,388 |
(7,109) |
(3,721) |
Return per ordinary
share |
8 |
35.09p |
99.87p |
134.96p |
24.77p |
(51.98)p |
(27.21)p |
*The total column of this statement is the profit and loss
account of the Company.
All revenue and capital items in the above statement derive from
continuing operations.
The supplementary revenue and capital columns are both prepared
under the guidance published by the Association of Investment
Companies.
There is no other comprehensive income and therefore the return
for the year is also the total comprehensive income for the
year.
The annexed notes form part of these accounts.
Statement of Financial Position
as at 30 September 2019
|
|
2019 |
2018 |
|
Notes |
£’000 |
£’000 |
Fixed
assets |
|
|
|
Investments at fair
value through profit or loss |
9 |
122,091 |
114,825 |
Current
assets |
|
|
|
Debtors |
10 |
217 |
1,460 |
Cash and cash
equivalents |
|
3,532 |
1,706 |
|
|
3,749 |
3,166 |
|
|
|
|
Current
liabilities |
|
|
|
Creditors:
amounts falling due within one year |
11 |
(10,054) |
(9,658) |
Net current
liabilities |
|
(6,305) |
(6,492) |
Net assets |
|
115,786 |
108,333 |
|
|
|
|
Capital and
reserves |
|
|
|
Called-up share
capital |
12 |
1,576 |
1,646 |
Share premium
account |
|
1,411 |
1,411 |
Redemption
reserve |
|
3,212 |
3,142 |
Capital reserve |
|
105,158 |
97,697 |
Revenue reserve |
|
4,429 |
4,437 |
|
|
|
|
Total Shareholders’
funds |
|
115,786 |
108,333 |
|
|
|
|
Net asset value per
share |
13 |
930.81p |
824.76p |
The financial statements above were approved by the Board on
5 December 2019 and signed on its
behalf by:
Frances
Daley
Chairman
Company registration number 04560726
The annexed notes below form part of these accounts.
Statement of Changes in Equity
for the year ended 30 September
2019
|
Called-up |
Share |
|
|
|
|
|
share |
premium |
Redemption |
Capital |
Revenue |
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
For the year ended 30 September
2019 |
|
|
|
|
|
|
Beginning of year |
1,646 |
1,411 |
3,142 |
97,697 |
4,437 |
108,333 |
Return for the year |
- |
- |
- |
12,754 |
4,482 |
17,236 |
Buyback of own shares for
cancellation |
- |
- |
- |
(5,293) |
- |
(5,293) |
Transfer to capital redemption
reserve |
(70) |
- |
70 |
- |
- |
- |
Dividends paid |
- |
- |
- |
- |
(4,490) |
(4,490) |
Balance at 30 September
2019 |
1,576 |
1,411 |
3,212 |
105,158 |
4,429 |
115,786 |
|
Called-up |
Share |
|
|
|
|
|
share |
premium |
Redemption |
Capital |
Revenue |
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
For the year ended 30 September
2018 |
|
|
|
|
|
|
Beginning of year |
1,735 |
1,411 |
3,053 |
111,384 |
5,590 |
123,173 |
Return for the year |
– |
– |
– |
(7,109) |
3,388 |
(3,721) |
Buyback of own shares for
cancellation |
– |
– |
– |
(6,578) |
– |
(6,578) |
Transfer to capital redemption
reserve |
(89) |
– |
89 |
– |
– |
– |
Dividends paid |
– |
– |
– |
– |
(4,541) |
(4,541) |
Balance at 30 September
2018 |
1,646 |
1,411 |
3,142 |
97,697 |
4,437 |
108,333 |
Distributable reserves comprise the revenue reserve and capital
reserve attributable to realised profits.
The split between realised and unrealised capital reserves is
provided in note 14.
All investments are held at fair value through profit or loss.
When the Company revalues the investments still held during the
period, any gains or losses arising are credited/charged to the
capital reserve.
The annexed notes below form part of these accounts.
Notes to the Accounts
for the year ended 30 September
2019
1. Accounting policies
A summary of the principal policies, all of which have been
applied consistently throughout the year, is set out below:
(a) Basis of accounting
The financial statements have been prepared in accordance with
the applicable UK Accounting Standards, being FRS 102 – The
Financial Reporting Standard – and with the Statement of
Recommended Practice “Financial Statements of Investment Trust
Companies and Venture Capital Trusts” (issued in November 2014 and updated in February 2018).
As an investment fund the Company has the option, which it has
taken, not to present a cash flow statement. A cash flow statement
is not required when an investment fund meets all the following
conditions: substantially all investments are highly liquid and are
carried at market value, and where a statement of changes in assets
as defined in section 7, FRS 102 is presented.
The Financial Statements have also been prepared on the
assumption that approval as an investment trust will continue to be
granted. The Directors consider that the Company has adequate
resources to enable it to continue in operational existence for the
foreseeable future. Accordingly, the Directors believe that it is
appropriate to adopt the going concern basis in preparing the
Company’s financial statements.
(b) Valuation of investments
Upon initial recognition the investments are designated by the
Company as “at fair value through profit or loss”. They are
included initially at fair value which is taken to be their cost.
Subsequently the investments are valued at fair value which is bid
market price for listed investments. Unquoted investments are
included at a valuation determined by the Directors after
discussion with the AIFM on the basis of the latest accounting and
other relevant information.
Changes in the fair value of investments held at fair value
through profit or loss and gains or losses on disposal are included
in the capital column of the income statement within
“Gains/(losses) from investments held at fair value through profit
or loss”. All purchases and sales are accounted for on a trade date
basis.
