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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Blackrock Emg | LSE:BEEP | London | Ordinary Share | GB00B0BN1P96 | ORD USD0.10 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 318.50 | 315.00 | 322.00 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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TIDMBEEP
BlackRock Emerging Europe plc
(LEI: 549300OGTQA24Y3KMI14)
Annual results announcement for the year ended 31 January 2018
Information disclosed under Article 4 of the Transparency Directive and DTR 4.1
PERFORMANCE RECORD
FINANCIAL HIGHLIGHTS
31 January 31 January Change
Attributable to ordinary shareholders 2018 2017 %
Assets
US dollar
Net assets (US$'000) 206,427 154,951 +33.2
Net asset value per ordinary share 574.75c 431.28c +35.5
(US$ cents)1
MSCI Emerging Europe 10-40 Index (net 525.64 404.84 +29.8
return)2
Ordinary share price (mid-market)(US$ 549.64c 378.06c +48.0
cents)1, 3
Sterling
Net assets (GBP'000)3 145,156 123,163 +17.9
Net asset value per ordinary share 404.16p 342.80p +19.9
(pence)1, 3
MSCI Emerging Europe 10-40 Index (net 369.62 321.79 +14.9
return)2
Ordinary share price (mid-market) 386.50p 300.50p +30.9
(pence)1
Discount to net asset value4 4.4% 12.3% -
Gross market exposure5 98.4% 103.1% -
Year ended Year ended
31 January 31 January Change
2018 2017 %
Revenue
Net revenue after taxation (US$'000) 5,690 2,705 +110.4
Revenue return per ordinary share 15.84c 7.50c +111.2
(US$ cents)
Final dividend per ordinary share 15.00c 7.50c +100.0
(US$ cents)
Earnings per ordinary share (US$ 150.95c 118.81c +27.1
cents)
Ongoing charges ratio6 1.1% 1.2% -8.3
Source: BlackRock.
1 This measures the Company's share price and NAV total return, which
assumes dividends paid by the Company have been reinvested. Further details of
the calculation of performance with dividends reinvested are given in the
glossary in the Company's Annual Report and Financial Statements.
2 Net return indices calculate the reinvestment of dividends net of
withholding taxes using the tax rates applicable to institutional investors who
are not resident in the local market.
3 Based on an exchange rate of 1.4221 to GBP1 (31 January 2017: 1.2581 to GBP
1).
4 This is the difference between the share price and the cum income NAV
per share with debt at par. Further details of the calculation of the discount
to NAV are given in the glossary in the Company's Annual Report and Financial
Statements.
5 Long positions plus short positions as a percentage of net assets.
Further details of the calculation of the gross market exposure are given in
the glossary in the Company's Annual Report and Financial Statements.
6 Ongoing charges represent the management fee and all other operating
expenses excluding interest as a % of average shareholders' funds. Further
details of the calculation of ongoing charges are given in the glossary in the
Company's Annual Report and Financial Statements.
CHAIRMAN'S STATEMENT
I am pleased to present the Annual Report and Financial Statements to
shareholders for the year ended 31 January 2018.
MARKET OVERVIEW
It has been another strong year for the region with the benchmark index, the
MSCI Emerging Europe 10-40 Index, returning +29.8%. Greece and Poland were the
standout performers with returns of +56.7% and +52.9% respectively, reflecting
the continued progress on Greece's third bailout and the normalising economic
cycle in Poland. Also benefiting from the economic cycle, the Czech Republic
and Hungary returned +47.2% and +43.6%, whilst Russia returned +18.5% supported
in part by oil reaching its highest level since 2015. In Turkey the market
rallied +41.0%, as political uncertainty abated following the referendum in
April 2017 resulting in an improving economy. (All performance data is in US
dollar terms with income reinvested.)
PERFORMANCE
I am pleased to report that against this background the Company performed well
during the year out-performing its benchmark by 5.7% in US dollar terms. In the
year to 31 January 2018 the Company's net asset value (NAV) per share increased
by 35.5% in US Dollar terms (19.9% in sterling terms) which compared favourably
with the benchmark return of 29.8% in US dollar terms (14.9% in sterling
terms). The share price increased by 48.0% (30.9% in sterling terms),
reflecting the marked improvement in the level of the Company's discount over
the period which ended the year at 4.4%.
Since BlackRock's inception as Manager on 30 April 2009 the Company's net asset
value (NAV) per share has increased by 140.3% in US dollar terms (150.3% in
sterling terms) which compared favourably with the benchmark return of 80.3% in
US dollar terms (87.9% in sterling terms). Over the same period the share price
has increased by 159.4% (170.3% in sterling terms). This represents outstanding
outperformance over a long period and in each financial year since the change
to a focussed portfolio in June 2013.
When compared to the Morningstar peer group of funds investing in Emerging
Europe equity the Company was ranked 5/40 over 1 year, 6/40 over 3 years and 3/
40 over 5 years as at 31 January 2018.
Stock selection in Russia was the main contributor to performance, including
significant contributions from off benchmark positions in Globaltrans and
Mail.Ru. Further details on the factors which contributed to performance are
set out in the report from the Investment Manager and the attribution analysis.
REVENUE RETURN AND DIVIDS
The Company's revenue return for the year amounted to 15.84 cents per share
(2017: 7.5 cents). Earnings grew strongly due to rising free cash flow at the
underlying companies and an increasing tendency for these cash flows to be paid
out to investors, especially in Russia where the government has decreed that
all state owned entities should pay out 50% of earnings. The Board is pleased
to declare a final dividend of 15.00 cents per share, double the amount paid in
2017. The dividend will be paid in sterling on 28 June 2018 to shareholders on
the Company's register on 18 May 2018; the ex-dividend date is 17 May 2018.
