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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Genesis Emerging Markets Fund Ld | LSE:GSS | London | Ordinary Share | GG00B4L0PD47 | PTG NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 869.00 | 871.00 | 872.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From May 2019 to May 2024
TIDMGSS
RNS Number : 0042L
Genesis Emerging Markets Fund Ld
27 September 2016
GENESIS EMERGING MARKETS FUND LIMITED
(The 'Company'; the 'Fund')
(Registration Number : 20790)
STOCK EXCHANGE ANNOUNCEMENT
ANNUAL FINANCIAL REPORT
The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the year ended 30(th) June 2016. The Annual Financial Report will shortly be available from the Manager's website www.giml.co.uk and also for inspection on the National Storage Mechanism, which is located at http://www.morningstar.co.uk/uk/NSM where users can access the regulated information provided by listed entities.
INVESTMENT APPROACH
The investment approach is to identify companies which are able to take advantage of growth opportunities in emerging markets and invest in them when they are trading at an attractive discount to the Manager's assessment of their intrinsic value.
BENCHMARK
MSCI Emerging Markets (Total Return) Index.
RESULTS
Hot Features
Premium
30(th) June 30(th) June
2016 2015
Published net asset value* GBP838.7m GBP771.4m
Published net asset value* US$1,121.3m US$1,213.3m
Published net asset value per Participating
Preference Share* GBP6.21 GBP5.72
Published net asset value per Participating US$8.31 US$8.99
Preference Share*
Loss per Participating Preference Share (US$0.68) (US$0.89)
* Figures are based on the last traded price for investments.
CHAIRMAN'S STATEMENT
Performance
Investors in emerging markets have faced a somewhat difficult environment in recent years, and the last twelve months provided little respite. The fall-out from the significant commodity price declines last year continued to affect many developing economies and their companies in the latter part of 2015, while increasing concerns about the Chinese economy held emerging markets back in the first half of 2016, even though some areas performed reasonably well.
The overall effect was that the MSCI EM (TR) Index (the 'Index') fell 11.7% in US dollar terms over the year. However, for UK investors the dramatic weakening of sterling against the US dollar during the weeks around the EU referendum meant that in sterling terms the Index in fact gained 3.9%.
Against this performance environment, the Fund's net asset value per share ('NAV') increased from GBP5.72 to GBP6.21 representing a return of 8.7%. The Fund's share price rose by only 7.1%, however, as investors generally continued to exhibit some nervousness about potential returns from emerging markets.
Having noted in the Half-Year Report six months ago that the Fund's performance in 2015 was disappointing, and that during discussions with the Manager the Board had reviewed the results in some depth, it is pleasing to report that the returns to shareholders over the full financial year have been ahead of the Index. That said, while the Manager has been able to add relative value for shareholders over the longer-term too (and its record in this regard generally compares well with peers), the disappointing absolute returns generated in recent years reflect the challenges facing emerging markets as a whole.
The Fund's Portfolio and the Manager
The Manager's fundamental investment approach is to invest in companies it feels are of sufficiently high quality to generate attractive returns over at least a five-year horizon, but which the market appears to be pricing too cheaply. The consideration of 'quality' within this approach incorporates not just an assessment of management capability and business position, but importantly also each company's management of the environmental, social and governance issues impacting its operations.
The Fund's portfolio consists of a diversified group of 142 companies (including several smaller businesses), representing a large number of emerging market countries. The Manager's long-term fundamental approach is reflected in the high average holding period of (currently) over seven years, with turnover correspondingly low at around 21% over the last twelve months.
The Board continues to believe that the investment approach and the resulting portfolio described above is appropriate for the Fund, and - noting that the Manager has added value for shareholders over the life of the Fund by following such an approach - that shareholders' interests remain well-served by the ongoing appointment of Genesis.
Discount
As noted above, the share price rose by 7.1% over the year, from GBP5.04 to GBP5.40, with the discount to NAV correspondingly widening from 11.8% at the beginning of the period to 13.1% at the end. During the twelve-month period the discount ranged between 7.3% and 15.1%, with an average level of 11.7%.
These figures are monitored closely by the Board and we actively consider appropriate ways in which the discount can be managed. The Board retains the ability to buy back shares if it believes this is warranted to help manage the discount, but in terms of the financial year under review we would observe that the Fund's discount has been in line with both the peer group and its own history and therefore that no explicit action was necessary.
The UK's EU Referendum
As a Guernsey investment company listed in the UK, the Fund may be affected in due course by the result of the UK's June referendum on membership of the EU. Shareholders will be aware that there is currently considerable uncertainty about the timing of the UK's potential departure. Naturally the Board and the Manager will monitor events closely to assess any potential impact on the Fund over time, and will take appropriate action to ensure the Fund is in compliance with all relevant regulation and remains as accessible and attractive as possible to shareholders within and outside the UK.
The Board of Directors
As well as my own appointment as Chairman, there have been a number of other changes within the Board that I would like to highlight to shareholders. In accordance with the AIC Code, during April the Board underwent an independent triennial evaluation of its performance, carried out by Stephenson & Co. As we announced earlier this year, Russell Edey has assumed the role of Senior Independent Director. Saffet Karpat has stepped down as Chair of the Audit and Risk Committee but remains a member. Russell Edey has succeeded Saffet as Chair, while I have also been appointed as a member of this Committee.
