Fidelity Emerging Markets Ltd - Annual Financial Report
Final Results for the year ended
Financial Highlights:
-- During the twelve-month period ended 30 June 2024 , Fidelity Emerging
Markets Limited reported a Net Asset Value (NAV) return of +18.7% and
ordinary share price total return of +22.6%.
-- The benchmark index, the MSCI Emerging Markets Index, produced a total
return of +13.2% over the same timeframe.
-- The company’s extensive ‘toolkit’ contributed positively to performance
including mid-cap exposure and the short book.
-- Long positions in the financials and information technology sectors also
stood out.
-- The Board has announced a final dividend of $0.20 Participating
Preference Share.
Contacts
For further information, please contact:
Company Secretary
07778 345 517
Chairman’s Statement
I am pleased to present your Company’s 35th annual report, covering a year in which
Overview
During the 12-month period to 30
Thus, after a difficult year in 2022, when the Company’s performance was negatively affected by Russia’s invasion of
You will find more detail on the contributors to absolute and relative performance in the Portfolio Managers’ Review on the following pages. However, your Board is pleased to note the positive impact of stock selection – which drove the majority of the outperformance – as well as the significant value delivered by the enhanced investment toolkit. Stock selection – rather than investing by country or sector – is at the heart of your Company’s investment strategy, facilitated by Fidelity’s large and experienced team of portfolio managers and analysts, whose location in the markets they cover gives them a key advantage in terms of information and access to company managements. Their deep understanding of their investment universe is also what drives the ability to identify successful short as well as long positions.
At Board level, your Directors and I continue to work hard to support the share price, both through capital management initiatives and by promoting the Company to current and potential investors. I am pleased to note the proactive efforts of the investment manager in raising the Company’s profile through events, presentations, and meetings with stakeholders, combined with regular advertising and content placement on many of the UK’s leading investment websites and in key printed media to reach the broadest possible audience, both professional and retail. These efforts continue apace and are helping build investor conviction in the investment thesis, as well as contributing towards a positive perception of the Company’s Portfolio Managers as thought leaders in emerging markets.
A key attraction for fee-conscious investors remains our low ongoing charges ratio of 0.81% (FY23: 0.81%), underpinned by a very competitive management fee that your Board believes offers great value for a truly actively managed emerging markets portfolio with a full set of investment tools at the managers’ disposal.
Outlook
Although US financial markets have continued to suck liquidity from the rest of the world, your Portfolio Managers are positive on the outlook for emerging markets in the coming year and well beyond. Emerging market central banks have been ahead of the curve in raising interest rates, inflation is generally well controlled, and they have significant policy headroom as the US Federal Reserve continues to ease, which should be beneficial for emerging market equities. Moreover, while much of the US stock market performance has been driven by multiple expansion, emerging market equities remain very attractively valued on a relative basis.
With artificial intelligence (AI) stocks having dominated the investment headlines from the US, it is important to remember the role that emerging market companies, such as Taiwanese semiconductor makers and Korean memory suppliers, play in the AI value chain. Emerging markets are also among the largest producers of essential commodities such as copper and lithium, all of which are fundamental to the build-out of AI and low-carbon infrastructure.
Often the best investment opportunities can be found in smaller and medium-sized companies with a longer runway for growth. However, in far-flung emerging markets, these can be very hard for individual investors to identify. Your Board and I believe that one of the Company’s major advantages is having a large team with ‘boots on the ground’, employing huge amounts of time and effort in finding the best mid-sized and smaller companies that can contribute to performance over many years. The permanent capital structure of the Company provides the freedom to invest for the long term in stocks that may not yet be widely known.
Board composition
As reported at the half-year stage,
Due diligence trip
In
Discount management
As noted above, during the year the discount to NAV narrowed somewhat, from 14.6% to 11.9% in what was a challenging year for the broader
I would also remind readers that the Company has committed to undertake a further tender for up to 25% of its then shares in issue (excluding any shares held in treasury) should its NAV total return fail to exceed the benchmark over the five years ending on 30
While buybacks are NAV-accretive for existing shareholders, share repurchases on their own do not narrow discounts, and as such we continue to work to ensure that potential and existing investors fully understand the Company’s story and the enhanced investment toolkit available to the managers, whose performance is beginning to speak for itself.
Dividend
Your Board does not task the Portfolio Managers with finding yield. However, some dividend income naturally arises, and after accounting for costs charged to the revenue account, the majority of this is paid out to our shareholders in the form of dividends.
A resolution to declare a final dividend of
AGM
This year’s AGM will be held on Tuesday, 10
Electronic proxy voting is now available and shareholders are encouraged to submit voting instructions using the web based voting facility at www.eproxyappointment.com and for institutional shareholders via the CREST system, CREST messages must be received by the issuer’s agent (ID number 3RA50) not later than 11.00
a.m. on 8
Heather Manners
Chairman
8
Portfolio Managers’ Review
Question
How has
Answer
The twelve months to the end of June was a period of strong performance for the Company. Markets were volatile as they reacted to developments in
Question
What were the main contributors to the outperformance during the year and why?
Answer
The Company’s extensive ‘toolkit’ added significant value over the year. When managing the portfolio, we draw on a broad range of ‘tools’, namely the ability to adjust the level of gross exposure via gearing, to invest in mid-cap companies, take out short positions, and use options. It is pleasing to see that many of these tools, including the mid - cap exposure and the short book, added substantial value over the past year. While yield enhancement (or the options book) detracted, this is a function of it being a hedging tool, which means it detracts when performance is strong.
The short book in particular generated very positive performance. We take out short positions in businesses that are in structural or cyclical decline, and that have a number of red flags around aspects like their balance sheet structure, cash conversion, or related party/management conflicts of interest. Over the year there were two short positions in the top ten contributors to relative returns, a notable achievement given that we limit the size of short positions to c.100bps. The top performer in the short book was a declining Asian utility that is unsuccessfully pivoting into unrelated business areas, and which saw its share price halve during June, following poor earnings and after the major shareholder faced margin calls.
Looking to the rest of the portfolio, several holdings in the financials sector stand out. These included high-conviction positions like Brazilian digital challenger bank Nu Holdings, and Kazakhstan’s e-commerce and payments platform Kaspi. Another contributor was Russia’s TCS Group 1 , a provider of online financial services, which we disposed of after identifying a liquidity opportunity. The Company’s holdings in Russian securities have been fair valued at nil since the first quarter of 2022. Within information technology, Taiwanese semiconductor foundry business TSMC performed well given the growing tailwind from AI-related demand.
The Chinese consumer names held in the portfolio were the main headwind to performance. The portfolio had a marginal underweight exposure to
Overall, it was a strong period for the Company, which benefited from broad-based performance drivers and where the extensive toolkit added notable value.
Question
The Company is unique in its peer group given its ability to use both long and short positions. How did you exploit that flexibility over the past year?
Answer
One of the additional tools the Company has at its disposal is the ability to take out short positions. This allows us to profit not only from the winning businesses in each industry, but also from the losers.
An example of a now-closed short position that worked well for us is Microvast, a battery maker using antiquated, obsolete technology. We thought that Microvast also had a questionable order book and a stretched balance sheet. The company’s share price fell significantly, and we exited the position at a profit earlier this year.
Other high-conviction short positions include several current holdings in Chinese EV makers (disclosure rules mean we are unable to name open short positions). These companies operate in an industry that suffers from high competitive intensity and overcapacity, while at a fundamental level these businesses also have undifferentiated products, high cash burn, and significant debt on their balance sheets.
Top 5 Positions
Index
Portfolio Relative
As at 30June 2024 Country Sector Weight
(%) (%)
(%)
Taiwan Semiconductor Taiwan Information 11.6 9.7 1.8
Manufacturing Technology
Naspers South Africa Consumer 5.4 0.5 5.0
Discretionary
Kaspi.KZ Kazakhstan Financials 5.4 0.0 5.4
Samsung Electronics South Korea Information 5.1 4.2 0.8
Technology
Nu Holdings Brazil Financials 4.6 0.0 4.6
1 Fidelity investment, trading and operational teams actively monitor developments, which can result in the identification of liquidity opportunities. Importantly, any pre-trade assessment ensures that activities do not contravene international sanctions. Prudent assessment of counterparties and all aspects of trade settlement arrangements are scrutinised and carefully managed in the best interests of clients. The decision to trade TCS was based on our assessment that a fair exit multiple was achievable.
Question
What were some of the major changes you made to the portfolio during the year and what drove those?
Answer
Over the
twelve months to the end of June we focused on adjusting the portfolio’s
One of the ways we looked to add exposure towards the end of the period was through the options book, initiating a long position in an out-of-the-money Hang Seng China Enterprises Index call option, which we funded by selling out-of-the-money put options. Given that implied volatility is at decade lows for emerging markets, utilising the options book is a cost-effective way to take out insurance against a rally in Chinese equities (which we saw during April and May and subsequent to the end of the review period in September). We also added a number of long positions in Chinese stocks during the review period, including high-quality consumer and internet businesses that now trade on very attractive valuations, including premium sportwear company
We also made changes within the portfolio’s information technology holdings. The semiconductor industry has performed extremely well and index heavyweight TSMC, the Taiwanese foundry business, now makes up about a tenth of the emerging market index. We have a very constructive outlook for TSMC, which is a vital part of the AI supply chain, and the company remains a core position in the portfolio. However, we have looked to diversify exposure to other AI supply chain beneficiaries, with recent additions including Elite Material, a Taiwanese manufacturer of copper clad laminate, a vital input for printed circuit boards, and another beneficiary of AI - driven demand.
Question
What opportunities are you particularly excited about – are there any stand - out markets, sectors or themes you’d highlight?
Answer
We have a particularly constructive outlook for copper miners. Electrification and datacentres alone could add an incremental 4% per annum to demand over the rest of the decade, while the backdrop for supply is very muted, with few copper mines currently in operation, and little supply expected to come online given it takes around 10 years to bring a greenfield copper discovery into production. This creates a buoyant environment for copper prices.
The largest position we have is in Grupo Mexico, which is the holding company for Southern Copper, one of the lowest cost copper producers in the world. Given the Company’s closed-ended nature we also have positions in mid-cap copper miners, for example Minsur, a Peruvian miner of copper and tin which has good assets, and a healthy cash balance that it has signalled it intends to pay out to investors.