Shareholders who wish to receive their dividend in US dollars should either
complete the currency election form which will be sent with the annual report
or make the appropriate election via CREST.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
The Board has been considering the prospects for, and relevance of, the
Company's mandate post 20 June 2018, the deadline for submission of proposals
to shareholders for the option of a cash exit.
Your Board believes that the unconstrained, focused approach of the Investment
Manager, as approved by shareholders in June 2013, has assisted performance and
still remains relevant. Since the introduction of the revised investment policy
absolute performance has been somewhat volatile but relative ouperformance has
been very strong: the NAV total return has exceeded the benchmark in the period
to 31 January 2018 by 26.6 percentage points. Over the last 2 years' in
particular, shareholders have benefited from very strong absolute performance
with the NAV returning 87.3% and the share price 106.6% against the benchmark
return of 71.1%. (All performance data is in US dollar terms). Our portfolio
Managers, Sam Vecht and Chris Colunga, are both highly rated and their relative
performance, as illustrated by the Morningstar peer group figures previously
stated, is impressive. Your Managers and Board remain convinced that
stock-markets in the region can continue to provide attractive opportunities
for active investors.
Notwithstanding the above the Board has committed to submit to shareholders,
proposals (which may constitute a tender offer and/or other method of
distribution) to provide shareholders with an opportunity to realise the value
of their investment in the Company at NAV less applicable costs this year
should they so wish. For those that wish to take this option, we have concluded
that the most appropriate method is to allow shareholders to tender up to 100%
of their shares for repurchase by Winterflood (the Company's broker). The
tender offer proposals will require the approval of shareholders at a general
meeting to be held on 20 June 2018, immediately following the Company's Annual
General Meeting (AGM). Further details of the tender will be announced in due
course and full details of the proposals will be set out in a circular to
shareholders which will be sent out during May of this year.
Shareholders will not be surprised to hear that, given the excellent recent
performance of the Company, both in absolute and relative terms, it is expected
that a number of shareholders will wish to continue with their investment and
not participate in the forthcoming tender. The members of your Board will
remain fully invested and will not tender any of their shares in the Company in
the proposed tender offer.
Some shareholders may decide to exit some or all of their investment for cash
but your Board's expectation is that this will be limited and the remaining
assets in the Company should remain in excess of GBP100 million which would allow
the Company to continue which is a fund size more than adequate to allow the
Company to continue in broadly the same manner as it has over the period under
review. In the event that the level of the cash exit is significantly higher
than expected and the remaining assets are materially below this level and your Board is of the view that the continuance of the Company would not be in the best interests of the continuing shareholders, the tender offer will not proceed. The Board will then put forward proposals as soon as practicable which will include a full cash exit at NAV less applicable costs. Your Board believes that the Manager can continue to deliver strong performance and also in the effectiveness of a policy of allowing shareholders the opportunity to exit for cash at regular intervals, together with performance based tenders in the interim periods. This has proven to be a successful mechanism; by way of example the Company has enjoyed tighter discounts than its emerging market peers; and one which has been strongly supported by the Company's shareholders. Your Board is now focused on minimising the Company's discount to NAV after the forthcoming tender and is considering a further measure; the introduction of a substantially higher dividend to broaden the appeal of the Company to a wider range of investors. The Board will be consulting with shareholders and its advisors on this discount control package and the conclusions of this exercise will be set out in the shareholder circular referred to above. BOARD It is more than 15 years since I first joined the Board and 7 years since I became Chairman and the time has now come for me to hand over the baton. I am pleased to report that Mark Bridgeman will succeed me as Chairman at the conclusion of the AGM. Mark has been a Director of the Company since 2012 and brings a wealth of experience both in investment markets and as a director, to the role. During my tenure as Chairman, the Company has experienced periods of volatility but has substantially outperformed its benchmark and I am delighted to end my tenure on a positive note with strong performance in the year under review. ANNUAL GENERAL MEETING The AGM will be held at 12.00 noon on 20 June 2018 at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL. We hope that as many shareholders as possible will attend. The AGM will include a presentation by the portfolio managers on the Company's performance and the outlook for the year ahead. OUTLOOK Notwithstanding the strong returns achieved in the year under review, your Managers and Board remain convinced that stock-markets in the region can continue to provide attractive opportunities for active investors. Although the region has now made a good start in making up part of the ground lost against developed markets over the last decade, there still remains considerable room for growth. Company valuations are half those of their western peers, dividend yields are higher supported by strong free cash flow, the region has experienced strong earnings growth and the correlation of the benchmark countries with global markets is low, helping to diversify portfolios. As the global economic upswing now looks increasingly assured, the ability of those countries on the boundaries of developed Europe to capitalise on their strong competitive positions, and prosper against the background of increasing demand, is greater than ever. A selective and focused approach to managing the portfolio remains key. Despite recent geopolitical tensions, your Board remains optimistic about future prospects for the portfolio and the region. NEIL ENGLAND Chairman 23 March 2018 STRATEGIC REPORT The Directors present the Strategic Report of the Company for the year ended 31 January 2018. PRINCIPAL ACTIVITY The Company carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading, although not eliminating investment risk. OBJECTIVE The Company's objective is to achieve long term capital growth, principally by investing in companies that do business primarily in Eastern Europe, Russia, Central Asia and Turkey. STRATEGY, BUSINESS MODEL, INVESTMENT POLICY & INVESTMENT PROCESS The Company invests in accordance with the objective given above and seeks to spread investment risk in accordance with its investment policy as set out below. The Board is collectively responsible to shareholders for the long term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager or BFM). Matters for the Board include setting the Company's strategy, including its investment objective and policy, setting limits on gearing (both bank borrowings and the effect of derivatives), capital structure, governance, and appointing and monitoring of performance of the Manager and other service providers. The Company's business model follows that of an externally managed investment trust. Therefore the Company does not have any employees and outsources its activities to third party service providers, including the Manager who is the principal service provider. In accordance with the Alternative Investment Fund Managers Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company's Alternative Investment Fund Manager. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (the Investment Manager or BIM (UK)). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company. Other service providers include the Depositary, The Bank of New York Mellon (International) Limited. BFM delegates fund accounting services to the Investment Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited. The Company delegates registration services to the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the other third party service providers are set out in the Directors' Report on page 23 of the Company's Annual Report and Financial Statements. INVESTMENT POLICY The Manager's portfolio selection is unconstrained by benchmark weightings and the Company's portfolio is expected to contain between 20 and 30 holdings at any one time. To achieve the Company's objective, the Manager selects stocks by combining political and macroeconomic insights with fundamental analysis of companies and by looking for long term appreciation from mispriced value or growth. The weightings of holdings within the Company's portfolio are based upon the Manager's conviction level and an assessment of upside potential and liquidity. As a result, the weighting of a company in the portfolio could be materially higher or lower than its benchmark weighting. The portfolio of the Company is not constructed with any yield target. The Company invests so as not to hold more than 15% of its net assets in any one stock at the time of investment. The Company may undertake transactions in derivatives for both hedging and investment purposes. The Company may use derivatives to diversify risk. It may use a variety of strategies which include the purchase or sale of options traded on recognised or designated investment exchanges as well as over-the-counter. The Company may also establish short positions up to a limit of 10% of net assets. To establish short exposures, the Company may use credit default swaps, major generic global indices as well as local indices and individual stocks. In addition, the Company may borrow to enhance its portfolio performance but the aggregate of gearing through the use of derivatives and borrowing shall not exceed 20% of the Company's net asset value. No more than 15% of the gross assets of the portfolio shall be invested in other UK listed investment companies (including other investment trusts). The Company's financial statements are maintained in US dollars. Although many investments are likely to be denominated and quoted in currencies other than in US dollars, the Company does not currently employ a hedging policy against fluctuations in exchange rates. No material change will be made to the Company's investment policy without shareholder approval. Portfolio construction is a continuous process, with the Investment Manager analysing constantly the impact of new ideas and information on the portfolio as a whole. The approach is flexible, varying through market and economic cycles to create a portfolio appropriate to the focused and unconstrained strategy of the Company. The global and country specific macroeconomic environment is factored into all portfolio decisions. In general, macroeconomic analysis is a more dominant factor in investment decision making when the outlook is negative. The macro process is comprised of three parts: political assessment, macroeconomic analysis and appraisal of the valuation of a country's market, which can only take place with thorough analysis of stock specific opportunities. The Investment Manager's research team generates ideas from a diverse range of sources. These include frequent travel to the markets in which the Company invests and regular conversations with contacts that allow the Emerging Europe team to assess the entire eco-system around a company; namely competitors, suppliers, financiers, customers and regulators. The team leverages the internal research network sharing information between BlackRock's investment teams using a proprietary research application and database, and develop
insights from macroeconomic analysis.
The Board believes that BlackRock's research platform is a significant
competitive advantage, both in terms of information specific to emerging
markets equities and through its global insights across asset classes. Access
to companies is extremely good given BlackRock's market presence, which makes
it possible to develop a detailed knowledge of a company and its management.
The research process focuses on cash flow, as the investment team believes that
this is ultimately the driver of share prices over time. The process is
designed with the aim of identifying companies that can translate top line
revenue growth to free cash flow and investing in these companies when the
analysis suggests that the cash flow stream is undervalued. Financial models
are developed focusing on company financials, particularly cash flow
statements, rather than relying on third party research.
The Investment Manager's research team monitors differing levels of risk
throughout the process and believes that avoiding major downside events can
generate significant outperformance over the long term. Inputs from BlackRock's
Risk & Quantitative Analysis Team (RQA) are an integral part of the investment
process. This is particularly important in emerging markets where portfolios
are subject to complex correlations. The overall premise of BlackRock's risk
analysis is to try and understand risk as opposed to avoiding risk. RQA analyse
market and portfolio risk factors including stress tests, correlations, factor
returns, cross-sectional volatility and attributions.
BlackRock's evaluation procedures and financial analysis of the companies
within the portfolio also take into account environmental, social and
governance matters and other business issues. The Company invests primarily on
financial grounds to meet its stated objectives.
DISCOUNT PROTECTION
The Directors recognise that it is in the long term interests of shareholders
that shares do not trade at a significant discount to their prevailing NAV.
SHARE BUY BACKS
The Board seeks to maintain the share price discount to NAV at below 10% in
normal market conditions. In the year to 31 January 2018 the average discount
to NAV has been 8.0%.
11,800 ordinary shares with a nominal value of 10 cents per share were bought
back for cancellation in the year under review for a total consideration of
US$46,000 (GBP37,000). Since the year end no further ordinary shares have been
bought back for cancellation or to be held in treasury.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
Prior to 21 June 2018, the Board will formulate and submit to shareholders
proposals which will constitute a tender offer to provide shareholders with an
opportunity to realise the value of their investment in the Company at NAV less
applicable costs. The Board believes in the effectiveness of a policy of
allowing shareholders the opportunity to exit for cash at regular intervals,
together with performance based tenders in the interim periods. The Board will
be consulting with shareholders and its advisors on the Company's discount
control package. Please see the Chairman's statement for more details.
PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided below.
PERFORMANCE
Details of the Company's performance are set out in the Chairman's Statement .
The Chairman's Statement and the Investment Manager's Report include a review
of the main developments in the Company's investment markets during the year,
together with information on investment activity within the Company's
portfolio.
RESULTS AND DIVID
The results for the Company are set out in the Income Statement . The total net
profit for the year, after taxation, was US$54,216,000 (2017: US$42,877,000) of
which the revenue return amounted to US$5,690,000 (2017: US$2,705,000), and the
capital return amounted to US$48,526,000 (2017: US$40,172,000).
The Company's revenue return amounted to 15.84 cents per share (2017: 7.50
cents). The Directors recommend the payment of a final dividend as set out in
the Chairman's Statement .
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objectives. The key
performance indicators (KPIs) used to measure the progress and performance of
the Company over time are set out below.
2018 2017 2016 2015
% % % %
Change in NAV per share1 +35.5 +38.2 -10.1 -20.2
Change in share price2 +48.0 +39.6 -9.9 -25.4
Relative NAV per share +5.7 +6.4 +4.1 +4.7
performance vs benchmark
over 1 year
Relative NAV per share +21.3 +14.1 +9.4 +7.9
performance vs benchmark
over 3 years
Average discount to net 8.0 11.9 11.7 10.3
asset value
Ongoing charges ratio3 1.1 1.2 1.3 1.3
1 Calculated in US dollar terms on a total return basis with dividends
reinvested. Further details of the calculation of performance with dividends
reinvested are given in the glossary in the Company's Annual Report and
Financial Statements.
2 Calculated in US dollar terms on a mid to mid basis with dividends
reinvested. Further details of the calculation of performance with dividends
reinvested are given in the glossary in the Company's Annual Report and
Financial Statements.
3 Ongoing charges represent the management fee and all other operating
expenses excluding interest as a % of average shareholders' funds. Further
details of the calculation of ongoing charges are given in the glossary in the
Company's Annual Report and Financial Statements.
The Board regularly reviews a number of indices and ratios to understand the
impact on the Company's relative performance of the various components such as
asset allocation and stock selection. The Board also reviews the performance
and ongoing charges of the Company against a peer group of Emerging Europe
focused open and closed-end funds.
Performance is assessed on a total return basis for both the NAV and the share
price. The relative performance of the benchmark is assessed on a net return
basis, reflecting the withholding tax rates applicable to institutional
investors who are not resident in the local market.
As set out on page 8 of the Company's Annual Report and Financial Statements,
the Directors recognise that it is in the long term interests of shareholders
that shares do not trade at a significant discount to their prevailing NAV.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. The Board has
in place a robust process to identify, understand and monitor the principal
risks of the Company. A core element of this process is the Company's risk
register which identifies the risks facing the Company, the likelihood and
potential impact of each risk and the controls established for mitigation. A
residual risk rating is calculated for each risk.
The risk register, its method of preparation and the operation of key controls
in the Manager's and third party service providers systems of internal control
are reviewed on a regular basis by the Audit Committee. In order to gain a more
comprehensive understanding of the Manager's and other third party service
providers' risk management processes and how these apply to the Company's
business, the Audit Committee periodically receives reports from BlackRock's
Internal Audit and Risk & Quantitative Analysis teams. In addition, the
Chairman of the Audit Committee meets with BlackRock's Internal Audit team on
an annual basis. Where produced, the Audit Committee also reviews Service
Organisation Control (SOC 1) reports from the Company's service providers. The
current risk register includes 51 risks which have been categorised as follows:
* Counterparty risk;
* Investment performance risk;
* Legal & Compliance risk;
* Operational risk;
* Market risk (including political risk);
* Financial risk; and
* Marketing risk.
The principal risks and uncertainties faced by the Company during the financial
year, together with the potential effects, controls and mitigating factors, are
set out in the following table.
Principal Risk Mitigation/Control
Counterparty
Potential loss that the Company could incur Due diligence is undertaken before
if a counterparty is unable (or unwilling) contracts are entered into and exposures
to perform on its commitments. are diversified across a number of
counterparties.
The Depositary is liable for restitution
for the loss of financial instruments held
in custody unless able to demonstrate the
loss was a result of an event beyond its
reasonable control.
Investment performance
The Board is responsible for: To manage this risk the Board:
- deciding the investment strategy to - regularly reviews the Company's
fulfil the Company's objective; and investment mandate and long term strategy;
- for monitoring the performance of teh - has set investment restrictions and
INvestment Manager and the implementaation guidelines which the Investment Manager
of the investment stratgey. monitors and regularly reports on;
- receives from the Investment Manager a
An inappropriate, or poorly executed, regular explanation of stock selection
investment strategy may lead to: decisions, portfolio exposure, gearing and
- poor performance compared to the any changes in gearing and the rationale
Benchmark Index and the Company's peer for the composition of the investment
group; portfolio; and
- a loss of capital; and - monitors the maintenance of an adequate
- dissatisfied shareholders. spread of investments in order to minimise
the risks associated with factors specific
to particular sectors, based on the
diversification requirements inherent in
the investment policy.
Legal & Compliance
The Company has been accepted by HM Revenue The Investment Manager monitors investment
& Customs as an investment trust, subject movements and the amount of proposed
to continuing to meet the relevant dividends, if any, to ensure that the
eligibility conditions and operates as an provisions of Chapter 4 of Part 24 of the
investment trust in accordance with Chapter Corporation Tax Act 2010 are not breached.