Michael Hamson has decided not to stand for re-election at the Fund's upcoming Annual General Meeting in November: on behalf of the whole Board I would like to express our great thanks to him for his considerable contribution over ten years as a Director of the Fund, and wish him well. It is the Board's intention to appoint a new Director following Mr Hamson's departure; the Fund's Nomination Committee is currently engaged in assessing potential candidates.
The remaining five Directors are standing for re-election at the Annual General Meeting, in accordance with the requirements of the AIC Code of Corporate Governance and the UK Corporate Governance Code. Following the Board's internal evaluation process, I confidently recommend all Directors for re-election; naturally I hope that shareholders will feel similarly confident in our ability to protect their interests and hence able to vote in favour of our re-election.
Dividend
Shareholders will appreciate that the Fund's stated objective is to achieve capital growth, with no specific focus on income, and historically the Board has therefore felt it counter-intuitive for the Fund to pay a dividend. In recent years, however, it has become clear that - notwithstanding the investment objective, and with no desire to change the way in which the Fund's portfolio is managed - some of the Fund's shareholders have raised the possibility of a dividend being introduced. With this in mind, the Board has been considering the Fund's position on dividends, taking into account a range of factors. The Board is currently of the view that it would not be appropriate to propose a dividend to shareholders principally because in the past few years the Fund's level of net income has not been sufficiently consistent to support a meaningful payment. The matter will, however, continue to be reviewed by the Board on an ongoing basis, with the intention of paying a dividend (or indeed buying back shares) in future years if an appropriate opportunity arises.
AGM and Shareholder Meeting, and Shareholder Communication
The notice convening the Annual General Meeting to be held on 8th November 2016 in Guernsey will be found at the end of this Annual Report, along with the schedule of resolutions to be considered, which include an update of the Fund's Articles of Incorporation. . As always we strongly urge all shareholders to vote on the resolutions.
We aim to ensure that all shareholders have access to up-to-date information about the Fund. As well as the distribution of Annual and Half-Year Reports and the release of announcements to the London Stock Exchange, we would encourage shareholders to refer to the monthly factsheets containing the latest information on recent activity and investment performance. These can be found on the Fund's website www.genesisemf.com along with other relevant Fund literature.
Shareholders are also very welcome to attend the Fund's annual Shareholder Information Meeting which this year will take place on 10(th) November 2016 at the Investment Adviser's office in London. An invitation to this event will be posted to shareholders with the Annual Report and we hope that as many shareholders as possible will take this opportunity to hear directly from representatives of the Manager.
Additionally, we recognise that it is important that - while in practice the Manager will usually be best placed to address shareholder queries - shareholders are able to communicate directly with the Board where necessary. To that end I have endeavoured to speak with many of the larger shareholders of the Fund since my appointment as Chairman (and naturally will continue to do so) but additional feedback is always helpful to us. Shareholders are welcome to contact me or Russell Edey (as Senior Independent Director), or indeed any of the Board with their comments.
Outlook
Companies in emerging markets continue to face challenges: past editions of the Annual Report have articulated concerns such as the drying up of new areas of business opportunity, the increased competition from developed market firms and the corresponding effect on profitability, the negative impact of potentially higher US interest rates, and - crucially - the lack of reforms in many countries that would help companies develop and grow more efficiently. None of these issues have disappeared, and uncertainty over growth and reform in China in particular also weighs heavily on sentiment, but despite all this, valuations for many companies in emerging markets remain elevated.
Against that backdrop, however, the necessary reform process has started in markets like Mexico, India and Indonesia, and others will follow in due course - even in Brazil, a country in the midst of a full-blown political crisis, we can anticipate that in time the eventual outcome is likely to be a better operating environment for companies. Ultimately, the high-quality businesses held in the Fund's portfolio are those with the capability to take advantage of the challenging landscape, increasing their reach at the expense of their peers. Good stock selection, and an awareness of potential changes in corporate operating conditions, remain the necessary skills to navigate through this environment, enabling the generation of strong emerging market returns for shareholders over the long term.
Hélène Ploix
Chairman
September 2016
DIRECTORS' REPORT
STRATEGY AND BUSINESS MODEL
Fund Objective
The investment objective of the Fund is to achieve capital growth over the medium to long term, primarily through investment in equity securities quoted on Emerging Markets.
Strategy
The core element of our strategy is to appoint and retain a high-quality manager whose investment philosophy best matches the Fund's objective, and carefully monitor the Fund's performance.
Genesis, the Fund's Manager, believes that it can best deliver excellent performance by making long-term investments in quality businesses at a discount to rigorously-assessed intrinsic value. By focussing on companies that can compound shareholders' capital, and ignoring the composition of the benchmarks, the Manager believes it can generate higher long-term relative returns while taking less risk.
Business Model and Investment Process
The Fund has no employees or premises and the Board is comprised of non-executive Directors. The day-to-day operations and functions of the Fund have been delegated to third-party service providers who are subject to the oversight of the Board.
During the year under review Genesis provided investment and risk management services, JP Morgan Chase Bank was the Custodian and JP Morgan Administration Services (Guernsey) Limited was the Administrator and Company Secretary. The Board regularly reviews the performance and risks of its primary service providers and that they have appropriate frameworks in place for the oversight of their internal controls, monitoring and reporting.