We continue to see opportunities in the financials sector. While
interest rates have likely peaked, the Company’s financials exposure is not rate sensitive. Examples of companies we own are Indian private sector banks, companies in the fintech space and banks in
Indian private sector banks
High conviction holdings in fintech include Brazil’s digital challenger bank Nu Holdings, which is rapidly taking market share from incumbents. Five years ago, the incumbent banks in
We also have exposure to beneficiaries of falling rates, for example, banks in countries such as
Question
Another aspect of the company’s broad toolkit is the ability to invest in smaller companies and in “off
-
the
-
beaten-track” markets like
Answer
One of the key benefits of the investment company structure is that we can take a longer investment horizon and move further down the market cap spectrum. This might be into smaller companies that are less well known by investors and are often poorly covered by the sell side, or companies in frontier markets such as
One mid-cap company we are particularly excited about is Brazil’s Direcional, a developer of large-scale, low-income housing projects in
We also see opportunities in frontier markets such as
Question
Given the scale of the emerging market opportunity set, one of Fidelity’s strengths is the depth of resources and local presence around the world combined with your frequent research trips to the countries in which the Company invests. How do you leverage that resource to the benefit of the Company’s shareholders and what were some of the key takeaways from recent country visits?
Answer
Travel is a huge part of our process and the investment team go on a number of research trips every year. These overseas trips form a crucial part of our due diligence process, and we’ve visited
One of the more recent trips we went on was to
Question
How do you actively and efficiently manage the portfolio, given the extensive universe of companies to choose from in emerging markets?
Answer
Fidelity’s extensive emerging market research team is one of the key mechanisms that lets us effectively manage the portfolio. We have about 50 analysts across the globe looking only at emerging market companies, which means we can develop a deep, unrivalled view of their dynamics, and explore the opportunities among mid-cap companies. There is excellent collaboration between all our analysts across regions and sectors, with those focused on global sectors like oil and gas, metals and mining, and technology helping us analyse what is going on in emerging markets alongside changes in developed markets.
Our research team really allows us to have ‘boots on the ground’ across emerging markets. This year we travelled to countries like
The way our global emerging markets investment team is structured also allows us to effectively cover different regions. The
broader team manages three regional portfolios, encompassing
Question
Finally, how do you view the prospects for the broad asset class and
Answer
Emerging market equities have structurally derated over the past 15 years. Weakness in
We are cautiously optimistic about the year ahead. As the Fed has now started to ease policy, this should give the green light to emerging economies to continue cutting interest rates, which will be supportive of consumers and corporates, and will help drive flows to equity markets. During the current rate-hiking cycle, many emerging economies were far ahead of developed economies in acting decisively to raise rates and bring inflation under control. This means that real interest rates in many emerging markets are still incredibly high, and there is huge scope for rates to come down further.
Emerging economies also benefit from an improved fiscal backdrop, which stands in stark contrast to developed economies like the
Part of the reason the fiscal backdrop is better for emerging markets is the more buoyant backdrop for commodity prices. For emerging economies, the past decade has been marked by a bursting of the commodity bubble as demand from the
Another driver for emerging markets is the exposure it offers to the AI supply chain. While US companies are typically thought of as AI beneficiaries, what is often overlooked is the fact that the bulk of the AI supply chain sits in emerging markets like
The emerging market universe is trading at multi-decade lows relative to developed markets. Part of this is down to concerns about geopolitics. 2024 is a busy election year, with developments in both emerging economies and the US requiring close scrutiny. These are the types of events we continue to monitor incredibly carefully, drawing on the inputs of external experts to help make sense of elevated unpredictability in markets, and we continue to focus on staying fully engaged and speaking to geopolitical experts with a range of different perspectives.
With an improving fundamental backdrop, we think today represents an attractive entry point for emerging market equities. Using our bottom-up, highly differentiated approach, we are focused on using the Company’s extensive toolkit to carefully manage country-level exposures, and the short book to benefit from the universe’s structural losers, as well as identifying the winners for the long book. Against a backdrop that will likely remain highly uncertain, we will continue to use this flexibility to closely manage risk, all the while exploiting the most exciting opportunities throughout the emerging market universe.
Nick Price
Portfolio Managers
8
Principal and Emerging Risks And Uncertainties, Risk Management
In accordance with the AIC Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces.
The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its corporate governance obligations.
Key emerging issues that the Board has identified include; rising geopolitical tensions, including contagion of the
The Board considers the following as the principal risks and uncertainties faced by the Company.
______________________________________________________________________________ |Principal Risks |Risk Description and |Risk Mitigation |Trend | | |Impact | | | |__________________|_________________________|_______________________|_________| | | -- The economies, | | | | | currencies and | | | | | financial markets| | | | | of a number of | | | | | developing | | | | | countries in | | | | | which the Company| | | | | invests may be | | | | | extremely | -- The Company’s | | | | volatile. | investments are| | | | -- Further risks on | geographically | | | | emerging markets | diversified in | | | | from high | order to manage| | | | inflation, and | risks from | | | | challenging | adverse price | | | | financial | fluctuations. | | | | conditions | -- Russian | | | | exacerbated by | securities | | | | the war in | already held at| | | | Ukraine and | nil value. | | | | Middle East. | -- The exposure to| | | | -- Market volatility| any one company| | | | from worsening | is unlikely to | | | | Chinese/Taiwanese| exceed 5% of | | | | relations that | the Company’s | | | | could prompt the | net assets at | | | | US to intervene | the time the | | | | amplified by | investment is | | | | uncertainty of | made. | | | | the foreign | -- Review of | | |Volatility of | policy changes | material | | |Emerging Markets | following US | economic or |Stable | |and Market Risks | elections. | market changes | | | | -- US imposed | and major | | | | Executive Orders | market | | | | prohibiting US | contingency | | | | investments in | plans for | | | | certain Chinese | extreme events.| | | | companies and the| -- China’s | | | | passing of the | integration | | | | Holding Foreign | into the global| | | | Companies | financial | | | | Accountable Act | system and into| | | | (HFCAA). | global supply | | | | -- Rising | chains. | | | | geopolitical | -- Companies that | | | | tensions, | were solely | | | | including | listed in the | | | | contagion of the | US are listing | | | | Ukraine and | on the HK or | | | | Middle East | mainland | | | | crisis or | markets. | | | | tensions between | -- Robust risk | | | | China and Taiwan | governance in | | | | into the wider | place supports | | | | region. | risk profile | | | | -- Regulatory | assessment. | | | | measures | | | | | impacting sectors| | | | | such as IT sector| | | | | or biotech sector| | | | | and a lingering | | | | | weakness in the | | | | | real estate | | | |__________________|________sector.__________|_______________________|_________| | | | -- An investment | | | | | strategy | | | | | overseen by the| | | | | Board to | | | | | optimise | | | | | returns. | | | | | -- A | | | | -- The Portfolio | well-resourced | | |Investment | Manager may fail | team of | | |Performance Risk | to outperform the| experienced |Stable | | | Benchmark Index | analysts | | | | over the | covering the | | | | longer-term. | market. | | | | | -- Board scrutiny | | | | | of the Manager | | | | | and the ability| | | | | in extreme | | | | | circumstances | | | | | to change the | | |__________________|_________________________|________Manager._______|_________| | | | -- The Company has| | | | | an active | | | | | investor | | | | | relations | | | | | programme. | | | | -- As a Company | -- The Board is | | | | investing in | updated | | | | emerging markets,| regularly by | | | | changes in | the Investment | | | | investor | Manager on | | | | sentiment may | developments in| | |Changing Investor | lead to the | emerging | | |Sentiment | Company becoming | markets and on |Stable | | | unattractive to | the portfolio. | | | | investors and | -- The Chairman | | | | reduced demand | communicates | | | | for its shares, | regularly with | | | | causing the | major | | | | discount to | shareholders. | | | | widen. | -- The Company | | | | | pays a regular | | | | | dividend and | | | | | considers | | | | | regularly when | | | | | and how to use | | |__________________|_________________________|________share_buybacks.|_________| | | -- Cybersecurity | | | | | risk to the | | | | | functioning of | | | | | global markets | | | | | and to national | | | | | infrastructure, | | | | | as a targeted | | | | | attack or | | | | | overspilling from| | | | | the | -- The risk is | | | | Russia/Ukraine | monitored by | | | | war, Middle East | the Board with | | | | crisis and | the help of the| | | | geopolitical | extensive | | | | events. | Fidelity global| | | | -- Cybersecurity | cybersecurity | | | | risk from Covid | team and | | | | or successor | assurances from| | | | pandemics | outsourced | | |Cybercrime and | affecting the | suppliers. | | |Information | functioning of | -- Development of |Increased| |Security Risks | businesses and | systems and | | | | global markets. | procedures by | | | | -- External | the AIFM | | | | cybercrime | resulting from | | | | threats such as | the experience | | | | spam attacks, | of the Covid | | | | ransomware, DDoS | pandemic and | | | | (Distributed | cyber activity | | | | Denial of | following the | | | | Service) attacks,| Russian | | | | financial theft | invasion of | | | | and reputational | Ukraine. | | | | risk arising from| | | | | accidental data | | | | | leakage. | | | | | Ransomware | | | | | continues to | | | | | increase globally| | | | | and is also | | | | | becoming a supply| | | |__________________|________chain_risk.______|_______________________|_________| | | | -- The Board | | | | | reviews the | | | | | discount on a | | | | | regular basis | | | | | and has the | | | | | authority to | | | | | repurchase | | | | | shares so | | | | | shares can | | | | | trade at a | | | | | level close to | | | | | the NAV. | | | | | -- If the NAV | | | | | total return | | | | | for the five | | | | | years ending 30| | | | | September 2026 | | | | | does not exceed| | | | | the Benchmark | | | | | Index, the | | | | -- The share price | Company will | | | | performance lags | make a tender | | | | NAV performance. | offer for up to| | | | -- The Board may | 25% of the | | | | fail to implement| shares in | | |Level of Discount | its discount | issues | | |to Net Asset Value| management | (excluding |Increased| |(“NAV”) Risk | policy. | shares held in | | | | -- Elevated energy | treasury) at | | | | costs and cost of| that time. | | | | living crisis | -- The Board and | | | | impact on retail | manager | | | | demand for | proactively try| | | | shares. | to raise the | | | | | Company’s | | | | | profile through| | | | | events, | | | | | presentations, | | | | | and meetings | | | | | with | | | | | stakeholders, | | | | | combined with | | | | | regular | | | | | advertising and| | | | | content | | | | | placement on | | | | | many of the | | | | | UK’s leading | | | | | investment | | | | | websites and in| | | | | key printed | | | | | media to reach | | | | | the broadest | | | | | possible | | |__________________|_________________________|________audience.