Year-end exchange rates are used to translate the value of
investments which are denominated in foreign currencies.
(c) Foreign currency
The Company is required to identify its functional currency,
being the currency of the primary economic environment in which the
Company operates. The Board, having regard to the currency of the
Company’s share capital and the predominant currency in which its
shareholders operate, has determined that sterling is the
functional currency. Sterling is also the currency in which the
financial statements are presented.
Transactions denominated in foreign currencies are recorded in
the functional currency at actual exchange rates as at the date of
the transaction. Monetary assets, liabilities and equity
investments held at fair value and denominated in foreign
currencies at the year end are reported at the rates of exchange
prevailing at the year end. Any gain or loss arising from a change
in exchange rates subsequent to the date of the transaction is
included as an exchange gain or loss in either the capital or
revenue column of the Income Statement depending on whether the
gain or loss is of a capital or revenue nature respectively.
(d) Segmental reporting
The Directors are of the opinion that the Company is engaged in
a single segment of business, being the investment business.
(e) cash equivalents
Cash and cash equivalents comprise cash on hand and short term
deposits in banks
(f) Income
Dividends receivable from equity shares are taken to revenue
return on an ex-dividend basis except where, in the opinion of the
Directors, the dividend is capital in nature in which case it is
taken to the capital return. Foreign dividends are gross of
withholding tax. Bank deposit interest is taken to revenue reserve
on an accruals basis.
(g) Expenses
All expenses are accounted for on an accruals basis and are
charged as follows:
• the basic investment management fee is charged 20% (2018: 20%)
to revenue and 80% (2018: 80%) to capital;
• any investment performance bonus payable to AIFM is charged
wholly to capital;
• dealing costs are charged wholly to capital; and
• other expenses are charged wholly to revenue.
(h) Interest payable
Interest payable is accounted for on an accruals basis, and is
charged 20% (2018: 20%) to revenue and 80% (2018: 80%) to capital.
See notes 5 and 11.
(i) Capital reserve
Gains or losses on disposal of investments and changes in fair
values of investments are transferred to the capital reserve. Any
investment performance fee payable to the AIFM is accounted for in
the capital reserve.
(j) Revenue reserve
The net profit/(loss) arising in the revenue column of the
Income Statement is added to or deducted from this reserve. This is
available for paying dividends on the Income shares.
(k) Taxation
The charge for taxation is based upon the net revenue for the
year. The tax charge is allocated to the revenue and capital
accounts according to the marginal basis whereby revenue expenses
are first matched against taxable income arising in the revenue
account; the effect of this for the year ended 30 September 2019 was that all the deductions for
tax purposes went to the revenue account.
Deferred taxation will be recognised as an asset or a liability
if transactions have occurred at the balance sheet date that give
rise to an obligation to pay more taxation in the future, or a
right to pay less taxation in the future. An asset will not be
recognised to the extent that the transfer of economic benefit is
uncertain.
(i) Dividends
Dividends are not recognised in the accounts unless there is an
obligation to pay or have been paid. Dividends are included in the
Statement of Changes in Equity.
(m) Bank Borrowings
Interest-bearing bank loans and overdrafts are recorded at the
proceeds received, net of direct issue costs. Finance charges,
including premiums payable on settlement or redemption and direct
issue costs, are accounted for through the income statement on an
accrual basis and are added to the carrying amount of the
instrument to the extent that they are not settled in the period in
which they arise.
2. Income
|
2019 |
2018 |
|
£’000 |
£’000 |
Income from
investments |
- |
- |
Overseas dividends –
Quoted |
6,302 |
5,028 |
Other
income: |
|
|
Bank interest |
13 |
8 |
Total income |
6,315 |
5,036 |
All income stated above is revenue in nature
3. Investment management fee
Baring Fund Managers Limited have been appointed the AIFM of the
Company under an agreement terminable by either party giving not
less than six months’ written notice. Under this agreement the AIFM
receives a basic fee (charged 20% to revenue (2018: 20%) and 80% to
capital (2018: 80%)) which is calculated monthly and payable at an
annual rate of 0.8% of the NAV of the Company.
The investment management fee comprises:
|
2019 |
2018 |
|
£’000 |
£’000 |
Basic fee (20% (2018:
20%) charged to revenue) |
173 |
185 |
Basic fee (80% (2018:
80%) charged to capital) |
693 |
750 |
|
866 |
935 |
At 30 September 2019, £76,000
(30 September 2018: £75,000) of this
fee remained outstanding.
4. Other expenses
|
2019 |
2018 |
|
£’000 |
£’000 |
Custody and
administration expenses* |
608 |
660 |
Auditor’s remuneration
for: |
|
|
– audit |
25 |
32 |
Directors’
remuneration |
132 |
144 |
|
765 |
836 |
* Included within administration expenses is £11,600 (2018:
£13,600) of employee’s National Insurance paid on Directors’
remuneration.