In line with the stated investment philosophy, the Manager employs a bottom-up investment approach with all members of its investment team taking responsibility for analysis on individual companies. The investment process is founded on proprietary internal research, with the Manager's structure designed to allow a cohesive team of investors to generate fundamental research insights and, subject to rigorous challenge, express those insights in portfolios. The Fund's portfolio is diversified across countries and industries and typically comprises approximately 130 holdings, to give a range of 10-15 per team member. The Manager believes that when its team concentrates on a smaller number of ideas, the research can be deeper and insights more valuable.
Portfolios comprise holdings in predominantly high-quality, sustainable businesses. As part of their analysis the Manager's team determines quality ratings for each company, which primarily measure a business's ability to generate sustainable excess returns on capital. High-quality companies should have a low probability of negative revisions to the Manager's assessment of their intrinsic value in US$ terms. Environmental, Social and Governance ('ESG') considerations are included in the analysis of sustainability, and the team takes ESG factors into account when determining the quality rating of a business. The Manager recognises that governance issues in particular are relevant to all companies and has laid out the key principles that it expects companies to follow from a corporate governance perspective.
Given that the average holding period of investments in client portfolios has consistently been more than five years (and is currently in excess of seven) and that this characteristic is expected to persist, the Manager is comfortable buying into relatively illiquid situations and building positions gradually. In the Manager's experience the trading liquidity of a stock improves as its underlying merits are gradually appreciated by a wider domestic and international investor base. Turnover is correspondingly low; typically of the order of 20-25% per annum.
There is no specific company market capitalisation range in which the Manager invests, and it is prepared to take positions in smaller-capitalisation stocks where compelling investment cases are found, in the belief that these can be a source of particularly attractive long-term investment opportunities. The Fund invests in a large number of emerging markets, many of which are not represented in the standard indices. The Manager aims to retain as much flexibility as possible with respect to portfolio constraints, so formal limits are applied only on maximum exposure (at time of purchase) to individual countries of 25% and individual stocks of 5%.
Because the Manager aims to invest in companies that can compound shareholders' capital, but also aims to invest at a discount to intrinsic value, the portfolio tends to have both growth and value characteristics.
FINANCIAL PERFORMANCE
Results
The total loss for the year for the Fund amounted to $91,996,000 compared to a total loss of $120,705,000 in the previous year. Refer to the Manager's Review for an explanation of the Fund's performance. The Directors do not recommend the payment of a dividend in respect of the year ended 30(th) June 2016 (2015: nil).
Capital Values
At 30(th) June 2016, the value of Equity Shareholders' Funds was $1,121,318,000 (2015: $1,213,314,000) a reduction of $91,996,000. The Net Asset Value per Participating Preference Share was $8.31 (2015: $8.99).
PRINCIPAL RISKS AND RISK MANAGEMENT
The main risks to the value of its assets arising from the Fund's investment in financial instruments are unanticipated adverse changes in market prices and foreign currency exchange rates and an absence of liquidity. The Board reviews and agrees with the Manager policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the period to which these financial statements relate.
Volatility of emerging markets and market risk
The economies, currencies and the financial markets of a number of developing countries in which the Fund invests may be extremely volatile. To manage the risks posed by adverse price fluctuations the Fund's investments are geographically diversified, and will continue to be so. The Fund will not invest more than 25% of its assets (at the time the investment is made) in any one country. Further, the exposure to any one company or group (other than an investment company, unit trust or mutual fund) is unlikely to exceed 5% of the Fund's net assets at the time the investment is made. The Articles of Incorporation place a limit of 10% for securities issued by one company but the Directors use 5% for monitoring purposes.
Foreign currency exposure
The Fund's assets will be invested in securities of companies in various countries and income will be received by the Fund in a variety of currencies. However, the Fund will compute its net asset value and distributions in US dollars. The value of the assets of the Fund as measured in US dollars may be affected favourably or unfavourably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies. The Fund has opted not to engage in any active management of foreign currency risk, and therefore all its open foreign exchange positions are typically unhedged.
Lack of liquidity
Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stockmarkets of the developed world and trading may even be temporarily suspended during certain periods. Liquidity can also be negatively impacted by temporary capital controls in certain markets. A lower level of liquidity can exaggerate the fluctuations in the value of investments described previously. The restrictions on concentration and the diversification requirements detailed above also serve normally to protect the overall value of the Fund from the risks created by the lower level of liquidity in the markets in which the Fund operates.
Custody risk
The Fund is also exposed to operational risks such as custody risk. Custody risk is the risk of loss of securities held in custody occasioned by the insolvency or negligence of the Custodian. Although an appropriate legal framework is in place that eliminates the risk of loss of value of the securities held by the Custodian, in the event of its failure, the ability of the Fund to transfer the securities might be temporarily impaired. The day-to-day management of these risks is carried out by the Manager under policies approved by the Board.
CORPORATE GOVERNANCE
The Board is accountable to shareholders for the governance of the Fund's affairs. The Directors use this Report to detail the Fund's corporate governance statement.
The Fund is a member of the Association of Investment Companies ('AIC') and the Board has considered the principles and recommendations of the 2015 AIC Code of Corporate Governance ('AIC Code') by reference to the AIC Corporate Governance Guide for Investment Companies ('AIC Guide'). The AIC Code addresses all the principles set out in the 2014 UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Fund.
As a Guernsey incorporated company listed on the London Stock Exchange within the FTSE 250, the Fund is required to comply with Listing Rule 9.8.7 (for overseas incorporated companies). This requires the Fund to state how it has applied the main principles set out in the 2014 UK Corporate Governance Code and whether it has complied with these provisions throughout the accounting period.