______|_________| | | -- Low trading | -- Restrictions on| | | | volumes on stock | concentration | | | | exchanges of less| and | | | | developed | diversification| | | | markets. | of the assets | | | | -- Lack of liquidity| in the | | |Lack of Market | from temporary | Company’s | | |Liquidity Risk | capital controls | portfolio to |Stable | | | in certain | protect the | | | | markets. | overall value | | | | -- Exaggerated | of the | | | | fluctuations in | investments and| | | | the value of | lower risks of | | | | investments from | lack of | | | | low levels of | liquidity. | | |__________________|________liquidity._______|_______________________|_________| | | | -- Business | | | | | Continuity and | | | | | Crisis | | | | -- The wars in | Management | | | | Ukraine and | Frameworks in | | | | Middle East | place. Business| | | | conflict has | Continuity | | | | increased the | Oversight Group| | | | risk for working | (BCOG) is | | | | from home or in | established | | | | offices, | which provides | | | | specifically | support to | | | | concerning the | drive business | | | | potential loss of| continuity | | | | network outages. | through the | | | | -- Business process | organisation | | | | disruption risk | that ranges | | |Business | globally | from strategic | | |Continuity & Event| considers Cyber, | input to |Stable | |Management Risks | Geopolitical, and| operational | | | | Earthquake as the| processes. | | | | top risks, which | -- Digital teams | | | | if were to | continue to | | | | materialise to a | maintain | | | | business | solutions to | | | | disruption event,| allow business | | | | the impact could | continuity and | | | | be reputational | operational. | | | | in the near term | -- Annual | | | | and broader over | requirement to | | | | time (financial, | perform | | | | client, industry)| recovery site | | | | depending on the | test, remote | | | | duration/severity| working test, | | | | of the events. | work transfer | | | | | test and | | | | | notification | | |__________________|_________________________|________test.__________|_________| | | -- The Portfolio | | | | | Manager may fail | | | | | to use gearing | -- The Board sets | | | | adequately, | a limit on | | |Gearing Risk | resulting in a | gearing and |Stable | | | failure to | provides | | | | outperform in a | oversight of | | | | rising market or | the Manager’s | | | | to underperform | use of gearing.| | | | in a falling | | | |__________________|________market.__________|_______________________|_________| | | -- The functional | | | | | currency in which| -- The Portfolio | | | | the Company | Manager does | | | | reports its | not hedge the | | | | results is US | underlying | | | | dollars, whilst | currencies of | | | | the underlying | the holdings in| | |Foreign Currency | investments are | the portfolio |Stable | |Exposure Risk | in different | but will take | | | | currencies. The | currency risk | | | | value of assets | into | | | | is subject to | consideration | | | | fluctuations in | when making | | | | currency rates | investment | | | | and exchange | decisions. | | | | control | | | |__________________|________regulations._____|_______________________|_________| | | | -- Fidelity has | | | | -- The adoption of | adopted a | | | | international | sophisticated | | | | standards may | and | | | | adversely impact | comprehensive | | | | the profitability| system for | | | | of companies in | analysing ESG | | | | the portfolio. | risks, | | | | -- The Manager may | including | | |Environmental, | fail to meet its | climate risk, | | |Social and | regulatory | in investee |Stable | |Governance (ESG) | requirements on | companies. | | |Risk | ESG, including | -- The Portfolio | | | | climate risk, in | Manager is | | | | relation to the | active in | | | | Company. | analysing the | | | | -- Higher degree of | effects of ESG | | | | valuation and | when making | | | | performance | investment | | | | uncertainties and| decisions. | | | | liquidity risks. | -- The Company is | | | | | not labeled as | | |__________________|_________________________|________an_ESG_product.|_________| | | | -- Succession | | | | -- Loss of the | planning for | | | | Portfolio Manager| key | | | | or other key | dependencies. | | | | individuals could| -- Depth of the | | |Key Person Risk | lead to potential| team within |Stable | | | performance | Fidelity. | | | | and/or | -- Experience of | | | | operational | the analysts | | | | issues. | covering the | | | | | Company’s | | |__________________|_________________________|________investments.___|_________|
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with the regulatory requirements of the
The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.
Operational Risks
The Company relies on a number of third-party service providers, principally the Manager, Registrar and Custodian. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements. The Registrar and Custodian are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an annual basis and any concerns are investigated. Risks associated with these service providers is rated as low, but the financial consequences could be serious, including reputational damage to the Company.
Professional negligence liability risks
The requirement to cover potential liability risks arising from professional negligence is covered by the Manager’s own funds. Sufficient capital above the regulatory limit is held which is monitored by the board of the Manager.
VIABILITY STATEMENT
In accordance with provision 35 of the 2019 AIC Code of Corporate Governance the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment fund with the objective of achieving long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging market companies, both listed and unlisted. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period. In making an assessment on the viability of the Company, the Board has considered the following:
-- The ongoing relevance of the investment objective in prevailing market
conditions;
-- The Company’s NAV and share price performance;
-- The principal and emerging risks and uncertainties facing the Company as
set out above and their potential impact;
-- The future demand for the Company’s shares;
-- The Company’s share price discount to its NAV;
-- The liquidity of the Company’s portfolio;
-- Consideration of the continuation vote in 2026;
-- The level of income generated by the Company; and
-- Future income and expenditure forecasts.
The Company has assumed for the purposes of the viability statement that the continuation vote in 2026 would be passed.
The Company’s performance for the five year reporting period to 30
The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:
-- The Investment Manager’s compliance with the Company’s investment
objective and policy, its investment strategy and asset allocation;
-- The fact that the portfolio comprises sufficient readily realisable
securities which can be sold to meet funding requirements if necessary;
and
-- The ongoing processes for monitoring operating costs and income which
are considered to be reasonable in comparison to the Company’s total
assets.
When considering the risk of under-performance, a series of stress tests were carried out including in particular the effects of any substantial future falls in investment value on the ability to maintain dividend payments and repay obligations as and when they arise.
In preparing the Financial Statements, the Directors have considered the impact of climate change, particularly in the context of the climate change risk identified within the ESG Risk on in the Annual Report . The Board has also considered the impact of regulatory changes and significant market events and how this may affect the Company. In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which is included in the Directors’ Report in the Annual Report .
Promoting the Success of the Company
The Company is not required to comply with the provisions of the
As an externally managed Investment Company, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodian, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential shareholders, the external appointed Manager and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this regularly. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.
The Board places great importance on communication with shareholders and is committed to listening to their views. The primary medium through which the Company communicates with shareholders is through its Annual and Half Year Financial Reports. Monthly factsheets are also produced. Company related announcements are released via the
The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of ESG issues aligns with the Company’s investment objective to deliver long-term growth in both capital and income, and the Board’s review of the Manager includes an assessment of their ESG approach.
In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of this report, have included:
-- Marketing & PR
The Board has been proactive in its efforts to promote the success of the Company. It has worked closely with the Manager, utilising the Manager’s extensive marketing capabilities, in combination with the Company’s appointed stockbrokers, and public relations firm to execute a comprehensive promotional programme for the Company.
-- Discount Control – Share Buybacks
In
-- Discount Control – Tender Offer
In recognition of the imbalance between demand and supply of its shares the Company undertook a
tender offer for 14.99% of its issued share capital in March
2024. The tender was priced at a 2% discount to the Net Asset Value per Share as at 6.00
p.m. on 22
-- Dividend
The decision to recommend a dividend of
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Financial Report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the
Under company law the Directors must not approve the financial statements unless they are satisfied that taken as a whole, they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether applicable 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 proper 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 (
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in
The Directors who hold office at the date of approval of this Directors’ Report confirm that so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and that each Director has taken all the steps he/she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.
Responsibility statement of the Directors in respect of the Annual Report
The Directors confirm that to the best of their 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 Chairman’s statement, Strategic Report and Portfolio Managers’
Review includes a fair review of the development and performance of the
business and the position of the Company, together with a description of
the principal and emerging risks and uncertainties that the Company
faces.
The Directors consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
There were no instances where the Company is required to make disclosures in respect of
For and on behalf of the Board
Heather Manners
Chairman
8
Statement of Comprehensive Income
for the year ended 30
Year ended 30June 2024 Year ended 30June 2023
Revenue Capital Total Revenue Capital Total
Note
$’000 $’000 $’000 $’000 $’000 $’000
Revenue
Investment income 3 19,284 – 19,284 22,272 – 22,272
Derivative income 3 19,711 – 19,711 17,709 – 17,709
Other income 3 1,252 – 1,252 620 – 620
Total Income 40,247 – 40,247 40,601 – 40,601
Net gains on
investments at fair 10 – 81,553 81,553 – 36,553 36,553
value through profit
or loss
Net gains/(loss) on 11 – 35,890 35,890 – (37,809) (37,809)
derivative instruments
Net foreign exchange – (1,569) (1,569) – (933) (933)
losses
Total income and 40,247 115,874 156,121 40,601 (2,189) 38,412
gains/(losses)
Expenses
Management fees 4 (935) (3,741) (4,676) (923) (3,690) (4,613)
Other expenses 5 (1,631) – (1,631) (1,619) – (1,619)
Profit/(loss) before
finance costs and 37,681 112,133 149,814 38,059 (5,879) 32,180
taxation
Finance costs 6 (21,566) – (21,566) (15,653) – (15,653)
Profit/(loss) before 16,115 112,133 128,248 22,406 (5,879) 16,527
taxation
Taxation 7 (2,060) (123) (2,183) (2,622) 644 (1,978)
Profit/(loss) after
taxation for the year
attributable to 14,055 112,010 126,065 19,784 (5,235) 14,549
Participating
Preference Shares
Earnings/(loss) per
Participating 8 $0.16 $1.29 $1.45 $0.22 $(0.06) $0.16
Preference Share
(basic and diluted)
The Company does not have any income or expenses that are not included in the profit/(loss) after taxation for the year. Accordingly the profit/(loss) after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Company’s Statement of Comprehensive Income prepared in accordance with IFRS. The supplementary information on the allocation between the revenue account and the capital reserve is presented under guidance published by the AIC.
All the profit/(loss) and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.