4 of Part 24 of the Corporation Tax Act The results are reported to the Board at
2010. As such, the Company is exempt from each meeting.
capital gains tax on the profits realised Compliance with the accounting rules
from the sale of its investments. affecting investment trusts is also
Any breach of the relevant eligibility carefully and regularly monitored.
conditions could lead to the Company losing The Company Secretary and the Company's
investment trust status and being subject professional advisers provide regular
to corporation tax on capital gains reports to the Board in respect of
realised within the Company's portfolio. In compliance with all applicable rules and
such event the investment returns of the regulations.
Company may be adversely affected.
Any serious breach could result in the
Company and/or the Directors being fined or
the subject of criminal proceedings or the
suspension of the Company's shares which
would in turn lead to a breach of the
Corporation Tax Act 2010.
The Company is required to comply with the
provisions of the Companies Act 2006, the
Alternative Investment Fund Manager's
Directive, the UK Listing Rules and
Disclosure & Transparency Rules and the
Market Abuse Regulations.
Operational
In common with most other investment trust Due diligence is undertaken before
companies, the Company has no employees. contracts are entered into with third party
The Company therefore relies on the service providers. Thereafter, the
services provided by third parties. performance of the provider is subject to
Accordingly, it is dependent on the control regular review and reported to the Board.
systems of the Manager, BNYM (the BlackRock and BNYM produce Service
Depositary and fund accountant), who Organisation Control (SOC 1) reports to
maintain the Company's assets, dealing provide assurance regarding the effective
procedures and accounting records. operation of internal controls as reported
Failure by any service provider to carry on by their reporting accountants. These
out its obligations to the Company could reports are provided to the Audit
have a material adverse effect on the Committee.
Company's performance. Disruption to the The Company's assets are subject to a
accounting, payment systems or custody strict liability regime and in the event of
records could prevent the accurate a loss of financial assets held in custody,
reporting and monitoring of the Company's the Depositary must return assets of an
financial position. identical type or the corresponding amount,
The security of the Company's assets, unless able to demonstrate that the loss
dealing procedures, accounting records and was a result of an event beyond its
adherence to regulatory and legal reasonable control.
requirements depend on the effective The Board reviews the overall performance
operation of the systems of these third of the Manager, Investment Manager and all
party service providers. other third party service providers and
compliance with the investment management
agreement on a regular basis.
The Board also considers the business
continuity arrangements of the Company's
key service providers.
Market (including political)
Market risk arises from volatility in the The Board considers asset allocation, stock
prices of the Company's investments. It selection, unquoted investments, if any,
represents the potential loss the Company and levels of gearing on a regular basis
might suffer through realising investments and has set investment restrictions and
in the face of negative market movements. guidelines which are monitored and reported
Investment in securities of issuers in on by the Investment Manager.
Eastern Europe (including Ukraine), Russia, The Board monitors the implementation and
Central Asia and Turkey involves results of the investment process with the
significant risks and special Investment Manager.
considerations, which are not typically
associated with investing in securities of
issuers in the United Kingdom. They are
additional to the normal risks inherent in
any such investments and include political,
economic, legal, currency, inflation and
taxation risks.
In addition the securities markets of
developing countries are not as large as
the more established securities markets and
have substantially less trading volume,
which may result in a lack of liquidity and
higher price volatility. Accounting,
auditing and financial reporting standards
and practices and disclosure requirements
applicable to many companies in developing
countries are less rigorous. As a result
there may be less information available
publicly to investors in such securities.
Such information which is available is
often less reliable.
Investment in securities of issuers in
Eastern Europe including Ukraine, Russia,
Central Asia and Turkey involves a high
degree of political risk. This may entail
sudden changes in political leadership,
disputes over territorial sovereignty and
political interference in the business
environment and the rights of shareholders.
Sanctions imposed either by, or on these
countries arising from political events may
have a substantial impact at times upon the
countries in which the Company invests, and
their economies, which in turn could have a
material adverse effect on the Company's
performance.
Financial
The Company's investment activities expose Details of these risks are disclosed in
it to a variety of financial risks that note 17 of the Company's Annual Report and
include interest rate, currency and Financial Statements, together with a
liquidity risk. summary of the policies for managing these
risks.
Marketing
Marketing efforts are inadequate, do not The Board and Manager monitor the share
comply with relevant regulatory register on an ongoing basis and focus
requirements, and fail to communicate significant time on communicating directly
adequately with shareholders or reach out with the major shareholders and reviewing
to potential new shareholders resulting in marketing strategy and initiatives. The
reduced demand for the Company's shares and Board and Manager have agreed a specific
a widening discount, or, with respect to program of marketing with 2018 return of
the 2018 return of capital event, a capital event in mind. All investment trust
subsequent possible lack of scale and the marketing documents are subject to
risk of liquidation. appropriate review and authorisation.
As required by the UK Corporate Governance Code (the 2016 Code), the Board has
undertaken a robust assessment of the principal risks facing the Company,
including those that would threaten its business model, future performance,
solvency or liquidity. Those principal risks have been described in the above
table together with an explanation of how they are managed and mitigated. The
Board will continue to assess these risks on an ongoing basis.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 Code on UK Corporate Governance,