The Fund is an Authorised Closed-Ended Investment Scheme regulated by the Guernsey Financial Services Commission ('GFSC'). The GFSC requires compliance with the principles set out in the Finance Sector Code of Corporate Governance ('Guernsey Code'), or alternative codes accepted by the GFSC, in the context of the nature, scale and complexity of the business.
Statement of compliance
The Directors believe that during the year under review, they have complied with the provisions of the AIC Code and therefore, insofar as they apply to the Fund's business, with the provisions of the 2014 UK Corporate Governance Code and Guernsey Code except as noted below.
-- The role of Chief Executive
Since all Directors are non-executive and day-to-day management responsibilities are sub-contracted to the Manager, the Fund does not have a Chief Executive.
-- Executive Directors' remuneration
As the Board has no Executive Directors, it is not required to comply with the principles of the 2014 UK Corporate Governance Code in respect of Executive Directors' remuneration and does not have a Remuneration Committee.
-- Internal audit function
As the Fund delegates to third parties its day-to-day operations and has no employees, the Board has determined that there is no requirement for an internal audit function. The Directors annually review whether a function equivalent to internal audit is needed and will continue to monitor the Fund's internal control framework in order to provide assurance that they operate as intended.
THE BOARD
The Board, chaired by Hélène Ploix, consists of non-executive Directors, all of whom are considered to be independent of the Manager. Michael Hamson has served on the Board for more than nine years and continued to perform his duties independently. The Board has consisted of no more than seven Directors during the year and the Board feels that given its size and the fact that the Directors do not have executive roles, it is not necessary to establish separate Remuneration or Management Engagement Committees. Russell Edey assumed the role of Senior Independent Director during the year. The Audit and Risk Committee is chaired by Russell Edey and has formally delegated duties and responsibilities with written terms of reference, which are available on request from the Manager. All Directors form the Nomination Committee, chaired by Hélène Ploix.
The Board regularly reviews both the performance of, and the contractual arrangements with the Manager, and is satisfied that the continuing appointment of the Manager is in the best interests of shareholders. The management agreement sets out matters over which the Manager has authority and includes management of the Fund's assets and the provision of administrative duties, including accounting, secretarial and administrative services. The agreement further permits the Manager to delegate its administrative duties, subject to the Board's prior consent. All other matters are reserved for the approval of the Board. Under this agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly, equal to 1.25% per annum, calculated and accrued on the Net Asset Value of the Fund as at each Valuation Day. The Manager's appointment is under a rolling contract which may be terminated by three months' written notice given by the Fund, and twelve months' written notice given by the Manager.
The Audit and Risk Committee reviews the performance of, and the contractual arrangements with the Administrator and the Custodian. The Board is satisfied that the continuing appointment of the Administrator and the Custodian is in the best interests of shareholders.
The Board meets at least three times during the year and between these meetings there is regular contact with the Manager which provides the Board with appropriate and timely information. Attendance at those meetings is given in the table below.
Audit and Nomination
Risk Committee Committee Meetings
Board Meetings Meetings Attended
Director Attended Attended
------------------------------- ----------------- --------------- -------------------
Hélène Ploix (joined
the Audit and Risk Committee
on 9(th) February 2016) 3 1 2
Sujit Banerji 3 n/a 2
Russell Edey 3 3 2
Michael Hamson 3 2 2
Saffet Karpat 3 3 2
Dr. John Llewellyn 3 n/a 2
Coen Teulings (retired 29(th)
October 2015) 1 n/a 0
Board appointments and re-election
All members of the Board consider new Board appointments. The Chairman, Manager or other appropriate persons provide new appointees to the Board with a detailed induction on the Fund. When appointing a new Director, the Board takes care to ensure that the new Director enhances the balance of skills and experience appropriate to the requirements of the Fund and that a new Director has enough time available to properly fulfil their duties. The Directors also have access, where necessary in the furtherance of their duties, to independent professional advice at the Fund's expense. Directors are initially appointed until the following Annual General Meeting when, under the Fund's Articles of Incorporation, it is required that they be elected by shareholders.
Hélène Ploix was appointed as non-executive Chairman on 30(th) October 2015, replacing Coen Teulings. She also acts as chairman of the Nomination Committee, which is comprised of all members of the Board.
On 9(th) February 2016, Russell Edey replaced Saffet Karpat as chairman of the Audit and Risk Committee, the members of which are Russell Edey, Saffet Karpat, Michael Hamson and Hélène Ploix. Russell Edey was also named as Senior Independent Director.
All the Directors are retiring in accordance with the AIC Code and, with the exception of Michael Hamson, will offer themselves for re-election. As each Director has maintained their effectiveness and commitment to the Fund, the Board endorses them and commends their re-election to the shareholders.
The Board evaluates its performance on an annual basis, and considers that the blend of skills, experience, age, gender and length of service is appropriate for the requirements of the Fund. In accordance with the AIC Code, an independent evaluation of the Board's performance was carried out in April 2016 by Stephenson & Co. The findings of the review were considered by the Directors and actions, where appropriate, have been taken. The Board is aware of the requirements of the 2014 UK Corporate Governance Code and regularly reviews its succession plan.