The notes below form an integral part of these financial statements
Statement of Changes in Equity
for the year ended 30
Share
Capital Revenue Total
premium
Note reserve reserve equity
account
$’000 $’000 $’000
$’000
Total equity at 30June 2023 6,291 735,860 54,583 796,734
Profit after taxation for the year – 112,010 14,055 126,065
Repurchase and cancellation of the 14 – (127,125) – (127,125)
Company’s own shares
Participating Preference Shares 14 – (24,923) – (24,923)
repurchased into Treasury
Dividend paid to shareholders 9 – – (17,305) (17,305)
Total equity at 30June 2024 6,291 695,822 51,333 753,446
Share
Capital Revenue Total
premium
Note reserve reserve equity
account
$’000 $’000 $’000
$’000
Total equity at 30June 2022 6,291 741,095 49,375 796,761
(Loss)/profit after taxation for the year – (5,235) 19,784 14,549
Dividend paid to shareholders 9 – – (14,576) (14,576)
Total equity at 30June 2023 6,291 735,860 54,583 796,734
The notes below form an integral part of these financial statements
Statement of Financial Position
as at 30
30June 30June
Note 2024 2023
$’000 $’000
Non-current assets
Investments at fair value through profit or loss 10 696,753 778,608
Current assets
Derivative assets 11 25,399 9,468
Amounts held at futures clearing houses and brokers 44,952 18,210
Other receivables 12 8,083 6,480
Cash at bank 8,794 18,057
87,228 52,215
Current liabilities
Derivative liabilities 11 11,857 12,847
Other payables 13 18,678 21,242
30,535 34,089
Net current assets 56,693 18,126
Net assets 753,446 796,734
Equity
Share premium account 15 6,291 6,291
Capital reserve 15 695,822 735,860
Revenue reserve 15 51,333 54,583
Total Equity Shareholders’ Funds 753,446 796,734
Net asset value per Participating Preference Share 16 $10.09 $8.75
The Financial Statements above were approved by the Board of Directors of the Company on 8
Heather Manners
Chairman
The notes below form an integral part of these financial statements
Statement of Cash Flows
for the year ended 30
30June 30June
2024 2023
$’000 $’000
Operating activities
Cash inflow from investment income 24,168 24,214
Cash inflow from derivative income 9,769 6,184
Cash inflow from other income 20 33
Cash outflow from taxation paid (2,060) (1,063)
Cash outflow from the purchase of investments (695,450) (928,894)
Cash inflow from the sale of investments 854,047 930,627
Cash inflow/(outflow) from net proceeds from settlement of 23,436 (4,819)
derivatives
Cash outflow from amounts held at futures clearing houses (26,742) (6,309)
and brokers
Cash outflow from operating expenses (6,217) (5,150)
Net cash inflow from operating activities 180,971 14,823
Financing activities
Cash outflow from CFD interest paid (18,527) (10,111)
Cash outflow from short CFD dividends paid (2,726) (5,564)
Cash outflow from dividends paid to shareholders (17,305) (14,576)
Cash outflow from repurchase of participating preference (22,982) –
shares into treasury
Cash outflow from repurchase and cancellation of (127,125) –
Participating Preference Shares
Net cash outflow from financing activities (188,665) (30,251)
Net decrease in cash at bank (7,694) (15,428)
Cash at bank at the start of the year 18,057 34,418
Effect of foreign exchange movements (1,569) (933)
Cash at bank at the end of the year 8,794 18,057
The notes below form an integral part of these financial statements
Notes to the Financial Statements
for the year ended 30
1. Principal Activity
The Company’s registered office is at Level 3, Mill Court La Charroterie,
The Company’s investment objective is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging market companies, both listed and unlisted.
These financial statements were approved by the Board of Directors and authorised for issue on 8
2. Summary of Material Accounting Policies
(a) Basis of preparation
The principal accounting policies applied in the preparation of these financial statements on a going concern basis are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. The Company’s financial statements, which give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company, have been prepared in accordance with International Financial Reporting Standards as adopted by the
Going concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these financial statements. In making their assessment the Directors have reviewed the income and expense projections, the liquidity of the investment portfolio, stress testing performed and considered the Company’s ability to meet liabilities as they fall due. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these financial statements.
Significant accounting estimates, assumptions and judgements
The preparation of financial statements in conformity with IFRS may require management to make critical accounting judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from the estimates.
Valuations use observable data to the extent practicable. Changes in any assumptions could affect the reported fair value of the financial instruments. The determination of what constitutes observable requires significant judgement by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
Adoption of new and revised International Financial Reporting Standards
The accounting policies adopted are consistent with those of the previous financial year as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.
At the date of authorisation of these financial statements, the following revised International Accounting Standards (IAS) were in issue but not yet effective:
-- Amendments to the Classification and Measurement of Financial
Instruments – Amendments to IFRS 9 and IFRS 7
-- Lack of Exchangeability – Amendments to IAS 21
-- Presentation and Disclosure in Financial Statements – IFRS 18
-- Supplier Finance Arrangements – Amendments to IAS 7 and IFRS 7
-- Subsidiaries without Public Accountability – IFRS 19
The adoption of these new and amended standards, together with any other IFRSs or IFRIC interpretations that are not yet effective, are not expected to have a material impact on the financial statements of the Company other than IFRS 18 (Presentation and Disclosure in Financial Statements) that the Company is in the process of assessing.
(b) Financial Instruments
Classification
(i) Assets
The Company classifies its investments based on both the Company’s business model for managing those financial assets and the contractual cash flow characteristics of the financial assets. The portfolio of financial assets is managed and performance is evaluated on a fair value basis. The Company is primarily focused on fair value information and uses that information to assess the assets’ performance and to make decisions. The Company has not taken the option to irrevocably designate any equity securities as fair value through other comprehensive income. All investments are measured at fair value through profit or loss. The Company’s investments are included in the Financial assets at fair value through profit and loss line in the Statement of Financial Position.
(ii) Liabilities
Derivative contracts that have a negative fair value are presented as derivative financial liabilities at fair value through profit or loss. As such, the Company classifies all of its investment portfolio as financial assets or liabilities at fair value through profit or loss. The Company’s policy requires the Manager and the Board of Directors to evaluate the information about these financial assets and liabilities on a fair value basis together with other related financial information.
Recognition/derecognition
The Company recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument.
Regular-way purchases and sales of investments are recognised on their trade date, the date on which the Company commits to purchase or sell the investment. Investments are derecognised when the rights to cash flows from the investments have expired or the Company has transferred substantially all risks and rewards of ownership. The Company derecognises a financial liability when the obligation under the liability is discharged, cancelled or expires.
Measurement
Financial assets at fair value through profit and loss are measured initially at fair value being the transaction price. Transaction costs incurred to acquire financial assets at fair value through profit or loss are expensed in the Statement of Comprehensive Income. Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers. Subsequent to initial recognition, all financial assets at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are presented in the Statement of Comprehensive Income in the year in which they arise.
The Company includes transaction costs, incidental to the purchase or sale of investments within Net gains/(losses) on financial assets at fair value through profit or loss in the capital column of the Statement of Comprehensive Income and has disclosed them in Note 10 below.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Securities listed on active markets are valued based on their last bid price for valuation and financial statement purposes.
Equity Linked Notes are valued based on the available price of the underlying asset as at reporting date.
In the normal course of business, the Company may utilise Participatory notes (‘P Notes’) to gain access to markets that otherwise would not be allowable as a foreign investor. P Notes are issued by banks or broker-dealers and allow the Company to gain exposure to local shares in foreign markets. They are valued based on the last price of the underlying equity at the valuation date.
The Company’s investment in other funds (‘Investee Funds’) are subject to the terms and conditions of the respective Investee Fund’s offering documentation. The investments in Investee Funds are primarily valued based on the latest available redemption price for such units in each
The Company may make adjustments to the value of a security if it has been materially affected by events occurring before the Company’s NAV calculation but after the close of the primary markets on which the security is traded. The Company may also make adjustment to the value of its investments if reliable market quotations are unavailable due to infrequent trading or if trading in a particular security was halted during the day and did not resume prior to the Company’s NAV calculation.
In preparing these financial statements the Directors have considered the impact of climate change risk as a principal and as an emerging risk as set out in the Annual Report, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with IFRS 13 – “Fair Value Measurement” investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the statement of financial position date. Investments which are unlisted are priced using market-based valuation approaches. All investments therefore reflect the market participants view of climate change risk on the investments held by the Company.
Derivative Instruments
When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short contracts for difference (“CFDs”), futures and options.
Under IFRS 9 derivatives are classified at fair value through profit or loss – held for trading, and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:
-- Long and short CFDs – the difference between the strike price and the
value of the underlying shares in the contract;
-- Futures – the difference between the contract price and the quoted trade
price;
-- Forward currency contracts – valued at the appropriate quoted forward
foreign exchange rate ruling at the Statement of Financial Position
date;
-- Exchange traded options – valued based on similar instruments or the
quoted trade price for the contract; and
-- Over the counter options – valued based on broker statements.
Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in derivative income in the revenue column of the Statement of Comprehensive Income. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included in net gains on derivative instruments in the capital column of the Statement of Comprehensive Income. Any positions on such transactions open at the reporting date are reflected on the Statement of Financial Position at their fair value within current assets or current liabilities.
Amortised cost measurement
Cash at bank, amounts held at futures clearing houses and brokers and other receivables are carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses are recognised in profit or loss when the receivables are derecognised or impaired, as well as through the amortisation process.
Capital gains tax payable and other payables are measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are derecognised, as well as through the amortisation of these liabilities.
(c) Foreign Currency Translation
Functional and Presentation Currency
The books and records of the Company are maintained in the currency of the primary economic environment in which it operates (its functional currency). The Directors have considered the primary economic environment of the Company and considered the currency in which the original capital was raised, past distributions have been made and ultimately the currency in which capital would be returned on a break up basis. The Directors have also considered the currency to which underlying investments are exposed.
On balance, the Directors believe that US dollars best represent the functional currency of the Company. The financial statements, results and financial position of the Company are also expressed in US dollars which is the presentation currency of the Company and have been rounded to the nearest thousand unless otherwise stated.
Transactions and Balances
Transactions in currencies other than US dollars are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting year, monetary items and non-monetary assets and liabilities that are fair valued and are denominated in foreign currencies are retranslated at rates prevailing at the end of the reporting year. Gains and losses arising on translation are included in the Statement of Comprehensive Income for the year. Foreign exchange gains and losses relating to cash and cash equivalents are presented in the Statement of Comprehensive Income within ‘Net foreign exchange gains or losses’. Foreign exchange gains and losses relating to financial assets at fair value through profit or loss and derivatives are presented in the Statement of Comprehensive Income within ‘Net gains or losses on investments’ and ‘Net gains on derivative instruments’ respectively.
(d) Recognition of Dividend and Interest Income
Dividends arising on the Company’s investments are accounted for on an ex-dividend basis, gross of applicable withholding taxes. Interest on cash at bank and collateral is accrued on a day-to-day basis using the effective interest method. Dividends and interest income are recognised in the Statement of Comprehensive Income.
(e) Income from Derivatives
Derivative instrument income received from dividends on long (or payable from short) CFDs are accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited (or charged) to the revenue column of the Statement of Comprehensive Income.
Interest received on CFDs is accounted for on an accruals basis and credited to the revenue column of the Statement of Comprehensive Income. Interest received on CFDs represent the finance costs calculated by reference to the notional value of the CFDs.
(f) Finance Costs
Finance costs comprise bank charges and finance costs paid on CFDs, which are accounted for on an accruals basis, and dividends paid on short CFDs, which are accounted for on the date on which the obligation to incur the cost is established, normally the ex - dividend date. Finance costs are charged in full to the revenue column of the Statement of Comprehensive Income.
(g) Dividend Distribution
Dividend distributions are at the discretion of the Board of Directors. A dividend is recognised as a liability in the period in which it is approved at the Annual General Meeting of the shareholders and is recognised in the Statement of Changes in Equity.