5. Finance costs
|
2019 |
2018 |
|
£’000 |
£’000 |
On short-term loan and
gearing facility with State Street Bank & Trust Company: |
|
|
Bank loan interest
(20% (2018: 20%) charged to revenue) |
77 |
62 |
Bank loan interest
(80% (2018: 80%) charged to capital) |
308 |
247 |
|
385 |
309 |
6. Taxation
(a) Current tax charge for the
year:
|
2019 |
2018 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Overseas taxation
(note 6(b)) |
818 |
- |
818 |
565 |
– |
565 |
(b) Factors affecting the current tax
charge for the year
The taxation rate assessed for the year is different from the
standard rate of corporation taxation in the UK. The differences
are explained below:
|
2019 |
2018 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Return on ordinary
activities before taxation |
5,300 |
12,754 |
18,054 |
3,953 |
(7,109) |
(3,156) |
|
|
|
|
|
|
|
Return on ordinary
activities multiplied by the standard rate of corporation tax of
19% (2018: 19%) |
1,007 |
2,423 |
3,430 |
751 |
(1,351) |
(600) |
Effects of: |
|
|
|
|
|
|
Non taxable overseas
dividends |
(1,197) |
– |
(1,197) |
(955) |
– |
(955) |
Overseas withholding
tax |
814 |
– |
814 |
565 |
– |
565 |
Prior year
adjustments |
4 |
– |
4 |
- |
- |
? |
Capital gains not
subject to tax |
– |
(2,613) |
(2,613) |
– |
1,161 |
1,161 |
Non-trade loan
relationship debts not utilised |
12 |
59 |
71 |
10 |
47 |
57 |
Management expenses
not utilised |
178 |
131 |
309 |
194 |
143 |
337 |
Current tax charge for
the year |
818 |
– |
818 |
565 |
– |
565 |
The Company is not liable to tax on capital gains due to its
status as an investment trust.
The Company has an unrecognised deferred tax asset of £2,605,000
(2018: £2,266,000) based on the long term prospective corporation
tax rate of 17.0% (2018: 17.0%). This asset has accumulated because
deductible expenses have exceeded taxable income in past years. No
asset has been recognised in the accounts because, all profits are
non taxable in the UK due to the entity being an investment trust.
It is not likely that this asset will be utilised in the
foreseeable future.
7. Dividend
|
2019 |
2018 |
|
£’000 |
£’000 |
Final dividend (19p)
paid for the year ended 30 Sep 2017 |
- |
2,620 |
Interim dividend (14p)
paid for the year ended 30 Sep 2018 |
- |
1,921 |
Final dividend (20p)
paid for the year ended 30 Sep 2018 |
2,591 |
|
Interim dividend (14p)
paid for the year ended 30 Sep 2019 |
1,899 |
|
|
4,490 |
4,541 |
The proposed final dividend of 20p for 2019 will be paid,
subject to Shareholder approval at the AGM, on 14 February 2020 to Shareholders on
the register when the shares are marked ex-dividend on 9
January 2020.
8. Return per ordinary share
|
|
|
Total |
|
|
Total |
|
Revenue |
Capital |
2019 |
Revenue |
Capital |
2018 |
Return per ordinary
share |
35.09p |
99.87p |
134.96p |
24.77p |
(51.98)p |
(27.21)p |
Revenue return (earnings) per ordinary share is based on the net
revenue on ordinary activities after taxation of £4,482,000 (2018:
£3,388,000).
Capital return per ordinary share is based on net capital gain
for the financial year of £12,754,000 (2018: net capital loss of
£(7,109,000)).
These calculations are based on the weighted average of
12,770,923 (2018: 13,677,229) ordinary shares in issue during the
year.
At 30 September 2019 there were
12,439,297 ordinary shares of 10
pence each in issue (2018: 13,135,044) which excludes
3,318,207 ordinary shares held in treasury (2018: 3,318,207 shares
held in treasury). The shares held in treasury are treated as not
being in issue when calculating the weighted average of ordinary
shares in issue during the year.
9. (i) Fixed asset investments
|
Quoted Overseas Total |
Quoted
Overseas Total |
|
2019 |
2018 |
Primary country of
investment |
£’000 |
£’000 |
Hungary |
2,637 |
3,596 |
Czechia Republic |
1,631 |
1,227 |
Poland |
20,100 |
20,491 |
Russia |
74,505 |
69,948 |
Turkey |
14,207 |
11,296 |
Greece |
3,883 |
1,993 |
Romania |
3,127 |
3,375 |
Other |
2,001 |
2,899 |
Total |
122,091 |
114,825 |
9. (ii) Movements in the year
Book cost at beginning
of year |
103,995 |
109,045 |
Gains on investments
held at beginning of year |
10,830 |
22,175 |
Valuation at beginning
of year |
114,825 |
131,220 |
Movements in
year: |
|
|
Purchases at cost |
54,954 |
47,136 |
Sales proceeds |
(61,814) |
(57,450) |
Gains on investments
sold in year |
6,952 |
5,264 |
Gains/(losses) on
investments held at year end |
7,174 |
(11,345) |
Valuation at end of
year |
122,091 |
114,825 |
Book cost at the end
of the year |
104,087 |
103,995 |
Gains on investments
held at the end of year |
18,004 |
10,830 |
Valuation at end of
year |
122,091 |
114,825 |
Transaction costs on purchases for the year ended 30 September 2019 amounted to £44,000 (2018:
£44,000) and on sales for the year they amounted to £48,000 (2018:
£50,000).
A list of the Company’s investments by market value is shown
above, and a geographical classification and industrial
classification of the investment portfolio are shown above.
10. Debtors
|
2019 |
2018 |
|
£’000 |
£’000 |
Amounts due within one
year |
|
|
Amounts due from
brokers |
- |
1,065 |
Prepayments and
accrued income |
187 |
377 |
Other debtors |
30 |
18 |
|
217 |
1,460 |
11. Creditors
|
2019 |
2018 |
|
£’000 |
£’000 |
Amounts falling due
within one year |
|
|
Bank loans |
9,738 |
9,202 |
Amounts outstanding to
brokers due to the buyback of own shares |
- |
113 |
Other creditors |
316 |
343 |
|
10,054 |
9,658 |
The Company has a US$12 million
loan facility with State Street Bank and Trust Company. The amount
outstanding in relation to this facility at 30 September 2019 was US$12 million (at 30
September 2018: US$12 million)
which is repayable on 8 April 2020,
interest is charged at the rate of LIBOR plus 3.527%.