Directors' remuneration
The Directors are entitled to receive fees for their services which shall not exceed $400,000, exclusive of relevant expenses, in aggregate per annum. This was approved by Shareholders at the Annual General Meeting on 2(nd) November 2012 and can only be amended by Shareholder approval at a General Meeting
The level of Directors' Fees is independently assessed and was reviewed this year concurrently with the independent evaluation of the Board's performance. Each Director receives GBP30,000 per annum, with a further GBP5,000 per annum for Audit and Risk Committee Directors, an additional GBP2,500 per annum for the Senior Independent Director and a further GBP10,000 per annum for the Chairman. Such remuneration is deemed to accrue on a daily basis. As there are no executive Directors of the Fund, no separate Remuneration Report is necessary.
The Directors are also entitled to be paid all travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of the Directors or any committee of the Directors or General Meetings of the Fund or in connection with the business of the Fund.
Directors' interests
The Directors served throughout the year under review (except Coen Teulings who retired on 29(th) October 2015). The following (who were Directors at the period end) had a beneficial interest in the share capital of the Fund at 30(th) June 2016:
Beneficial interest
in Participating
Preference Shares
at 30(th) June
Directors 2016
--------------------------------- -------------------
Hélène Ploix 15,000
Sujit Banerji 10,000
Michael Hamson (including family
interests) 8,700
Saffet Karpat 20,000
Directors' insurance and indemnification
Directors' and Officers' liability insurance cover is held by the Fund to cover Directors against certain liabilities that may arise in the course of their duties.
OTHER MATTERS
Going Concern
The Directors believe that the Fund has adequate resources to continue in operational existence for twelve months from the approval date of the Annual Financial Report. This is based on various factors including the Fund's forecast expenditure, its ability to meet its current liabilities, the highly liquid nature of its assets, its market price volatility and its closed-ended legal structure. For these reasons, the Directors continue to adopt the going concern basis in preparing the Financial Statements.
Viability Statement
In accordance with provision C.2.2. of the 2014 UK Corporate Governance Code, the Board has assessed the prospects of the Fund over the next three years. The Board considers that this period of time is appropriate to assess the viability of the Fund given the inherent uncertainty in the global emerging markets and the Fund's investment cycle. As part of its assessment, the Board has considered the Fund's business model including its investment objective and investment policy as well as the principal risks and uncertainties that may affect the Fund.
The Board has noted that:
-- The Fund's investment objective is to achieve capital growth over the medium to long term and the Board regards the Fund as a long term investment. The average holding period for companies in the Fund's portfolio is currently over seven years, with turnover at around 21% over the last twelve months. These attributes reflect the Manager's long term fundamental approach.
-- The Fund's portfolio consists of a diversified group of companies from a large number of emerging market countries. The majority of these are traded on major international stock exchanges. In the opinion of the Manager, the portfolio is sufficiently liquid to meet all ongoing and future liabilities arising from the Fund's day-to-day business.
-- No significant increase to ongoing charges or operational expenses is anticipated.
The Board has therefore concluded that there is a reasonable expectation that the Fund will be able to continue in operation and meet its liabilities as they fall due over the next three years.
Voting Policy
The Directors have given the Manager discretion to exercise the Fund's voting rights and the Manager, so far as is practicable, will exercise them in respect of resolutions by investee companies.
The Manager aims to vote in the best interests of the Fund, and to vote on all shares in all markets, Proxy voting Guidelines are maintained to outline the overall approach to voting and ensure that it is conducted in an appropriate manner. In evaluating specific voting issues, the Manager's team members may engage directly with company management and directors and may also contact interest groups, other shareholders and research providers. Where appropriate, and particularly where a vote against management is warranted, the Manager will contact the company to explain the decision-making process and promote best practice. In a case where securities are on loan ahead of a General Meeting or corporate action it is the Manager's policy to request that such securities be recalled to enable the shares to be voted.
The Manager has contracted with Institutional Shareholder Services, Inc. (ISS), an independent third-party provider of proxy voting and corporate governance services. ISS provides proxy research and recommendations, executes votes as instructed by the Manager, and keeps various records necessary for tracking proxy voting materials and proxy voting actions taken. ISS recommendations are one form of external research which is factored into the Manager's investment decision-making process. Each voting issue is analysed independently, however, and the Manager's votes are not necessarily in line with company management or the ISS recommendations.
Further details on voting policy are disclosed on the Manager's website www.giml.co.uk, where a proxy voting report for the Fund over the last five years is also available.
Environmental, Social and Governance Factors
Genesis meaningfully integrates ESG factors into the investment process as part of its ongoing qualitative judgement of a company's sustainable competitive advantage. Genesis recognises that ESG factors can expose potential investment opportunities and risks, reflect the quality of management and impact a company's financial performance. ESG factors are assessed in the context of materiality and particular attention is paid to the quality of company management and the alignment of interests with minority investors.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the financial statements for each financial year so that they give a true and fair view, in accordance with applicable Guernsey Law and International Financial Reporting Standards as adopted by the European Union, of the state of affairs of the Fund and of the profit or loss of the Fund for that year.
In the preparation of these financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently; -- make judgments and estimates that are reasonable and prudent;
-- ensure the financial statements are prepared on a going concern basis unless it is inappropriate to presume that the Fund will continue in business; and
-- state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements.
The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for ensuring that the Fund keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for ensuring the safeguarding of the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Having taken all available information into consideration, the Board has concluded that the Annual Financial Report for the year ended 30th June 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Fund's performance, business model and strategy.