(h) Cash and Cash Equivalents
Cash comprises current deposits with banks. Cash equivalents are short-term highly liquid investments that are readily convertible to known amounts of cash, are subject to an insignificant risk of changes in value, and are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
Bank overdrafts are accounted for as short term liabilities on the Statement of Financial Position and the interest expense is recorded using the effective interest rate method. Bank overdrafts are classified as other financial liabilities.
(i) Amounts held at/due to futures clearing houses and brokers
Cash deposits are held in segregated accounts on behalf of brokers as collateral against open derivative contracts. These are carried at amortised cost.
(j) Other receivables
Other receivables include amounts receivable on settlement of derivatives, securities sold pending settlement, accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets. Other receivables are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method and as reduced by appropriate allowance for estimated irrecoverable amounts.
(k) Other payables
Other payables include amounts payable on settlement of derivatives, securities purchased pending settlement, investment management fees, amounts payable for repurchase of shares, finance costs payable and expenses accrued in the ordinary course of business. Other payables are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Other payables are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
(l) Segment Reporting
Operating Segments are reported in a manner consistent with the internal reporting used by the chief operating decision maker (‘CODM’). The CODM, who is responsible for allocation of resources and assisting performance of the operating segments, has been identified as the Directors of the Company, as the Directors are ultimately responsible for investment decisions.
The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.
(m) Expenses
All expenses are accounted for on an accruals basis and are charged to the Statement of Comprehensive Income.
Expenses are allocated wholly to revenue with the following exceptions:
-- Management fees are allocated 20% to revenue and 80% to the capital, in
line with the Board’s expected long-term split of revenue and capital
return from the Company’s investment portfolio; and
-- Expenses which are incidental to capital events are charged to capital.
(n) Taxation
The Company currently incurs withholding taxes imposed by certain countries on investment income and capital gains taxes upon realisation of its investments. Such income or gains are recorded gross of withholding taxes and capital gains taxes in the Statement of Comprehensive Income. Withholding taxes and capital gains taxes are shown as separate items in the Statement of Comprehensive Income.
In accordance with IAS 12, ‘Income taxes’, the Company is required to recognise a tax liability when it is probable that the tax laws of foreign countries require a tax liability to be assessed on the Company’s capital gains sourced from such foreign country, assuming the relevant taxing authorities have full knowledge of all the facts and circumstances. The tax liability is then measured at the amount expected to be paid to the relevant taxation authorities, using the tax laws and rates that have been enacted or substantively enacted by the end of the reporting year. There is sometimes uncertainty about the way enacted tax law is applied to offshore investment funds. This creates uncertainty about whether or not a tax liability will ultimately be paid by the Company. Therefore, when measuring any uncertain tax liabilities, management considers all of the relevant facts and circumstances available at the time that could influence the likelihood of payment, including any formal or informal practices of the relevant tax authorities.
(o) Share Capital
Participating Preference Shares are not redeemable and there is no obligation to pay cash or another financial asset to the holder but are entitled to receive dividends. They are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds net of tax.
(p) Purchase of Own Shares
The cost of purchases of the Company’s own shares is shown as a reduction in Shareholders’ Funds. The Company’s net asset value and return per Participating Preference Share are calculated using the number of shares outstanding after adjusting for purchases.
(q) Critical Accounting Estimates and Assumptions
As stated in Note 2(a) Basis of Preparation, the preparation of financial statements, in conformity with IFRS, requires the use of certain critical accounting estimates. It also requires the Board of Directors to exercise its judgment in the process of applying the Company’s accounting policies. For example, the Company may, from time to time, hold financial instruments that are not quoted in active markets, such as minority holdings in investment and private equity companies. Fair values of such instruments are determined using different valuation techniques validated and periodically reviewed by the Board of Directors.
(r) Capital reserve
The following are attributable to capital reserve:
-- Gains and losses on the disposal of financial assets at fair value
through profit and loss and derivatives instruments;
-- Changes in the fair value of financial assets at fair value through
profit and loss and derivative instruments, held at the year end;
-- Foreign exchange gains and losses of a capital nature;
-- 80% of management fees;
-- Dividends receivable which are capital in nature;
-- Taxation charged or credited relating to items which are capital in
nature; and
-- Other expenses which are capital in nature.
The Company holds 2,921,898 participating preference shares in treasury which have been excluded from the net asset value and earnings per participating preference share calculations from the date of repurchase into treasury.
3. Income
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Investment income
UK dividends 362 798
Overseas dividends 18,900 21,474
UK and overseas scrip dividends 15 –
Interest on bonds 7 –
19,284 22,272
Derivative income
Dividends earned on long CFDs 8,489 5,220
Interest earned on CFDs 2,114 1,414
Option income 9,108 11,075
19,711 17,709
Other income
Interest income from cash and collateral 1,232 587
Fee rebate 20 33
1,252 620
Total income 40,247 40,601
4. Management Fees
Year ended 30June Year ended 30June
2024 2023
Revenue Capital Total Revenue Capital Total
$’000 $’000 $’000 $’000 $’000 $’000
Management fees 935 3,741 4,676 923 3,690 4,613
Under the Investment Management Agreement (‘the IMA’),
Management fees incurred by collective investment schemes or investment companies managed or advised by the Investment Manager are reimbursed.
Please see information on ongoing charges ratio as presented in the Annual Report.
5. Other expenses
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Allocated to revenue:
Custodian fees 415 362
Directors’ fees 263 279
Directors’ expenses 24 74
Administration fees 193 192
Audit fees 106 73
Legal and professional fees 120 117
Sundry expenses 510 522
Other expenses 1,631 1,619
Administration fees
The Administrator is entitled to receive a fee, payable monthly, based on the Net Asset Value of the Company and time incurred.
Custodian fee
Under the Custodian Agreement, the Custodian to the Company is entitled to receive a fee payable monthly, based on the Net Asset Value of the Company. All custody services are performed by
The Company also incurs charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.06% (2023: 0.05%) per annum of the average Net Assets of the Company.
6. Finance costs
Year ended 30June 2024 Year ended 30June 2023
Revenue Capital Total Revenue Capital Total
$’000 $’000 $’000 $’000 $’000 $’000
Dividends expenses on short CFDs 3,081 – 3,081 5,270 – 5,270
Interest expenses on CFDs 18,485 – 18,485 10,383 – 10,383
21,566 – 21,566 15,653 – 15,653
7. Taxation
Year ended 30June Year ended 30June
2024 2023
Revenue Capital Total Revenue Capital Total
$’000 $’000 $’000 $’000 $’000 $’000
Capital gains tax – 123 123 – (644) (644)
Withholding taxes 2,060 – 2,060 2,622 – 2,622
2,060 123 2,183 2,622 (644) 1,978
The Company is exempt from taxation in
Income due to the Company is subject to withholding taxes. The Manager undertakes regular reviews of the tax situation of the Company and believes that withholding taxes on dividend income and capital gains taxes on capital gains are currently the material transactions that generate the amounts of tax payable.
In accordance with IAS 12, ‘Income taxes’, where necessary the Company provides for deferred taxes on any capital gains/losses on the revaluation of securities in such jurisdictions where capital gains tax is levied.
The capital gains charge has been calculated on the basis of the tax laws enacted or substantially enacted at the reporting date in the countries where the Company’s investments generate taxable income on realisation. The Manager, on behalf of the Board, periodically evaluates which applicable tax regulations are subject to interpretation and establishes provisions when appropriate.
As at 30
8. Earnings/(loss) per Participating Preference Share
Year ended Year ended
30June 30June
2024 2023
Revenue earnings per Participating Preference Share $0.16 $0.22
Capital earnings/(loss) per Participating Preference Share $1.29 $(0.06)
Total earnings per Participating Preference Share – basic $1.45 $0.16
and diluted
The earnings/(loss) per Participating Preference Share is based on the profit/(loss) after taxation for the year divided by the weighted average number of Participating Preference Shares in issue during the year, as shown below:
$’000 $’000
Revenue profit after taxation for the year 14,055 19,784
Capital profit/(loss) after taxation for the year 112,010 (5,235)
Total profit after taxation for the year attributable to 126,065 14,549
Participating Preference Shares
Number Number
Weighted average number of Participating Preference Shares 86,936,701 91,100,066
in issue
9. Dividends Paid to Shareholders
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Dividend paid
2023 final dividend of 19.0¢ (2022: 16.0¢) per 17,305 14,576
Participating Preference Share
Total dividend paid 17,305 14,576
Dividend proposed
2024 final dividend of 20.0¢ (2023: 19.0¢) per 14,929 17,309
Participating Preference Share
Total dividend proposed 14,929 17,309
The Directors have proposed the payment of a dividend for the year ended 30
10. Investments at Fair Value through Profit or Loss
30June 30June
2024 2023
$’000 $’000
Financial Assets:
Equity securities 687,025 752,126
Equity linked notes 4,555 17,433
Debt instruments 316 –
Investee funds 4,857 9,049
Total Investments at fair value through profit or loss 696,753 778,608
Opening book cost 884,753 907,801
Opening unrealised losses on Investments at fair value (106,145) (180,459)
through profit or loss
Opening fair value of Investments at fair value through 778,608 727,342
profit or loss
Movements in the year
Purchases at cost 692,013 932,911
Sales – proceeds (855,428) (918,198)
Gains on Investments at fair value through profit or loss 81,553 36,553
Amortisation adjustment 7 –
Closing fair value 696,753 778,608
Closing book cost 695,828 884,753
Closing unrealised gains/(losses) on Investments at fair 925 (106,145)
value through profit or loss
Closing fair value of Investments at fair value through 696,753 778,608
profit or loss
Gains/(losses) on Investments at fair value through profit or loss
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Realised gains/(losses) on Investments at fair value
through profit or loss
Realised gains 81,933 75,936
Realised losses (107,443) (113,697)
Net realised losses on Investments at fair value through (25,510) (37,761)
profit or loss
Change in unrealised gains/(losses) on Investments at fair
value through profit or loss
Change in unrealised gains on Investments at fair value 39,223 20,750
through profit or loss
Change in unrealised losses on Investments at fair value 67,840 53,564
through profit or loss
Net change in unrealised gains on Investments at fair 107,063 74,314
value through profit or loss
Net gains on Investments at fair value through profit or 81,553 36,553
loss
The Company received
Transaction costs incurred during the year in the acquisition and disposal of Investments at fair value through profit or loss, which are included in the Net gains/(losses) on financial investments at fair value through profit or loss were as follows:
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Purchases transaction costs 1,012 1,403
Sales transaction costs 1,116 1,123
2,128 2,526
11. Derivative Instruments
Year ended Year ended
30June 30June
2024 2023
$’000 $’000
Realised gains/(losses) on derivative instruments
Gains on CFDs 177,604 163,817
Gains on future contracts 16,178 19,508
Gains on option contracts 18,681 10,947
Losses on CFDs (141,402) (187,154)
Losses on future contracts (23,062) (21,287)
Losses on option contracts (23,903) (13,600)
Net realised gains/(losses) on derivative instruments 24,096 (27,769)
Change in unrealised gains/(losses) on derivative
instruments
Change in unrealised gains on CFDs 9,979 (11,177)
Change in unrealised gains on future contracts (581) 849
Change in unrealised gains on option contracts 4,746 138
Change in unrealised gains on forward currency contracts 364 –
Change in unrealised losses on CFDs 4,143 (15)
Change in unrealised losses on future contracts (1,889) 277
Change in unrealised losses on option contracts (4,968) (112)
Net change in unrealised gains/(losses) on derivative 11,794 (10,040)
instruments
Net gains/(losses) on derivative instruments 35,890 (37,809)
30June 30June
2024 2023
Fair value Fair value
$’000 $’000
Fair value of derivative instruments recognised on the
Statement of Financial Position
Derivative instrument assets 25,399 9,468
Derivative instrument liabilities (11,857) (12,847)
13,542 (3,379)
30June 2024 30June 2023
Asset Asset
Fair value Fair value
exposure exposure
$’000 $’000
$’000 $’000
At the year end the Company held the
following derivative instruments
Long CFDs 4,751 366,358 (4,598) 312,737
Short CFDs 6,830 170,814 2,057 203,746
Long future contracts (399) 22,348 – –
Short future contracts (26) 22,831 – –
Short futures (hedging exposure) (1,196) (148,757) 849 (130,176)
Long call option contracts 5,508 49,080 254 2,879
Short put option contracts 915 2,269 (1,557) 10,789
Short call option contracts (1) 37 (384) 6,406
Short call option contracts (hedging (2,418) (15,110) – –
exposure)
Long put option contracts (786) 10,698 – –
Forward currency contracts 364 – – –
13,542 480,568 (3,379) 406,381
12. Other Receivables
30June 30June
2024 2023
$’000 $’000
CFD dividend receivable 1,661 827
Securities sold pending settlement 2,170 789
Amounts receivable on settlement of derivatives 3,054 –
Accrued income 1,182 4,834
Other receivables 16 30
8,083 6,480
13. Other Payables
30June 30June
2024 2023
$’000 $’000
CFD interest payable 431 473
CFD dividend payable 616 261
Securities purchased pending settlement 12,613 16,050
Amounts payable on settlement of derivatives 1,182 2,762
Management fees 335 391
Custodian fees 102 89
Directors’ fees 65 45
Repurchases of the Company’s own shares awaiting settlement 1,941 –
Capital gains tax payable 1,038 915
Accrued expenses 355 256
18,678 21,242
14. Share Capital
2024 2023
Number of Number of
shares shares
Authorised
Founder shares of no par value 1,000 1,000
Issued
Participating Preference Shares held outside Treasury
Beginning of the year 91,100,066 91,100,066
Repurchase and cancellation of the Company’s own (13,531,881)
Participating Preference Shares
Participating Preference Shares repurchased into (2,921,898) –
Treasury
End of the year 74,646,287 91,100,066
Participating Preference Shares held in Treasury *
Beginning of the year – –
Participating Preference Shares repurchased into 2,921,898 –
Treasury
End of the year 2,921,898 –
Total Participating Preference Shares including held in 77,568,185 91,100,066
Treasury
* The ordinary shares held in
The Board of Directors is mindful that the Company’s shares have traded at a discount to NAV for some time, and frequently deliberates appropriate discount control mechanisms to address the imbalance between the demand and supply of the Company’s shares. In recognition of this, on 13
The costs associated with the repurchase and cancellation of shares as well as repurchase of shares held in treasury of
The Company may issue an unlimited number of Unclassified Shares of no par value.
Founder Shares
All of the Founder Shares were issued on 6
The Founder Shares confer no rights upon holders other than at general meetings, on a poll, every holder is entitled to one vote in respect of each Founder Share held.
On 7
Treasury Shares
As at year ending 30
Participating Preference Shares
At the Extraordinary General Meeting of the Company held on 30
The holders of Participating Preference Shares rank ahead of holders of any other class of share in issue in a winding up. They have the right to receive any surplus assets available for distribution. The Participating Preference Shares confer the right to dividends declared, and at general meetings, on a poll, confer the right to one vote in respect of each Participating Preference Share held. Participating Preference Shares are classed as equity as they have a residual interest in the assets of the Company.
All of the above classes of shares are considered as Equity under the definitions set out in IAS 32, ‘Financial instruments: Disclosure and presentation’, because the shares are not redeemable and there is no obligation to pay cash or another financial asset to the holder.
15. Capital and Reserves
Share
Capital Revenue Total
premium
reserve reserve equity
account
$’000 $’000 $’000
$’000
At 1July 2023 6,291 735,860 54,583 796,734
Net gains on investments at fair value – 81,553 – 81,553
through profit or loss (see Note 10)
Net gains on derivative instruments (see – 35,890 – 35,890
Note 11)
Net foreign exchange losses – (1,569) – (1,569)
Management fees (see Note 4) – (3,741) – (3,741)
Tax charged to capital (see Note 7) – (123) – (123)
Repurchase and cancellation of the – (127,125) – (127,125)
Company’s own shares (see Note 14)
Participating Preference Shares repurchased – (24,923) – (24,923)
into Treasury (see Note 14)
Revenue profit after taxation for the year – – 14,055 14,055
Dividends paid to shareholders (see Note 9) – – (17,305) (17,305)
At 30June 2024 6,291 695,822 51,333 753,446
Share
Capital Revenue Total
premium
reserve reserve equity
account
$’000 $’000 $’000
$’000
At 1July 2022 6,291 741,095 49,375 796,761
Net gains on investments at fair value – 36,553 – 36,553
through profit or loss (see Note 10)
Net losses on derivative instruments (see – (37,809) – (37,809)
Note 11)
Net foreign exchange losses – (933) – (933)
Management fees (see Note 4) – (3,690) – (3,690)
Tax charged to capital (see Note 7) – 644 – 644
Revenue profit after taxation for the year – – 19,784 19,784
Dividends paid to shareholders (see Note 9) – – (14,576) (14,576)
At 30June 2023 6,291 735,860 54,583 796,734
Share Premium
Share Premium is the amount by which the value of shares subscribed for exceeded their nominal value at the date of issue.
The capital reserve balance at 30
16. Net Asset Value per Participating Preference Share
The calculation of the net asset value per Participating Preference Share is based on the following:
30June 30June
2024 2023
Net assets $753,446,000 $796,734,000
Participating Preference Shares in issue 74,646,287 91,100,066
Net Asset Value per Participating Preference Share $10.09 $8.75
17. Financial Instruments
Management of risk
The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Investment Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are investment performance, cybercrime and information security, business continuity & event management, gearing, discount to NAV, unlisted securities, foreign currency exposure, lack of market liquidity, environmental, social and governance (ESG) and key person risks. Other risks identified are tax and regulatory and operational risks, including those relating to third party service providers covering investment management, marketing and business development, company secretarial, fund administration and operations and support functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. Risks identified are shown in the Strategic Report.
This note is incorporated in accordance with IFRS 7: Financial Instruments: Disclosures and refers to the identification, measurement and management of risks potentially affecting the value of financial instruments.
The Company’s financial instruments may comprise:
-- Equity shares (listed and unlisted), preference shares, equity linked
notes, convertible bonds, rights issues, holdings in investment
companies and private placements;
-- Derivative instruments including CFDs, warrants, futures and options
written or purchased on stocks and equity indices and forward currency
contracts; and
-- Cash, liquid resources and short-term receivables and payables that
arise from its operations.
The risks identified by IFRS 7 arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, credit and counterparty risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below.
Interest rate risk
The Company has the ability to borrow up to 10% of the Company’s NAV in order to increase the amount of capital available for investment. The Company aims to keep its use of an overdraft facility for trading purposes to a minimum only using a facility to enable settlements. It may also hold interest bearing securities and cash.
The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:
30June 30June
2024 2023
$’000 $’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 361,607 317,335
361,607 317,335
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value 177,644 205,804
Debt Instrument 316 –
Amounts held at futures clearing houses and brokers 44,952 18,210
Cash and cash equivalents 8,794 18,057
231,706 242,071
Net exposure to financial instruments that bear interest (129,901) (75,264)
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at the statement of financial position date, an increase of 1% in interest rates throughout the year, with all other variables held constant, would have decreased the profit after taxation for the year and decreased the net assets of the Company by
Foreign currency risk
The Company invests in financial instruments and enters into transactions denominated in currencies other than its functional currency. Consequently, the Company is exposed to risks that the exchange rate of its functional currency relative to other foreign currencies may change in a manner that has an adverse effect on the value of that portion of the Company’s assets or liabilities denominated in currencies other than US dollars (functional currency) or
Three principal areas have been identified where foreign currency risk could impact the Company:
-- movements in currency exchange rates affecting the value of investments
and derivatives exposures;
-- movements in currency exchange rates affecting short-term timing
differences, for example, between the date when an investment is bought
or sold and the date when settlement of the transaction occurs; and
-- movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The Company’s financial assets comprise of investments, positions on derivative instruments, short-term debtors and cash and cash equivalents.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise positions on derivative instruments and other payables.
The net currency exposure profile of these financial assets/(liabilities) is shown below:
Investments Asset/ Cash, cash
held at (liabilities) equivalents 2024
fair value exposure of and other Total foreign
Currency
through derivative receivables/ currency risk
profit or loss instruments1 (payables)2 $’000
$’000 $’000 $’000
Australian dollar 3,594 (4,012) (35) (453)
Brazilian real 44,315 – (275) 44,040
Canadian dollar 25,805 9,545 (17) 35,333
Euro 16,125 21,793 (28) 37,890
Hong Kong dollar 40,623 108,530 (1,395) 147,758
Hungarian Forint 10,536 – – 10,536
Indian rupee 77,447 (17,942) 25,903 85,408
Indonesian rupiah 28,009 – – 28,009
Japanese Yen – (25,855) (97) (25,952)
Korean won 20,102 (7,027) 1,325 14,400
Mexican peso 33,824 23,248 (49) 57,023
Other currencies 38,148 (374) (36) 37,738
Poland złoty 13,899 (16,346) (351) (2,798)
Saudi riyal 36,888 – 385 37,273
South African Rand 85,394 2,518 (9) 87,903
Sterling 4,465 16,082 (985) 19,562
Swedish Krona – 8,450 (12) 8,438
Taiwan dollar 115,039 – 395 115,434
United Arab Emirates 16,671 – – 16,671
Dirham
United States dollar 65,389 (29,581) 18,432 54,240
Vietnamese dong 20,480 – – 20,480
696,753 89,029 43,151 828,933
1 The asset exposure of long and short derivative positions is after the netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing houses and brokers.