the Directors have assessed the prospects of the Company over a longer period
than the 12 months referred to by the 'Going Concern' guidelines. The Board is
obliged to formulate and submit to shareholders by 21 June 2018 proposals
(which may constitute a tender offer and/or other method of distribution) to
provide an opportunity to realise the value of their investment in the Company
at NAV less applicable costs. The degree to which shareholders will realise the
value of their investment is an uncertainty in assessing the prospects of the
Company beyond June 2018 and is discussed further in the Statement on Going
Concern on page 24 of the Company's Annual Report and Financial Statements and
in the Chairman's Statement. In addition, the Company's next triennial
continuation vote is due to take place at the AGM in 2019. However, given the
factors stated below, and assuming that, following the 2018 return of capital,
the Company has sufficient scale to continue as an independent Company, the
Board is confident that the continuation vote would be passed. Notwithstanding
these uncertainties, the Board has conducted this review for the period up to
31 January 2023.
In choosing this period of approximately 5 years for its assessment of the
viability of the Company the Directors have considered the following matters:
* the Company has a relatively liquid portfolio (as at 31 January 2018, 98%
of the portfolio was estimated as being capable of being liquidated within
20 days);
* the Company's expenses and liabilities are relatively stable;
* the Company's principal risks and uncertainties as set out above are
unlikely to change materially;
* the Company's business model should remain attractive for much longer than
the period up to 31 January 2023, unless there is a significant economic or
regulatory change;
* the impact of a significant fall in Emerging European markets on the value
of the Company's investment portfolio;
* the ongoing relevance of the Company's investment objective, business model
and investment policy in the current environment; and
* the level of demand for the Company's shares.
The Directors reviewed the assumptions and considerations underpinning the
Company's existing going concern assertion which are based on:
* processes for monitoring costs;
* key financial ratios;
* evaluation of risk management and controls;
* portfolio risk profile;
* share price discount to NAV;
* gearing; and
* counterparty exposure and liquidity risk.
Based on the results of their analysis, the Directors have a reasonable
expectation that the Company will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment.
FUTURE PROSPECTS
The Board's main focus is the achievement of capital growth and an attractive
total return. The future of the Company is dependent upon the success of the
Company's investment strategy. The outlook for the Company is discussed in both
the Chairman's Statement and the Investment Manager's Report.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the
normal course of business, and does not have customers. Accordingly, the
Directors consider that the Company is not required to make any slavery or
human trafficking statement under the Modern Slavery Act 2015. In any event,
the Board considers the Company's supply chains, dealing predominantly with
professional advisers and service providers in the financial services industry,
to be low risk in relation to this matter.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community
responsibilities. However, the Company believes that it is in shareholders'
interests to consider human rights issues, environmental, social and governance
factors when selecting and retaining investments. Details of the Company's
policy on socially responsible investment are set out on pages 33 and 34 of the
Company's Annual Report and Financial Statements.
DIRECTORS AND EMPLOYEES AND GER REPRESENTATION
The Directors of the Company as at 31 January 2018, all of whom held office
throughout the year, are set out in the governance structure and Directors'
biographies on page 21 of the Company's Annual Report and Financial Statements.
The Board consists of four men and one woman. The Company does not have any
employees, therefore there are no disclosures to be made in respect of
employees.
The Chairman's Statement together with the Investment Manager's Report and
portfolio analysis form part of the Strategic Report.
The Strategic Report was approved by the Board at its meeting on 23 March 2018.
BY ORDER OF THE BOARD
SARAH BEYNSBERGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
23 March 2018
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration
services to the Company under a contract which is terminable on six months'
notice. BFM has (with the Company's consent) delegated certain portfolio and
risk management services, and other ancillary services, to BlackRock Investment
Management (UK) Limited (BIM (UK)). Further details of the investment
management contract are disclosed in the Note 4 on page 52 of the Company's
Annual Report and Financial Statements. In addition to the above services,
BlackRock has provided the Company with marketing services. The total fees paid
or payable for these services for the year ended 31 January 2018 amounted to
US$45,000 excluding VAT (2017: US$27,000). Marketing fees of US$47,000 (2017:
US$29,000) were outstanding at 31 January 2018.
The Board consists of five non-executive Directors, all of whom are considered
to be independent by the Board. None of the Directors has a service contract
with the Company. In respect of the year ended 31 January 2018 the Chairman
received an annual fee of GBP38,500, the Chairman of the Audit Committee received
an annual fee of GBP28,500 and each other Director received an annual fee of GBP
24,250. This excludes expenses paid to each of the Directors which are set out
in the Directors' Remuneration Report in the Annual Report and Financial
Statements.
All members of the Board hold ordinary shares in the Company. Neil England
holds 156,633 ordinary shares, Rachel Beagles holds 20,209 ordinary shares,
Mark Bridgeman holds 8,650 ordinary shares, Philippe Delpal holds 12,000
ordinary shares and Robert Sheppard holds 10,000 ordinary shares.
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND
FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each financial year.
Under that law they have elected to prepare the financial statements in
accordance with applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice).
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company as at the end of each financial year and of the profit
or loss of the Company for that year.
In preparing those financial statements, the Directors are required to:
* present fairly the financial position, financial performance and cash flows
of the Company;
* select suitable accounting policies and then apply them consistently;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are also responsible for preparing the Strategic Report,
Directors' Report, the Directors' Remuneration Report, the Corporate Governance
Statement and the Report of the Audit Committee in accordance with the
Companies Act 2006 and applicable regulations, including the requirements of
the Listing Rules and the Disclosure and Transparency Rules. The Directors have
delegated responsibility to the Investment Manager for the maintenance and
integrity of the Company's corporate and financial information included on the
Investment Managers' website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 21 of the Company's
Annual Report and Financial Statements, confirm to the best of their knowledge
that:
* the financial statements, 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 Company; and
* the Annual Report 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 risks and uncertainties that it faces.
The 2016 UK Corporate Governance Code also requires Directors to ensure that
the Annual Report and Financial Statements are fair, balanced and
understandable. In order to reach a conclusion on this matter, the Board has
requested that the Audit Committee advise on whether it considers that the
Annual Report and Financial Statements fulfil these requirements. The process
by which the Audit Committee has reached these conclusions is set out in the
Audit Committee's report on pages 36 to 38 of the Company's Annual Report and
Financial Statements . As a result, the Board has concluded that the Annual
Report and Financial Statements for the year ended 31 January 2018, taken as a
whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position, performance,
business model and strategy.