12. Called-up share capital
|
2019 |
2018 |
|
£’000 |
£’000 |
Allotted, issued
and fully paid up |
|
|
15,757,504 (2018:
16,453,251) ordinary shares of 10 pence (fully paid) |
1,576 |
1,646 |
During the year 695,747 ordinary shares were repurchased for
cancellation for £5,293,000 (2018: 893,935 ordinary shares were
repurchased for cancellation for £6,578,000). During the year no
ordinary shares were repurchased to be held in treasury and no
ordinary shares which were held in treasury were cancelled. The
Company holds 3,318,207 ordinary shares in treasury which are
treated as not being in issue when calculating the number of
ordinary shares in issue during the year (2018: 3,318,207 ordinary
shares were held in treasury). Shares held in treasury are
non-voting and not eligible for receipt of dividends. Subsequent to
the year end a further 17,753 shares have been repurchased for
cancellation.
13. Net asset value per share
Total Shareholders’ funds and the NAV per share attributable to
the ordinary shareholders at the year end calculated in accordance
with the Articles of Association were as follows:
|
2019 |
2018 |
Total shareholders’
funds (£’000) |
115,786 |
108,333 |
Net asset value (pence
per share) |
930.81p |
824.76p |
The NAV per share is based on total Shareholders’ funds above,
and on 12,439,297 ordinary shares in issue at the year end (2018:
13,135,044 ordinary shares in issue) which excludes 3,318,207
ordinary shares held in treasury (2018: 3,318,207 ordinary shares
held in treasury). The ordinary shares held in treasury are treated
as not being in issue when calculating the NAV per share.
14. Capital reserve
|
Capital reserve |
|
|
Realised* |
Unrealised |
|
|
gains/(losses) |
Investment holdings |
|
|
on
sale of investments |
gains/(losses) |
Total |
|
£’000 |
£’000 |
£’000 |
At 1 October 2018 |
88,422 |
9,275 |
97,697 |
Net gains on disposal
of investments |
6,952 |
- |
6,952 |
Repurchase of share
costs |
(5,293) |
- |
(5,293) |
Net movement in
unrealised appreciation of investments |
- |
7,174 |
7,174 |
Losses on foreign
exchange |
173 |
(544) |
(371) |
Management fees
charged to capital |
(693) |
- |
(693) |
Finance charges
charged to capital |
(308) |
- |
(308) |
At 30 September
2019 |
89,253 |
15,905 |
105,158 |
|
Capital reserve |
|
|
Realised* |
Unrealised |
|
|
gains/(losses) |
Investment holdings |
|
|
on sale
of investments |
gains/(losses) |
Total |
|
£’000 |
£’000 |
£’000 |
At 1 October 2017 |
90,512 |
20,872 |
111,384 |
Net gains on disposal
of investments |
5,264 |
- |
5,264 |
Repurchase of share
costs |
(6,578) |
- |
(6,578) |
Net movement in
unrealised appreciation of investments |
- |
(11,345) |
(11,345) |
Losses on foreign
exchange |
221 |
(252) |
(31) |
Management fees
charged to capital |
(750) |
- |
(750) |
Finance charges
charged to capital |
(247) |
- |
(247) |
At 30 September
2018 |
88,422 |
9,275 |
97,697 |
* Considered distributable.
15. Financial commitments
At 30 September 2019, there were
no outstanding capital commitments (2018: £nil).
16. Custodian’s lien
Under the terms of the Custody Agreement with State Street Bank
& Trust Company (“State Street”), the Company has granted a
lien over its securities and other assets that are deposited with
State Street to cover all sums due in connection with the loan
facility and the Custody Agreement.
17. Related party disclosures and
transactions with the Alternative Investment Fund Manager
The Company is required to provide additional information
concerning its relationship with the AIFM. Details of the
investment management fee charged by Baring Fund Managers Limited
(“AIFM”) are set out in note 3. The ultimate holding company of the
AIFM is Massachusetts Mutual Life Insurance Company, 1295 State
Street, Springfield, MA
01111-0001. Fees paid to the Directors and full details of
Directors’ interests are disclosed in the Directors’ Remuneration
Report in the full Annual Report and Accounts .
18. Risk management policies and
procedures
As an investment trust the Company invests in equities and other
investments for the long-term so as to secure its investment
objective stated above. In pursuing its investment objective, the
Company is exposed to a variety of risks that could result in
either a reduction in the Company’s net assets or a reduction of
the profits available for dividends.
These risks, include market risk (comprising currency risk,
interest rate risk, and other price risk), liquidity risk, and
credit risk, and the Directors’ approach to the management of them
are set out below.
The objectives, policies and processes for managing the risks,
and the methods used to measure the risks, that are set out below,
have not changed from the previous accounting period.
(a) Market risk
Special considerations and risk factors associated with the
Company’s investments are discussed above. The fair value or future
cash flows of a financial instrument held by the Company may
fluctuate because of changes in market prices. This market risk
comprises three elements – currency risk (see (b) below), interest
rate risk (see (c) below) and other price risk (see (d) below). The
Board of Directors reviews and agrees policies for managing these
risks, which have remained substantially unchanged from those
applying in the year ended 30 September
2018. The Company’s AIFM assesses the exposure to market
risk when making each investment decision, and monitors the overall
level of market risk on the whole of the investment portfolio on an
ongoing basis.