Investments Asset/ Cash, cash
held at (liabilities) equivalents 2023
fair value exposure of and other Total foreign
Currency
through derivative receivables/ currency risk
profit or loss instruments1 (payables)2 $’000
$’000 $’000 $’000
Brazilian real 70,992 263 (74) 71,181
Canadian dollar 23,451 19,717 15 43,183
Chinese yuan renminbi 6,364 – 30 6,394
Euro 35,411 3,570 5 38,986
Hong Kong dollar 77,538 53,348 1,265 132,151
Indian rupee 93,561 – 136 93,697
Indonesian rupiah 36,602 – – 36,602
Korean won 9,563 (604) 36 8,995
Mexican peso 34,214 18,890 (65) 53,039
Nigerian naira 9,356 – 1,319 10,675
Poland zloty 12,087 (7,503) 21 4,605
South African rand 80,608 (4,512) (237) 75,859
UK Sterling 20,784 9,044 (27) 29,801
Swedish Krona 10,837 – – 10,837
Taiwan dollar 107,225 – 1,835 109,060
United Arab Emirates 4,124 – – 4,124
dirham
United States dollar 92,384 (90,177) 17,175 19,382
Vietnamese dong 15,131 – 68 15,199
Other currencies 38,376 (15,959) 3 22,420
778,608 (13,923) 21,505 786,190
1 The asset exposure of long and short derivative positions is after the netting of hedging exposures;
2 Other receivables/(payables) include amounts held at futures clearing houses and brokers.
Foreign currency risk management
The degree of sensitivity of the Company’s assets to foreign currency risk depends on the net exposure of the Company to each specific currency and the volatility of that specific currency in the year. At 30
An increase in the US dollar by 5% in relation to the basket of currencies in which the Company’s net assets are denominated would have resulted in a decline in net assets by the same amount, under the assumption that all other factors remain constant.
The Investment Manager does not consider it realistic or useful to examine foreign currency risk in isolation. The Investment Manager considers the standard deviation of the NAV (which is struck in US dollars) as the appropriate risk measurement for the portfolio as a whole as it reflects market price risk generally. Please see Market Price Risk section.
Market price risk
Market price risk is the risk that value of the instrument will experience unanticipated fluctuations as a result of changes in market prices (other than those arising from foreign currency risk and interest rate risk), whether caused by factors specific to an individual investment, its issuer, or all factors influencing all instruments traded in the market.
Market price risk management
Market price risk can be moderated in a number of ways by the Investment Manager through:
(i) a disciplined stock selection and investment process; and
(ii) limitation of exposure to a single investment through diversification and through amongst others, the implementation of investment restrictions.
The Board reviews the prices of the portfolio’s holdings and investment performance at their meetings. Country and Sector Exposure of the
The Investment Manager has identified the MSCI Emerging Markets Index as a relevant reference point for the markets in which it operates. However, the Investment Manager does not manage the Company’s investment strategy to track the MSCI Emerging Markets Index or any other index or benchmark. The short-term performance of the Company and its correlation to the MSCI Emerging Markets Index is shown in the Financial Highlights section and is expected to change over time.
Market price risk – Investee Funds
The Company’s investments in Investee Funds are subject to the terms and conditions of the respective Investee Fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those Investee Funds. The Investment Manager makes investment decisions after extensive due diligence of the underlying fund, its strategy and the overall quality of the underlying fund’s manager. All of the Investee Funds in the investment portfolio are managed by portfolio managers who are compensated by the respective Investee Funds for their services. Such compensation generally consists of an asset based fee and a performance based incentive fee and is reflected in the valuation of the Company’s investment in each of the Investee Funds.
The exposure to investments in Investee Funds at fair value is disclosed as part of Note below. These investments are included in ‘Financial assets at fair value through profit or loss’ in the Statement of Financial Position. The Company’s maximum exposure to loss from its interests in Investee Funds is equal to the total fair value of its investments in Investee Funds.
There were no purchases of Investee Funds during the year ended 30
Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments. It represents the potential loss the Company might suffer through price movements in its investment positions. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective.
The Investment Manager is responsible for actively monitoring the portfolio selected in accordance with the overall asset allocation parameters and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from derivative positions, mainly due to the underlying exposures, are assessed by the Investment Manager’s specialist derivative instruments team.
Other price risk sensitivity
The following table illustrates the sensitivity of loss after taxation for the year and net assets to an increase or decrease of 10% (year ended 30
The other price sensitivity analysis is based on the valuation of investments directly held by the Company. For underlying investment funds this is based on the net assets of such underlying funds as included in the Company’s portfolio of investments at reporting date.
The value of certain investments, in particular positions held in underlying funds may vary due to currency, interest rate and credit risks and such risks are not directly considered in the other price risk sensitivity analysis.
Effect of a 10% increase/(decrease) in fair value:
2024 2023
10% increase 10% decrease 10% increase 10% decrease
in fair value in fair value in fair value in fair value
$’000 $’000 $’000 $’000
Statement of
Comprehensive Income –
profit/(loss) after
taxation
Total profit/(loss)
after taxation for the 69,644 (69,644) 77,861 (77,861)
year
Net assets 69,644 (69,644) 77,861 (77,861)
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short-term flexibility is achieved by the use of a bank overdraft, if required.
The liquidity risk profile of the Company was as follows:
30June 30June
2024 2023
$’000 $’000
Amounts due within one month
Securities purchased pending settlement 12,613 16,050
Repurchases of the Company’s own shares awaiting settlement 1,941 –
Amounts payable on settlement of derivatives 1,182 2,762
Derivative liabilities 8,377 12,847
CFD interest payable 431 473
CFD dividend payable 616 261
Custodian fees 102 89
Management fees 335 391
Directors’ fees 65 45
Accrued expenses 355 256
Amounts due within one year
Derivative liabilities 3,480 –
Capital gains tax payable 1,038 915
Total liabilities 30,535 34,089
Liquidity risk management
The restrictions on concentration and the diversification requirements detailed above (see market price risk) also serve normally to protect the overall value of the Company from the risks created by the lower level of liquidity in the markets in which the Company operates.
The Company has no payables past their due dates as at 30
Credit and counterparty risk
Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment it has entered into with the Company. Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Investment Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Investment Manager. Exposure to credit risk arises on outstanding security transactions and derivative instrument contracts and cash at bank. The Company only engages with approved counterparties that are rated investment grade or above.
The Company has no receivables past their due dates as at 30
Credit risk management
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over The Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and evaluates derivative instrument credit risk exposure.
The maximum exposure to credit risk at 30 June is the carrying amount of the financial assets as set out below.
30June 30June
2024 2023
Amounts due Amounts due
within 1 year within 1 year
$’000 $’000
Derivative assets 25,399 9,468
Debt instruments 316 –
Securities sold pending settlement 2,170 789
Amounts receivable on settlement of derivatives 3,054 –
Amounts held at futures clearing houses and brokers 44,952 18,210
Cash and cash equivalents 8,794 18,057
CFD dividend receivable 1,661 827
Accrued income 1,182 4,834
Other receivables 16 30
87,544 52,215
None of these assets are impaired nor past due but not impaired.
For OTC and exchange traded derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions and held in segregated collateral accounts. Collateral can be held by brokers on behalf of the Company to reduce the credit risk exposure of the Company or held by the Company on behalf of brokers to reduce the credit risk exposure of the brokers. All collateral received or pledged at reporting date is in form of cash. The value of collateral received from brokers and pledged to brokers is shown below:
30June 2024 30June 2023
collateral collateral collateral collateral
received pledged received pledged
$’000 $’000 $’000 $’000
Bank of America Merrill Lynch – – – 250
International
Goldman Sachs International Ltd 6,440 – – 3,430
J.P. Morgan Securities plc 5,290 – 1,180 –
Morgan Stanley & Co. International – 530 110 –
Ltd
HSBC Bank plc 790 – – 1,800
UBS AG 2,300 44,422 – 12,730
Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in the Risk Management Process document. This document was approved by the Board and allows the use of derivative instruments for the following purposes:
-- to gain exposure to equity markets, sectors or individual investments;
-- to hedge equity market risk in the Company’s investments with the
intention of mitigating losses in the events market falls;
-- to enhance portfolio returns by writing call and put options; and
-- to take short positions in equity markets, sectors or individual
investments which would benefit from a fall in the relevant market
price, where the Investment Manager believes the investment is
overvalued. These positions distinguish themselves from other short
exposures held for hedging purposes since they are expected to add risk
to the portfolio.
The risk and investment performance of these instruments are managed by an experienced, specialist derivative team of the Investment Manager using portfolio risk assessment tools for portfolio construction.
Derivative instruments exposure sensitivity analysis
The Company invests in derivative instruments to gain or reduce exposure to the equity market. An increase of 10% in the share prices of the investments underlying the derivative instruments at the reporting date would have increased the profit after taxation for the year and increased the net assets of the Company by
Offsetting
To mitigate counterparty risk for OTC derivative transactions, the ISDA legal documentation is in the form of a master agreement between the Company and the brokers. This allows enforceable netting arrangements in the event of a default or termination event. Derivative instrument assets and liabilities that are subject to netting arrangements have not been offset in preparing the Statement of Financial Position.