FOR AND ON BEHALF OF THE BOARD
NEIL ENGLAND
Chairman
23 March 2018
INVESTMENT MANAGER'S REPORT
MARKETS
In the 12 months to 31 January 2018, the MSCI Emerging Europe 10-40 Index
returned +29.8% in US dollar terms. To put this into perspective, the UK FTSE
returned +24.5% and the US S&P 500 returned 26.4% over the same time period.
(All performance data is in US dollar terms with income reinvested.)
All countries in the Emerging Europe index saw solid positive returns over the
period, with Greece and Poland being the largest drivers of performance.
Greece (+56.7% in US dollar terms) posted strong returns over the 12 months as
continued progress was made on the country's third bailout. The second review
was completed in the summer and the third review is likely to be completed in
the Spring of 2018 in record time. These successes have caught the credit
agencies' eyes, which in turn have upgraded the sovereign credit ratings and
outlook, and enabled Greece to return to the bond markets for the first time
since 2014, helping drive bond yields to their lowest level since 2005.
The Polish equity market finished the period up +52.9% in US dollar terms.
Elsewhere in the Central and Eastern European region, the Czech Republic
(+47.2% in US dollar terms) and Hungary (+43.6% in US dollar terms) also
rallied and continued to benefit from a normalising European economic cycle.
These economies are experiencing accelerating wage growth, multi-decade low
unemployment, and an increase in investment spending. Combined with higher
inflation, this should allow the regional banks to recover from the damaging
effects of years of low interest rates.
Turkey returned to form and was up +41.0% in US dollar terms over the period.
The constitutional referendum in April alleviated investor concerns regarding
political uncertainty. The 'Yes' vote won the referendum with 51.4% of the vote
to change Turkey from a parliamentary democracy into a presidential republic,
cementing Erdogan's leadership position. With political clarity restored, the
markets focused on the improving economy and significant growth in earnings,
lifting the market higher through the first nine months of the year. This rally
stalled in the fourth quarter when inflation rose significantly, as witnessed
by the CPI (Consumer Price Index) hitting a 15-year high at 13% in November
2017. High inflation coupled with an expanding current account deficit started
to put significant pressure on the currency, forcing the Central Bank of Turkey
to hike rates to 12.75% at its 14 December 2017 meeting.
Following a +57.4% US dollar return over the 12 months to 31 January 2017,
Russia managed to return a further +18.5% in US dollar terms for the 12 months
to 31 January 2018. The economy continued to recover with expanded industrial
production (IP) numbers, solid wage growth and credit impulse (change in net
new credit issued as % of GDP over last four quarters) turning positive.
Inflation fell rapidly and reached the Central Bank of Russia's target of 4%
faster than expected, hitting a record low level of 2.2% in January 2018. This
allowed the Central bank to cut interest rates and bring down the cost of
borrowing, continuing the monetary easing cycle and supporting the economy. The
Brent oil price gained and closed the year at US$69 per barrel in January,
which marked its highest level since 2014.
PORTFOLIO
In the 12 months to 31 January 2018, the Company's net asset value (NAV)
returned +35.5% in US dollar terms (+19.9% in sterling terms, all percentages
with income reinvested), outperforming the MSCI Emerging Europe 10-40 Index by
+5.7% in US dollar terms.
As with prior years, significant contributions to performance came from
positions that are not represented in the benchmark, highlighting the
opportunities that exist beyond the index stocks.
Strong stock selection in Russia contributed the most to returns. The
off-benchmark position in Globaltrans, the leading private freight rail
transportation company, continued to benefit from rising transportation tariffs
in Russia, and has made it into our top attribution list two years running.
Another off-benchmark position, Mail.Ru, Russia's leading social network,
contributed positively as the company reported strong results and investors
gained confidence in management's ability to put adjacent businesses (Youla,
Delivery Club) onto the social networking platform. On a relative basis the
portfolio benefited greatly by not holding index heavyweight Magnit, Russia's
largest food retailer. Magnit continually disappointed on sales and margins
throughout the year, causing the stock to drop by 39.6% in US dollar terms.
However, our chosen Russian retailer Lenta, detracted from returns as the stock
was down by 11% as falling inflation put pressure on food retail businesses.
Our faith in Greece was amply rewarded this year. The overweight position in
Greek banks, National Bank of Greece and Alpha Bank, benefited from a stronger
economy and continued progress of the bailout reviews. Greek gaming company,
OPAP (Greek Organisation of Football Prognostics), also performed well on solid
results and we took some profits as the company reached our target price.
In the Central and Eastern European region, stock selection in Poland added
value. In particular, the overweight in Polish bank, PKO Bank Polski,
contributed to returns as the company announced better than expected third
quarter results and was able to fulfil the regulator's guidelines for paying a
dividend of up to 25% of profits. In Hungary, not holding OTP Bank detracted
from performance as the stock rallied in line with other CEE financials on the
back of rising global reflation expectations.
Stock selection in Turkey detracted most from relative returns. The
off-benchmark position in Eldorado Gold Corporation, a gold miner with
operations in Turkey and Greece, was the largest individual detractor as the
stock fell after it downgraded production guidance at its main cash flow
generating asset. We believe that the stock has seen the worst and continue to
hold the position. On a positive note, our position in Turkish Airlines took
off on the back of improving passenger numbers and higher margins, which drove
substantial positive earnings per share revisions. We also profited from being
overweight the Turkish oil refiner, Tupras, which was supported by improving
refining margins.