(b) Currency risk
Most of the Company’s assets, liabilities, and income, are
denominated in currencies other than sterling (the Company’s
functional currency, and in which it reports its results). As a
result, movements in the rate of exchange between sterling and the
currencies of the countries in which the Company invests, which are
identified in the table shown in note 9, may affect the sterling
value of those items. In addition the Company’s uninvested cash
balances are usually held in US Dollars.
Management of the risk
The AIFM monitors the Company’s exposure and reports to the
Board on a regular basis.
Income denominated in foreign currencies is converted to
sterling on receipt. The Company does not use financial instruments
to mitigate the currency exposure in the period between the time
that income is included in the Financial Statements and its
receipt.
Foreign currency exposures
At 30 September 2019 monetary
assets included cash balances totalling £3,532,000 (2018:
£1,706,000) that were held predominantly in US Dollars.
At 30 September 2019 monetary
liabilities included a bank loan totalling £9,738,000 (2018:
£9,202,000) that was due in US Dollars. If sterling had
weakened/strengthened by an average of 10%, this would have had an
effect of +/- £973,800.
At 30 September 2019 and at
30 September 2018 all of the equity
investments were priced in a foreign currency.
Foreign currency sensitivity
The following table illustrates the sensitivity of the revenue
return for the year in regard to the Company’s monetary financial
assets to changes in the exchange rates for the various currencies
to which the Company is exposed.
If sterling had weakened by an average of 10%, this would have
had the following effect:
|
2019 |
2018 |
|
£’000 |
£’000 |
Income statement –
profit after taxation: |
|
|
Revenue return –
increase |
449 |
336 |
Capital return –
increase |
12,209 |
11,483 |
Total |
12,658 |
11,819 |
If sterling had strengthened by an average of 10%, this would
have had the following effect:
|
2019 |
2018 |
|
£’000 |
£’000 |
Income statement –
profit after taxation: |
|
|
Revenue return –
decrease |
(449) |
(336) |
Capital return –
decrease |
(12,209) |
(11,483) |
Total |
(12,658) |
(11,819) |
Impact on capital return is disclosed in note 18 (d).
(c) Interest rate risk
Interest rate movements may affect the level of income
receivable on cash deposits.
Cash at bank at 30 September 2019
(and 30 September 2018) was held at
floating interesting rates, linked to current short-term market
rates.
Interest rate movements may affect the interest payable on the
Company’s variable rate borrowings.
Management of the risk
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when borrowing under the bank loan facility.
Interest rate exposure
The exposure at 30 September 2019
of financial assets and financial liabilities to floating interest
rates is shown below:
|
2019 |
2018 |
|
Total |
Total |
|
(within one year) |
(within
one year) |
|
£’000 |
£’000 |
Exposure to
floating interest rates: |
|
|
Cash at bank |
3,532 |
1,706 |
Creditors: |
|
|
Borrowings under bank
loan facility |
(9,738) |
(9,202) |
|
(6,206) |
(7,496) |
Interest rate sensitivity
The Company is primarily exposed to interest rate risk through
its bank loan facility.
Due to the insignificant impact of fluctuations in interest
rates no sensitivity analysis is shown.
(d) Other price risk
Other price risk (i.e. changes in market prices other than those
arising from interest rate risk or currency risk) may affect the
value of the quoted and unquoted equity investments.
Management of the risk
The Board of Directors believe that as the Company’s investment
objective is to provide exposure to Emerging European Securities
its neutral position in respect of this risk is full exposure to
the market as represented by its Benchmark Index. The AIFM has been
given discretion around the Benchmark Index to enable it to add
value. The amount by which the portfolio diverges from the
Benchmark Index is closely monitored by the Board with the goal of
ensuring that the risk taken is proportionate to the value
added.
Concentration of exposure to other
price risk
An analysis of the Company weighting versus Benchmark Index and
a sector breakdown and geographical allocation of the portfolio is
contained in the Investment Manager’s Report above.
Other price risk sensitivity
The following table illustrates the sensitivity of the profit
after taxation for the year and the equity to an increase or
decrease of 10% in the fair values of the Company’s equities. This
level of change is considered to be reasonably possible based on
observation of current market conditions. The sensitivity analysis
is based on the Company’s equities at each balance sheet date, with
all other variables held constant.
|
Increase in |
Decrease in |
Increase
in |
Decrease
in |
|
fair
value |
fair
value |
fair
value |
fair
value |
|
2019 |
2019 |
2018 |
2018 |
|
£’000 |
£’000 |
£’000 |
£’000 |
Income statement -
profit after taxation: |
|
|
|
|
Capital return -
increase/(decrease) |
12,209 |
(12,209) |
11,483 |
(11,483) |
Total profit after
taxation other than arising from interest rate or currency risk -
increase/(decrease) |
12,209 |
(12,209) |
11,483 |
(11,483) |
Equity |
12,209 |
(12,209) |
11,483 |
(11,483) |
(e) Liquidity risk
This is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not significant as the majority of the
Company’s assets are investments in quoted equities that are
readily realisable.