Auditors and Disclosure of Information to Auditors
In the case of each of the persons who are Directors at the time when the Report is approved, the following applies:
so far as the Director is aware, there is no relevant audit information of which the Fund's auditors are unaware; and
-- they have taken all steps that ought to have been taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Fund's auditors are aware of that information.
Compliance with disclosure and transparency directive
The Directors confirm to the best of their knowledge that:
-- the financial statements are prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Fund; and
-- this Annual Financial Report includes a fair review of the development and performance of the business and the position of the Fund, together with a description of the principal risks and uncertainties that exist.
Approved on behalf of the board
Hélène Ploix
Russell Edey
27(th) September 2016
MANAGER'S REVIEW
Investment Environment
There was a stark contrast between emerging market returns during the first and second half of the Fund's financial year. Economic growth, corporate earnings, commodity prices and currencies were all generally weaker than most investors expected in the latter part of 2015. However political and macroeconomic events - such as a delay to interest rate hikes in the US, the impeachment of Brazilian President Dilma Rousseff and China increasing fixed asset investment through leverage - have prompted a dramatic reversal of fortunes in 2016, through to the Fund's year-end in June, and into the summer. In this volatile environment developing stockmarkets, as measured by the MSCI Emerging Markets Index, rose 3.9% in sterling terms over the financial year. The Fund's net asset value performed better than the Index, gaining 8.7%.
As we have noted in previous Reviews, emerging market companies have been through a significant boom period driven by plentiful liquidity and ultra-low interest rates. Easy access to credit has led to an increase in consumption, and penetration levels of consumer products in many markets are higher than they used to be. The tailwinds leading up to the financial crisis in 2008 and stimulus measures afterwards have, several years on, resulted in imbalances in many emerging markets. In order to generate more sustainable growth going forward these countries need to go through a period of adjustment.
We believe that the most significant risk facing emerging markets today is the potential economic instability in China, which is experiencing a structural slowdown with high financial leverage. The Chinese government is trying to achieve three things at the same time: engineer a soft landing, rebalance the economy from fixed asset investment to consumption, and reduce financial leverage. We remain sceptical that all three can be achieved at once. Credit is still running ahead of nominal GDP growth, rebalancing has been limited and - crucially - the economy has not reached a new equilibrium. This, combined with a lack of genuine economic reforms, means that the risk of a hard landing is increasing. That said, we are trying to maintain as constructive a view of China as possible - from a more positive viewpoint it can be argued that since the government controls both assets and liabilities they have enough tools to control the situation.
Performance
The Chinese market was one of the worst-performing over the year, and so its impact on the portfolio was the most significant driver of relative performance from a country perspective. The Fund's underweight versus the benchmark added substantial value in the period, while avoiding state-owned financials including China Life Insurance (down 40%) and Bank of China (down 23%), and owning a variety of strongly performing holdings, including premium baijiu producer Kweichow Moutai (up 39%) and e-commerce company Alibaba (up 14%), also helped. Further performance gains were made in Thailand for stock-specific reasons - Thai Beverage (up 45%) experienced a turnaround in its beer business due to a new management team and Central Pattana (up 44%) benefitted from a variety of government infrastructure investments. On the negative side value was lost in Indonesia by being underweight in what was a strong market, and in Brazil where our holdings failed to keep pace with the recovery of the local market.
Value was added in a variety of sectors, particularly financials, consumer and IT, where one of the Fund's largest holdings, TSMC, rose 35%. These gains were partially offset by losses in the materials sector, where Anglo American's price falls in 2015 were responsible for a loss of 20% over the last twelve months, despite its share price almost trebling so far in 2016.
Looking at individual stocks, the major contributor was SABMiller, which rose by 31% after accepting a bid by rival brewer AB InBev to acquire the company.
Portfolio activity
The announcement last year of AB InBev's SABMiller acquisition prompted us to start exiting the position (which at the time was the largest in the portfolio), with the vast majority sold before the UK's referendum on EU membership in order to alleviate currency risk. Given the size of the holding (5.8% at its peak), the concentration of the top 20 holdings has declined from 43.4% at the start to the period to 41.5% at the end. The position was recycled into a variety of new and existing holdings across a number of markets. Aside from South Africa (where SABMiller is based), China dominated the Fund's trading activity, where market volatility allowed us to improve the quality of the Fund's holdings, offering greater protection against a deteriorating macroeconomic environment. There were significant increases to pan-Asian insurer AIA, internet giant Alibaba and food and beverage producer Tingyi, while China Merchants Bank, AAC and Mindray exited the portfolio. New purchases in China included home appliance manufacturer Midea, and Jiangsu Hengrui, a generics pharmaceutical company specialising in oncology drugs.
In other markets, noteworthy new positions included food retailer Magnit (Russia), global brewer Heineken - the majority of whose revenues now come from emerging markets - branded snack company Universal Robina (Philippines) and private hospital operator Bangkok Dusit (Thailand). Notable sales activity included taking profits in Cognizant (India), reducing exposure to Brazilian banks Itaù and Santander Brasil, and selling some of the Anglo American holding as its share price rallied, whilst Ambuja Cements (India) and Big C (Thailand) exited the portfolio.