The Company’s derivative instrument financial assets and liabilities recognised in the Statement of Financial Position and amounts that could be subject to netting in the event of a default or termination are shown below:
Related amounts not set
off on statement of 2024
financial position
Gross amount
Net amount
of recognised
of financial
financial Margin
assets
Gross liabilities Financial account Net
Financial presented on
assets amount set off on instruments received as amount
the statement
$’000 the statement $’000 collateral $’000
of financial
of financial $’000
position
position
$’000
$’000
CFDs 18,344 – 18,344 (6,763) (9,169) 2,412
Options 6,423 – 6,423 (1,209) – 5,214
Futures 268 – 268 (268) – –
Forward
currency 11,801 (11,437) 364 – – 364
contracts
36,836 (11,437) 25,399 (8,240) (9,169) 7,990
Related amounts not
set 2024
off on statement of
financial position
Gross amount
Net amount
of recognised
of financial
financial Margin
liabilities
Gross assets Financial account Net
Financial presented on
liabilities amount set off on instruments pledged as amount
the statement
$’000 the statement $’000 collateral $’000
of financial
of financial $’000
position
position
$’000
$’000
CFDs (6,763) – (6,763) 6,763 – –
Options (3,205) – (3,205) 1,209 – (1,996)
Futures (1,889) – (1,889) 268 1,621 –
Forward
currency (11,437) 11,437 – – – –
contracts
(23,294) 11,437 (11,857) 8,240 1,621 (1,996)
Related amounts not set
off on statement of 2023
financial position
Gross amount
Net amount
of recognised
of financial
financial Margin
assets
Gross liabilities Financial account Net
Financial presented on
assets amount set off on instruments received as amount
the statement
$’000 the statement $’000 collateral $’000
of financial
of financial $’000
position
position
$’000
$’000
CFDs 8,365 – 8,365 (6,055) (1,290) 1,020
Options 254 – 254 (254) – –
Futures 849 – 849 – – 849
9,468 – 9,468 (6,309) (1,290) 1,869
Related amounts not
set 2023
off on statement of
financial position
Gross amount
Net amount
of recognised
of financial
financial Margin
liabilities
Gross assets Financial account Net
Financial presented on
liabilities amount set off on instruments pledged as amount
the statement
$’000 the statement $’000 collateral $’000
of financial
of financial $’000
position
position
$’000
$’000
CFDs (10,906) – (10,906) 6,055 4,235 (616)
Options (1,941) – (1,941) 254 1,687 –
(12,847) – (12,847) 6,309 5,922 (616)
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Valued by reference to inputs other than quoted prices included
Level 2 in level 1 that are observable (i.e. developed using market data)
for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are
not based on observable market data
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. The valuation techniques used by the Company are explained in Note 2(b). The table below sets out the Company’s fair value hierarchy
30June
Financial assets at fair value through profit or Level 1 Level 2 Level 3 2024
loss
$’000 $’000 $’000 Total
$’000
Investments in equity securities 686,519 – 506 687,025
Equity linked notes – 4,555 – 4,555
Debt instruments – 316 – 316
Investee funds – – 4,857 4,857
Derivative instrument assets – futures contracts 268 – – 268
Derivative instrument assets – options 6,412 11 – 6,423
Derivative instrument assets – CFDs – 18,344 – 18,344
Derivative instrument assets – forward currency – 364 – 364
contracts
693,199 23,590 5,363 722,152
Financial liabilities at fair value through
profit or loss
Derivative instrument liabilities – futures 1,889 – – 1,889
contracts
Derivative instrument liabilities – options 1,198 2,007 – 3,205
Derivative instrument liabilities – CFDs – 6,763 – 6,763
3,087 8,770 – 11,857
Financial instruments classified under Level 2 are valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly. The Level 2 instruments include underlying investment funds, equity linked notes, over the counter option contracts and contracts for difference.
30June
Financial assets at fair value through profit or Level 1 Level 2 Level 3 2023
loss
$’000 $’000 $’000 Total
$’000
Investments in equity securities 751,117 – 1,009 752,126
Equity linked notes – 17,433 – 17,433
Investee funds – 3,943 5,106 9,049
Derivative instrument assets – futures contracts 849 – – 849
Derivative instrument assets – options 13 241 – 254
Derivative instrument assets – CFDs – 8,365 – 8,365
751,979 29,982 6,115 788,076
Financial liabilities at fair value through
profit or loss
Derivative instrument liabilities – options 1,516 425 – 1,941
Derivative instrument liabilities – CFDs – 10,906 – 10,906
1,516 11,331 – 12,847
30June 30June
Valuation basis for Level 3 investments 2024 2023
$’000 $’000
Net asset value 4,857 5,106
Most recently available published price adjusted 506 1,009
5,363 6,115
As the key input into the valuation of Level 3 investments is official valuation statements from the investee funds and the adjusted most recently available published price, we do not consider it appropriate to put forward a sensitivity analysis on the basis that insufficient value is likely to be derived by the end users.
The following table summarises the change in value associated with Level 3 financial instruments carried at fair value during the year:
30June 30June
2024 2023
Movements in level 3 investments during the year
Level 3 Level 3
$’000 $’000
Opening balance 6,115 5,809
Sales (8,384) (4,045)
Transfers into level 3 – 1,009
Realised (losses)/gains (19,431) 3,112
Net change in unrealised gains/(losses) 27,063 230
Closing balance 5,363 6,115
During the year the Company participated in a tender offer which was being undertaken in Detsky Mir’s restructuring from being a public listed company to a private company. The Company’s application was successful and it received proceeds of
During the year, the Company sold its position in
The Company’s holdings in Russian securities have been fair valued at nil as at 30
The Company’s policy is to recognise transfers in and transfers out at the end of each accounting year.
Capital Risk Management
The capital of the Company is represented by the equity attributable to holders of Participating Preference Shares. The amount of equity attributable to holders of Participating Preference Shares is subject to change, at most, twice monthly as the Company is a closed-ended fund with the ability to issue additional shares only if certain conditions are met as set out in the Company’s scheme particulars. The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and to maintain a strong capital base to support the development of the investment activities of the Company.
18. Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital, reserves and gearing, which are disclosed on the Statement of Financial Position. The Company is managed in accordance with its investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report. The principal risks and their management are disclosed in the Strategic Report and in Note 17.
The Company’s gearing at the year end is set out below:
30June 2024
Gross gearing Net gearing
Exposure Exposure
%1 %1
$’000 $’000
Investments 696,753 92.5 696,753 92.5
Long CFDs 366,358 48.6 366,358 48.6
Long futures 22,348 3.0 22,348 3.0
Long put options 10,698 1.4 10,698 1.4
Long call options 49,080 6.5 49,080 6.5
Total long exposures before hedges 1,145,237 152.0 1,145,237 152.0
Less: short derivative instruments hedging the (148,757) (19.7) (148,757) (19.7)
above
Less: short call covered options for hedging (15,110) (2.0) (15,110) (2.0)
purposes
Total long exposures after the netting of 981,370 130.3 981,370 130.3
hedges
Short CFDs 170,814 22.7 (170,814) (22.7)
Short futures 22,831 3.0 (22,831) (3.0)
Short put options 2,269 0.3 (2,269) (0.3)
Short call options 37 – (37) –
Gross Asset Exposure/net exposure 1,177,321 156.3 785,419 104.3
Net Assets 753,446 753,446
Gearing2 56.3% 4.3%
30June 2023
Gross gearing Net gearing
Exposure Exposure
%1 %1
$’000 $’000
Investments 778,608 97.7 778,608 97.7
Long CFDs 312,737 39.2 312,737 39.2
Short put options 10,789 1.4 10,789 1.4
Long call options 2,879 0.4 2,879 0.4
Total long exposures before hedges 1,105,013 138.7 1,105,013 138.7
Less: short derivative instruments hedging (130,176) (16.3) (130,176) (16.3)
the above
Total long exposures after the netting of 974,837 122.4 974,837 122.4
hedges
Short CFDs 203,746 25.5 (203,746) (25.5)
Short call options 6,406 0.8 (6,406) (0.8)
Gross Asset Exposure/net exposure 1,184,989 148.7 764,685 96.1
Net Assets 796,734 796,734
Gearing2 48.7% (3.90)%
1 Exposure to the market expressed as a percentage of Net Assets.
2 Gearing is the amount by which Gross Asset Exposure/net exposure exceeds Net Assets expressed as a percentage of Net Assets.
19. Transactions with the Managers and Related Parties
Details of the current fee arrangements are given in Note 4. During the year, management fees of
At the date of this report, the Board consisted of five non-executive Directors (as shown in the Annual Report) all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company
The Directors received for the financial year fees totalling £205,829, (2023: £156,604), the breakdown of the fees is shown in the Directors’ Remuneration Report in the Annual Report. From 1
Directors’ expenses for the year include travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Company.
Directors’ related party interests are stated in the Annual Report as part of the Directors’ Remuneration Report.
*Appointed 17
20.
Ultimate Controlling Party
In the opinion of the Directors on the basis of the shareholdings advised to them, the Company has no immediate or ultimate controlling party.
21. Segment Information
The Directors, after having considered the way in which internal reporting is provided to them, are of the opinion that the Company continues to be engaged in a single segment of business, being the provision of a diversified portfolio of investments in emerging markets.
All of the Company’s activities are interrelated, and each activity is dependant on the others. Accordingly, all significant operating decisions are based upon analysis of the Company operating in one segment.
The financial positions and results from this segment are equivalent to those per the financial statements of the Company as a whole, as internal reports are prepared on a consistent basis in accordance with the measurement and recognition principles of IFRS.
A breakdown of the Company’s financial assets at fair value through profit and loss is shown in the Country exposure of the Company’s portfolio in the Annual Report.
The Company is domiciled in
22. Subsequent events
No significant events have occurred since the end of the reporting date which would impact on the financial position of the Company disclosed in the Statement of Financial Position as at 30
Alternative Performance Measures
Active Share
Active Share is a measure of the percentage which stock holdings in the Company differ from the constituents of the benchmark, the MSCI Emerging Markets Index. Active share is calculated by taking the sum of the absolute difference between the weights of the holdings in the Company and those in the MSCI Emerging Markets Index and dividing the result by two. See The Year at a Glance inside the front cover of this report for further details.
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the NAV of the Company and the share price and is expressed as a percentage of the NAV. Details of the Company’s discount are on the Financial Highlights in the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18 in the Annual Report for details of the Company’s gearing.
Net Asset Value (“NAV”) per Participating Preference Share
The NAV per Participating Preference Share is considered to be an Alternative Performance Measure. See the Statement of Financial Position in the Annual Report and Note 16 in the Annual Report for further details.
Ongoing charges ratio
Ongoing charges ratio is considered to be an Alternative Performance Measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of management fees and other expenses expressed as a percentage of the average net assets throughout the year.
30June 30June
2024 2023
Management fees ($’000) 4,676 4,613
Other expenses ($’000)1 1,631 1,619
Ongoing charges ($’000) 6,307 6,232
Average net assets ($’000) 782,365 768,785
Ongoing charges ratio 0.81% 0.81%
Total Return Performance
Total return performance is considered to be an Alternative Performance Measure (as defined in the Glossary to the Annual Report). NAV per share total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. Share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.
The tables below provide information relating to the NAV per share and share prices of the Company, the impact of the dividend reinvestments and the total returns for the years ended 30
Net asset
Share
2024 value per
price
share
30 June 2023 687.91p 587.50p
30 June 2024 798.47p 703.00p
Change in the year +16.1% +19.7%
Impact of dividend reinvestment +2.6% +2.9%
Total return for the year +18.7% +22.6%
Net asset
Share
2023 value per
price
share
30 June 2022 720.13p 633.70p
30 June 2023 687.91p 587.50p
Change in the year -4.5% -7.3%
Impact of dividend reinvestment +1.9% +2.1%
Total return for the year -2.6% -5.2%
The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended
A copy of the above results announcement will be available on the Company's website at www.fidelity.co.uk/emergingmarkets within two working days.
A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelity.co.uk/emergingmarkets where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
ENDS