The Company has a bank loan facility of US$12 million which was fully drawn down and the
value was £9,738,000 (2018: £9,202,000) was drawn down at
30 September 2019.
Liquidity risk exposure
The contractual maturities of the financial liabilities at
30 September 2019, based on the
earliest date on which payment can be required were as follows:
|
2019 |
2018 |
|
Total |
Total |
|
(within one year) |
(within
one year) |
|
£’000 |
£’000 |
Bank loan |
9,738 |
9,202 |
Other creditors and
accruals |
316 |
456 |
|
10,054 |
9,658 |
The Board gives guidance to the AIFM as to the maximum amount of
the Company’s resources that should be invested in any one
holding.
(f) Credit risk
The failure of the counterparty to a transaction to discharge
its obligations under that transaction could result in the Company
suffering a loss.
Management of the risk
This risk is not significant, and is managed as follows:
• the majority of transactions take place through clearing
houses on a delivery versus payment basis;
• investment transactions are carried out with an approved list
of brokers, whose credit-standing is reviewed periodically by the
AIFM, and limits are set on the amount that may be due from any one
broker; and
• cash at bank is held only with reputable banks with high
quality external credit ratings.
None of the Company’s financial assets are secured by collateral
or other credit enhancements.
(g) Fair values of financial assets
and liabilities
Financial assets and liabilities are either carried in the
balance sheet at their fair value (investments), or the balance
sheet amount if it is a reasonable approximation of fair value
(amounts due from brokers, dividends receivable, accrued income,
amounts due to brokers, accruals and cash balances).
The table below sets out fair value measurements using the fair
value hierarchy.
|
|
Total |
|
Level
1 |
2019 |
Financial assets at
fair value through profit or loss at 30 September 2019: |
£’000 |
£’000 |
Equity
investments |
122,091 |
122,091 |
Total |
122,091 |
122,091 |
|
|
|
|
|
|
|
|
Total |
|
Level
1 |
2019 |
Financial assets at
fair value through profit or loss at 30 September 2018: |
£’000 |
£’000 |
Equity
investments |
114,825 |
114,825 |
Total |
114,825 |
114,825 |
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant asset as follows:
Level 1 - valued using quoted prices in active markets
for identical assets.
Level 2 - valued by reference to valuation techniques
using observable inputs other than quoted prices included within
Level 1 (there are no Level 2 investments at 30 September 2019).
Level 3 - valued by reference to valuation techniques
using inputs that are not based on observable market data (there
are no Level 3 investments at 30 September
2019).
The valuation techniques used by the Company are explained in
the accounting policies note above.
19. Subsequent events
There are no significant events after the year end of reporting
period requiring disclosure.
AIFMD disclosures (unaudited)
The Alternative Investment Fund
Manager
Baring Fund Managers Limited (the “AIFM”), authorised by the
Financial Conduct Authority as an Alternative Investment Fund
Manager, under the Alternative Investment Fund Managers Directive
(“AIFMD”), is the appointed AIFM to the Company.
AIFMD Disclosures
Pre-investment Disclosures
The AIFM and the Company are required to make certain
disclosures available to investors in accordance with the AIFD.
Those disclosures that are required to be made pre-investment can
be found on the Company’s website www.barings.com under the
prospectus and literature heading, the document is titled
“Pre-investment disclosures”, dated September 2016. There have been no material
changes to the disclosures contained within the document since
publication in July 2015.
Leverage Disclosure
For the purposes of this disclosure, leverage is any method by
which the Company’s exposure is increased, whether through
borrowing cash or securities, or leverage embedded in contracts for
difference or by any other means. The AIFMD requires that each
leverage ratio be expressed as the ratio between a Company’s
exposure and its NAV, and prescribes two required methodologies,
the Gross Methodology and the Commitment Methodology (as set out in
AIFMD Level 2 Implementation Guidance), for calculating such
exposure.
Using the methodologies prescribed under the AIFMD, the leverage
ratios of the Company calculated on a Gross Basis was 106% and on a
Commitment Basis was 109% as at 30 September
2019.
Remuneration Policy
The Investment Manager’s Remuneration Policy ensures that the
remuneration arrangements as defined in “ESMA’s Guidelines on Sound
Remuneration Policy under AIFMD, ESMA 2013/201” (the ‘ESMA
Guidelines’), (as amended) are:
(i) consistent with and promote sound and effective risk
management and do not encourage risk-taking which is inconsistent
with the risk profile, rules or instruments of incorporation of the
Investment Manager or the Fund; and
(ii) consistent with the Investment Manager’s business strategy,
objectives, values and interests and includes measures to avoid
conflicts of interest.
The Investment Manager is also subject to the FCA’s AIFMD
Remuneration Code (SYSC 19B). and
complies with the AIFMD remuneration principles in a way and to the
extent that is appropriate to its size and business.
Remuneration Committee
Due to the size and nature of the Investment Manager, the Board
of Directors considers it appropriate to dis-apply the requirement
to appoint a remuneration committee.
The Investment Manager forms part of the Barings Europe Limited
(UK) group of companies (“Barings”). Barings has two remuneration
committees to take remuneration decisions, namely the Remunerations
Committee and the Senior Compensation Committee. The remuneration
committees ensure the fair and proportionate application of the
remuneration rules and ensures that potential conflicts arising
from remuneration are managed and mitigated appropriately.
Remuneration Code Staff
The Investment Manager has determined its Remuneration Code
Staff as the following:
1. Senior Management
Senior Management comprises the Board of Directors and all
members of the European Management Team (“EMT”).
All control functions detailed in section 2 below are also
senior managers.
2. Control Functions
The Investment Manager’s control functions include the Heads of
Risk, Compliance, Legal, Operations, Internal Audit, HR and Finance
along with other heads of department in the Executive Committee and
the Money Laundering Reporting Officer.