At the end of the period the number of positions in the Fund was 142, a net reduction of 20 over the year. This followed a decision by the Manager to focus on fewer holdings, allowing deeper analysis on each The majority of these sales occurred in the second half of the financial year and most came from the tail of the Fund - i.e. those with a weight of less than 25 basis points.
Outlook
Structurally, investors in emerging market equities have been facing substantial headwinds, such as lower commodity prices, the impact of China's lower growth, greater competition and weaker currencies. Amidst this lower-growth environment the profitability of emerging market companies has declined over the past few years. Despite this, valuations have largely held up, particularly for higher quality companies which offer greater protection when the investment landscape is more challenging.
However, of the difficult headwinds mentioned above, significant adjustments have already taken place in three of the four - commodity prices, competition and currencies - meaning that further downside in these areas is limited. As we have noted, China's orderly transition to a more sustainable growth strategy is, we believe, the key risk facing emerging markets investors. Should a soft landing play out in China, we could see the beginning of a new, more positive cycle in emerging markets.
In the medium to long term we firmly believe that emerging markets are an attractive place to invest: the Fund's high-quality companies should be able to differentiate themselves from their competition and do well, and key growth drivers - such as rising consumption, financial penetration and infrastructure development - are still in place.
Genesis Asset Managers, LLP
September 2016
STATEMENT OF FINANCIAL POSITION
as at 30(th) June 2016
2016 2015
$'000 $'000
ASSETS
Current assets
Financial assets at fair value
through profit or loss 1,099,567 1,196,264
Amounts due from brokers 4,261 231
Dividends receivable 4,001 4,170
Other receivables and prepayments 204 208
Cash and cash equivalents 20,245 23,729
---------- ----------
TOTAL ASSETS 1,128,278 1,224,602
---------- ----------
LIABILITIES
Current Liabilities
Capital gains tax payable 141 217
Amounts due to brokers 4,941 8,992
Payables and accrued expenses 1,878 2,079
---------- ----------
TOTAL LIABILITIES 6,960 11,288
---------- ----------
TOTAL NET ASSETS 1,121,318 1,213,314
========== ==========
EQUITY
Share premium 134,349 134,349
Capital reserve 946,972 1,045,055
Revenue account 39,997 33,910
---------- ----------
TOTAL EQUITY 1,121,318 1,213,314
NET ASSET VALUE PER PARTICIPATING
PREFERNCE SHARE* $8.31 $8.99
========== ==========
* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2015: 134,963,060).
STATEMENT OF COMPREHENSIVE INCOME
for the year ended 30(th) June 2016
2016 2015
$'000 $'000
INCOME
Net change in financial assets
at fair value through profit
or loss (98,311) (126,208)
Net exchange gains 228 1,338
Dividend income 25,086 28,426
Miscellaneous income 10 3
---------- -----------
(72,987) (96,441)
---------- -----------
EXPENSES
Management fees (13,124) (17,442)
Custodian fees (910) (924)
Transaction costs (1,269) (1,836)
Directors' fees and expenses (463) (570)
Administration fees (259) (289)
Legal and professional fees (84) (22)
Audit fees (52) (81)
Other expenses (223) (184)
---------- -----------
TOTAL OPERATING EXPENSES (16,384) (21,348)
---------- -----------
OPERATING LOSS (89,371) (117,789)
FINANCE COSTS
Bank charges (1) -
---------- -----------
TOTAL FINANCE COSTS (1) -
---------- -----------
Capital gains tax (29) 50
Withholding taxes (2,595) (2,966)
---------- -----------
(2,624) (2,916)
---------- -----------
LOSS AFTER TAX FOR THE YEAR
ATTRIBUTABLE TO PARTICIPATING
PREFERENCE SHARES (91,996) (120,705)
========== ===========
TOTAL COMPREHENSIVE LOSS (91,996) (120,705)
LOSS PER PARTICIPATING PREFERENCE
SHARE* $(0.68) $(0.89)
* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2015:134,963,060).
STATEMENT OF CHANGES IN EQUITY
for the year ended 30(th) June 2016
2016
Share Premium Capital Revenue
$'000 Reserve Account Total
$'000 $'000 $'000
-------------- ---------- ---------- ----------
Balance at the beginning
of the year 134,349 1,045,055 33,910 1,213,314
Total Comprehensive
Loss - - (91,996) (91,996)
Transfer from Capital
Reserves* - (98,083) 98,083 -
-------------- ---------- ---------- ----------
Balance at the end of
the year 134,349 946,972 39,997 1,121,318
============== ========== ========== ==========
2015
Share Premium Capital Revenue
$'000 Reserve Account Total
$'000 $'000 $'000
-------------- ---------- ---------- ----------
Balance at the beginning
of the year 134,349 1,169,925 29,745 1,334,019
Total Comprehensive
Loss - - (120,705) (120,705)
Transfer from Capital
Reserves* - (124,870) 124,870 -
-------------- ---------- ---------- ----------
Balance at the end of
the year 134,349 1,045,055 33,910 1,213,314
============== ========== ========== ==========
* Calculated by summing the 'Net change in financial assets at fair value through profit or loss' and 'Net exchange gains' in the Statement of Comprehensive Income.
STATEMENT OF CASH FLOWS
for the year ended 30(th) June 2016
2016 2015
$'000 $'000
---------- ----------
OPERATING ACTIVITIES
Dividends received 25,265 25,685
Taxation paid (2,700) (2,966)
Purchase of investments (309,415) (268,571)
Proceeds from sale of investments 299,720 272,451
Interest received (1) -
Operating expenses paid (16,581) (21,624)
---------- ----------
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES (3,712) 4,975
========== ==========
Effect of exchange gains on cash and cash
equivalents 228 1,338
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (3,484) 6,313
Net cash and cash equivalents at the beginning
of the year 23,729 17,416
---------- ----------
NET CASH AND CASH EQUIVALENTS AT THE
OF THE YEAR 20,245 23,729
========== ==========
Comprising:
Cash and cash equivalents 20,245 23,729
========== ==========
1. BASIS OF PREPARATION
The principal accounting policies applied in the preparation of these financial statements on a going concern basis are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.
The financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS') and interpretations by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board.
The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS may require management to make critical accounting judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions about the future which are made by management relating to unlisted securities, are made using models generally recognised as standard within the industry and inputs are based on the historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these 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 Board. The Board considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
New standards, amendments and interpretations effective from 1(st) July 2015
No new standards were effective or adopted by the Fund during the year having an impact on the financial statements.
New standards, amendments and interpretations issued but not yet effective
The following standards and interpretations have been issued and are expected to be relevant to the Fund in future periods, with effective dates on or after 1(st) July 2016:
-- Amendments to IAS 27, 'Separate financial statements' (effective 1(st) January 2016).
-- Amendments to IFRS 10, IFRS 12 and IAS 28, 'Investment Entities: Applying the Consolidation
Exception' (effective 1(st) January 2016).
-- Amendments to IAS 1, 'Disclosure Initiative' (effective 1(st) January 2016). -- Annual improvements 2014 (effective 1(st) January 2016). -- Amendments to IAS 27, 'Equity Method in Separate Financial Statements' (effective
1(st) January 2017).
-- IFRS 9, Financial Instruments (effective 1(st) January 2018)
The Directors are currently reviewing these standards with a view to implementation on their effective date, however they do not believe their adoption will have a significant impact on the financial statements.
Early adoption of standards
The Fund did not early adopt any new or amended standards/interpretations for the year ended 30(th) June 2016.
2. RELATED PARTIES AND OTHER MATERIAL AGREEMENTS
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
Manager's remuneration and terms of appointment
The Manager's appointment is under a rolling contract which may be terminated by three months written notice given by the Fund and twelve months by the Manager.
Under the Management Agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly in arrears equal to 1.25% per annum. It is calculated and accrued on the Net Asset Value of the Fund as at each weekly Valuation Day, except for investments in Investee Funds, where the Manager will absorb the expenses of the management of such funds to a maximum of 1% per annum of the value of the Fund's holding in the relevant fund at the relevant time. Genesis affiliated investment companies do not charge a separate management fee to the Manager.
Administration fees
The Administrator is entitled to receive a fee, payable monthly, based on time incurred. Administration fees for the year were $259,000 and charged by JP Morgan Administration Services (Guernsey) Limited (2015: $289,000).
Custodian fee
Under the Custodian Agreement, the Custodian to the Fund is entitled to receive a fee payable monthly, based on the Net Asset Value of the Fund. All custody services are performed by JP Morgan Chase Bank.
The Fund also reimburses the charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.09% (2015: 0.07%) per annum of the average Net Assets of the Fund.
Securities lending fees
The fund earned income of $5,000 from securities lending transactions during the year. Commissions amounting to $1,000 were paid to JPMorgan Chase Bank N.A. during the year in respect of these transactions of which none were outstanding at the year end. As the securities lending agreement began in April 2016, there are no comparative figures for 30(th) June 2015.
Directors' fees and expenses
Included in Directors' fees and expenses are Directors' fees for the year of $263,000 (2015: $352,000). Also included are travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Fund.
Other group investments
Genesis Smaller Companies SICAV is a related party of the Fund by virtue of having a common Manager in Genesis Asset Managers, LLP. The Fund's holding in this fund is summarised in the portfolio statement. Genesis Indian Investment Company Limited was also a related party of the Fund for the same reason although there was no holding in this fund at year end due to its liquidation. Subscriptions and redemptions during the year under review are detailed in the table below. No dividends were received from these funds during the year (2015: nil).
There were no other transactions between the Fund and such related parties during the year except as disclosed in the notes in the Annual Financial Report and there were no outstanding balances between these entities at 30(th) June 2016.
2016
Subscriptions Redemptions
$'000 $'000
-------------- ------------
Genesis Indian Investment Company
Limited - 18,781
Genesis Smaller Companies SICAV 527 4,767
2015
Subscriptions Redemptions
$'000 $'000
-------------- ------------
Genesis Indian Investment Company
Limited - 7,785
Genesis Smaller Companies SICAV 241 1,346
This Annual Financial Report announcement does not constitute the Company's statutory accounts for the years ended 30(th) June 2016 and 30(th) June 2015 but is derived from those accounts.
The audited Annual Financial Report for the year ended 30(th) June 2016 will be sent to shareholders shortly and will be available for inspection at the registered office: 1(st) Floor, Les Echelons Court, Les Echelons, South Esplanade, St. Peter Port, Guernsey GY1 6JB, Channel Islands.
For Genesis Emerging Markets Fund Limited
J.P. Morgan Administration Services (Guernsey) Limited
27(th) September 2016
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR EAKNXASNKEFF
(END) Dow Jones Newswires
September 27, 2016 13:02 ET (17:02 GMT)
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