3. Risk Takers
Risk Takers are defined as the investment managers of the Fund.
Investment managers do not work for the Investment Manager directly
as the Investment Manager delegates portfolio management to Barings
Asset Management Limited (“BAML”). Accordingly, the Investment
Manager currently has no risk takers outside of senior
management.
BAML is as a BIPRU firm and subject to the Capital Requirements
Directive (“CRD”) which has equivalent remuneration rules.
4. Employees in the same remuneration
bracket as risk takers
The Investment Manager will not treat a person as Remuneration
Code Staff if a person’s professional activities do not have a
material impact on the risk profiles of the firm or the Funds.
Accordingly, the Investment Manager currently has no staff in this
category.
5. Staff responsible for heading the
investment management, administration, marketing and human
resources
To the extent that the Investment Manager’s staff fall within
this category, they are also control function staff falling within
(2) above.
Remuneration Disclosure
The disclosure below details fixed and variable remuneration
paid to BFM staff and BFM Remuneration Code Staff.
|
|
Total Fixed |
Total Variable |
|
|
Number of |
Remuneration for |
Remuneration for |
Total |
|
Beneficiaries |
The period |
The period |
Remuneration |
Total remuneration paid by BFM in
relation to the Fund* |
16 |
£9,934 |
£36,010 |
£45,944 |
Total Senior Management Remuneration
paid by BFM** |
16 |
£255,749 |
£818,297 |
£1,044,045 |
The Investment Manager’s Remuneration Policy is reviewed
annually both in respect of the general principles it contains and
its own implementation. For 2018 the policy was updated to align it
to the Barings group policy. The 2018 review resulted in some
changes to the remuneration approach and disclosure; no
irregularities were identified.
The above disclosures are made in line with Barings’
interpretation of currently available regulatory guidance on
quantitative remuneration disclosures. As market or regulatory
practice develops, Barings may consider it appropriate to make
changes to the way in which quantitative remuneration disclosures
are calculated. Where such changes are made, this may result in
disclosures in relation to a fund not being comparable to the
disclosures made in the prior year, or in relation to other Barings
fund disclosures in that same year.
Notes:
*The Investment Manager does not make any direct payments to
staff, who are paid by other Barings Group entities. Figures shown
are apportioned on a fund AUM basis as a proportion of Barings
total AUM as at the end of the accounting year. Accordingly,
the figures are not representative of any individual’s actual
remuneration.
**Senior management remuneration is apportioned on the basis of
the Investment Manager’s total AUM as a proportion of Barings’
total AUM.
Variable remuneration consists of Short Term Incentive awards,
Long Term Incentive awards and any other variable payments
including benefits in kind and discretionary pension awards.
The Fund does not pay performance fees.
There has been no award of carry interest in the period.
Glossary of Terms
Alternative performance measures (APM)
are denoted by an (#) below:
An alternative performance measure is a financial measure of
historical or future financial performance, financial position, or
cash flows, other than a financial measure defined within the
Trust’s financial reporting framework.
Annual Management Charge (AMC)
A management fee is a charge levied by an investment manager for
managing an investment fund intending to compensate the manager for
their time and expertise in selecting stocks and managing the
portfolio.
Annualised Net Asset Value (NAV) Total
Return#
A measure showing how the net asset value (NAV) per share has
performed over the year, including both capital returns and
dividends paid to shareholders.
Average Discount#
The average that the Ordinary share price is lower than the net
asset value per Ordinary share over a predefined period. The
discount is normally expressed as a percentage of the net asset
value per share. NAV minus share price divided by NAV.
Average Discount
(Annual)#
This is the average discount over one year.
Carbon Emissions (Scope 1 & 2)
Scope 1 greenhouse gas emissions arise from direct fuel
combustion from sources owned or controlled by the company (i.e. as
in a furnace or vehicle).
Scope 2 greenhouse gas emissions are caused by the generation of
electricity purchased by the company.
Comparator Benchmark
A comparative benchmark is used to measure the performance of an
investment fund for the purpose of tracking relative return and
defining the asset allocation or a portfolio. The annualised
Benchmark movement represents the percentage movement in the
Benchmark over the year.
Cost of Equity (COE)
The cost of equity (COE or Discount Rate) is the minimum rate of
return which an equity investor will expect to be compensated for
investment risk.
Discount
Discount is the amount by which the Ordinary share price is
lower than the net asset value per Ordinary share. The discount is
normally expressed as a percentage of the net asset value per
share. NAV minus share price divided by NAV.
Dividend Pay-out Ratio#
The ratio of the total amount of dividends paid out to
shareholders relative to the net income of the company. Calculated
by the dividing the Dividends Paid by Net Income.
Dividend Reinvested Basis
Applicable to the calculation of return, this calculates the
return by taking any dividends generated over the relevant period
and reinvesting the proceeds to purchase new shares and compound
returns.
Dividend Yield#
The annual dividend expressed as a percentage of the current
market price. (see Chairman’s Statement above).
EMEA
Europe, Middle East and Africa (“EMEA”) is a geographic region.
Emerging Markets
An emerging market economy is a developing nation that is
becoming more engaged with global markets as it grows. Countries
classified as emerging market economies are those with some, but
not all, of the characteristics of a developed market.
Environmental, Social and Governance
or ESG
ESG (environmental, social and governance) is a term used in
capital markets and used by investors to evaluate corporate
behaviour and to determine the future financial performance of
companies.
ESG factors are a subset of non-financial performance indicators
which include sustainable, ethical and corporate governance issues
such as managing the company’s carbon footprint and ensuring there
are systems in place to ensure accountability.
Frontier Markets
A Frontier market is a country that is more established than the
least developed countries globally but still less established than
the emerging markets because it economy is too small, carries too
much inherent risk, or it markets are too illiquid to be considered
an emerging market.
Gearing#
Two methods of calculating such exposure are set out in the
AIFMD, gross and commitment.
Under the gross method, exposure represents the aggregate of all
the Company’s exposures other than cash balances held in base
currency and without any offsetting. Investments (A) divided by
Total Shareholders funds. (B). This can be found above: Gross
method = 105% (A=£122,091,000/B=£115,786,000) x 100
The commitment method takes into account hedging and other
netting arrangements designed to limit risk, offsetting them
against the underlying exposure. Investments (A) plus current
assets (C) divided by Total Shareholders’ funds. (B) This can be
found above: Commitment method = 109% (A=£122,091,000) + (C = Cash
£3,532,000 + Debtor £217,000)/B = £115,786,000) x 100 .
Gross Assets
Aggregate of all the Company’s exposures including Gearing.
Growth at a Reasonable Price (GARP)
Investing
GARP investing incorporates elements of growth and value
investing, focusing on companies which have sustainable growth
potential but do not demand a high valuation premium.
Idiosyncratic Risk
Idiosyncratic or “Specific risk” is a risk that is particular to
a company.
Net Asset Value or NAV
The value of total assets less current liabilities. The net
asset value divided by the number of shares in issue produces the
net asset value per share. NAV divided by number of ordinary shares
in issue at the period end.
Ongoing Charges Figure (OCF)
#
The Ongoing Charge Figure is an accurate measure of what it
costs to invest in a fund. It is made up of the Annual Management
Charge (AMC) and a variety of other operating costs. These charges
cover the cost of running the fund.
Ongoing charges for the year = management fees of £866,000 +
other operating expenses of £765,000 = £1,631,000 (see notes 3 and
4, above).
Average daily Shareholders’ fund for the year = £109,623,000
£1,631,000/£109,623,000 = 1.49%.
Return (per ordinary share)
#
The return per ordinary share is based on revenue/capital earned
during the year divided by the weighted average number of shares in
issue during the year.
Relative Returns
Relative return is the difference between investment return and
the return of a benchmark.
Risk-adjusted Returns
Risk-adjusted return refines an investment’s return by measuring
how much risk is involved in producing that return.
Return on Equity (ROE)
Return on equity (ROE) is a measure of financial performance
calculated by dividing net income by shareholders’ equity. Because
shareholders’ equity is equal to a company’s assets minus its debt,
ROE could be thought of as the return on net assets. This measure
is used to understand how effectively management is using a
company’s assets to create profits.
Share Price
The price of a single share of a company. The share price is the
highest amount someone is willing to pay for the stock, or the
lowest amount that it can be bought for. The annualised share price
movement equivalent to the percentage movement of the share price
over the year.
Systematic Risk
Systematic risk or “Market risk” is the risk inherent to the
entire market or market segment, not just a particular stock or
industry.
Total Return
Total return is the increase/(decrease) in NAV per share plus
the dividends paid, which are assumed to be reinvested at the time
the share price is quoted ex-dividend.
Directors and Officers
Directors
Frances Daley, Chairman
Nadya Wells
Calum Thomson
Christopher Granville (appointed
on 30 November 2018)
Vivien Gould (appointed on
11 March 2019)
Ivo Coulson (retired on
30 November 2018)
Jonathan Woollett (retired
on 10 January 2019)
Registered Office
Beaufort House
51 New North Road
Exeter EX4 4EP
Company Secretary
Link Company Matters Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
Company number
4560726
Alternative Investment Fund
Manager
Baring Fund Managers Limited
20 Old Bailey
London EC4M 7BF
Telephone: 020 7628 6000
Facsimile: 020 7638 7928
Auditor
BDO LLP
150 Aldersgate Street
London EC1A 4AB
Depositary
State Street Trustees Limited
20 Churchill Place
Canary Wharf
London E14 5HJ
Custodian
State Street Bank & Trust Company Limited
20 Churchill Place
Canary Wharf
London E14 5HJ
Administrator
Northern Trust Global Services SE
50 Bank Street
Canary Wharf
London E14 5NT
Telephone: 0207 982 2000
Registrars and transfer office
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Telephone: 0871 664 0300
Overseas: +44 371 664 0300
(Calls cost 12p per minute plus your phone company’s access charge.
Calls outside the United Kingdom
are charged at the applicable international rate.)
Lines are open 9:00 am - 5:30 pm,
Monday to Friday
Email: enquiries@linkgroup.co.uk
Broker
JP Morgan Cazenove
25 Bank Street
Floor 29
Canary Wharf
London E14 5JP
Website
www.beeplc.com
Please note this should be accessed via the Barings website
(www.barings.com). Please select Investment Trust.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held on
Thursday, 23 January 2020 at
2.30pm at 20 Old Bailey, London, EC4M 7BF
NATIONAL STORAGE MECHANISM
A copy of the Annual Report and Accounts will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for
inspection at the NSM, which is situated
at:www.morningstar.co.uk/uk/nsm
LEI: 213800HLE2UOSVAP2Y69
ENDS
Neither the contents of the Company’s website nor the contents
of any website accessible from hyperlinks on the website (or any
website) is incorporated into, or forms part of, this
announcement.