The Company's off-benchmark position in MHP, a Ukrainian poultry producer,
added to performance as it rallied on the back of strong results and increased
pricing both domestically and in the export market.
OUTLOOK
Emerging Europe continues to recover from a lost decade of performance and we
believe still has plenty of room to deliver further returns. We maintain our
positive outlook and think that Emerging European equities will provide an
attractive opportunity for investors given the economic recovery in the region,
the uncorrelated equity returns of its markets, attractive valuations supported
by high dividend yields, growing earnings and strong free cash flows.
Furthermore, when compared to other areas of global markets, Emerging Europe
equities trade at a significant discount.
In Russia, positive monetary and fiscal policies are ongoing and the potential
remains for the market to re-rate higher, on the back of lower interest rates.
The possibility of increased economic sanctions continued to weigh on market
sentiment, however record low inflation, the potential for further interest
rate cuts and an improving economy support our positive stance on Russia.
Combined with low valuations, high dividend yields and the recent rally in oil
prices not being fully reflected in the market, we think Russia offers a good
upside.
In the Central European economies of Poland, Czech Republic and Hungary
inflationary pressures continue to build on the back of accelerating wage
growth, low unemployment, and a pickup in investment spending. This creates
opportunities for CEE banks as inflationary pressures could allow them to
increase lending spreads.
In Greece the successful conclusion of the current bailout program this summer
appears just within its grasp. The recent bond issuances, the credit upgrades,
the falling bond yields and the reduction in bad debt levels are all starting
to reassure investors. This coupled with positive macro data for the country:
accelerating GDP growth, rising ESI (Economic Sentiment Indicators) and a PMI
(Purchase Managers Index) at the highest level since August 2008 are setting
the scene for a sustainable recovery. Despite these improvements, the Greek
financial sector is still much cheaper than its peers and trades at discount of
50%+ on price to book multiples. Whilst there will be some volatility during
the final Bailout Reviews, we believe that the program will ultimately end with
a successful conclusion and higher equity valuations.
Finally, Turkey remains a trading market prone to both exuberance and excessive
pessimism. The economy has been normalizing and we have seen an improvement in
tourism trends. However, the market has rallied significantly, and we are
seeing that the persistently high inflation and expanding twin deficits are
pressuring the currency. Furthermore, the spectre of tighter global liquidity
may constrain the upside in the near term.
In conclusion, we believe that the economic recovery of the region, the
uncorrelated equity returns of the different regional markets, the attractive
valuations supported by high dividend yields, and the lost decade of
performance yet to be recovered continue to make the Emerging European equities
an attractive opportunity for investors.
SAM VECHT and CHRISTOPHER COLUNGA
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
23 March 2018
PERFORMANCE ATTRIBUTION
Contribution to return against
the benchmark1
Country Stock Total
Country selection % selection2 Effect % Commentary
%
Russia & CIS
Russia 0.3 5.2 5.5 Stock selection in Russia contributed to outperformance. The
fund benefited from not holding Magnit, the largest retailer in
the country, as the company released weaker than expected
results and continued to miss on expectations. Off-benchmark in
Russia, Globaltrans, the leading private freight rail
transportation company, continued to benefit from rising
transportation tariffs in Russia. The off-benchmark position in
Mail.Ru, Russia's leading social network, contributed
positively after it reported strong results and investors
gained confidence in management ability to put adjacent
businesses onto the social networking platform.
Kazakhstan -0.2 0.0 -0.2 The off-benchmark position in the oil company, KazMunaiGas,
detracted from returns on a relative basis as it lagged the
benchmark, however it added to returns on an absolute basis.
Ukraine 0.4 0.0 0.4 The Company's off-benchmark position in MHP, a poultry
producer, added to performance as it rallied on the back of
strong results and increasing pricing both domestically and in
the exports market.
Central and Eastern Europe
Czech Republic 0.3 -0.2 0.1 The overweight in Moneta Bank contributed to relative returns
as it rallied on the back of rising global reflation
expectations which are creating the potential for interest
rates to increase from multi-year low levels. However, no
holdings in other stocks in the Czech Republic, detracted from
relative returns.
Poland -1.9 2.2 0.3 The overweight in Polish bank, PKO Bank Polski, contributed to
relative returns as the company announced Q3 results better
than expected and was able to fulfil the regulator's guidelines
for paying out up to 25% of profits.
Hungary -0.6 -0.3 -0.9 No holding of OTP Bank detracted most as the stock rallied in
line with other CEE financials on the back of rising global
reflation expectations.
Turkey 1.0 -2.3 -1.3 The off-benchmark position in Eldorado Gold Corporation, a gold
miner with operations in Turkey and Greece, detracted as the
stock was down after it downgraded production guidance at their
main cash flow generating asset.
Greece 1.3 0.2 1.5 Our overweight positions in banks benefited from the successful
completion of the second bailout review and the fall in Greek
bond yields.
Other Pan-Emerging Europe 0.2 0.0 0.2 The position in Erste Group, the largest financial services
provider in Central and Eastern Europe, rallied as it reacted
positively to rising global reflation expectations in the
region, which are creating the potential for interest rates to
increase from multi-year low levels.
Cash/gearing 0.7
Other effects 0.7
Other factors -1.3
Management fees -0.9 Includes the impact of operating expenses, taxation and
Other operating costs -0.4 finance charges.
Total 5.7
1. Due to the limitations of a static attribution methodology, the numbers
quoted are indicative and not exact.
2. The interaction effect is included within stock selection.
FIFTEEN LARGEST EQUITY INVESTMENTS
Sberbank - 9.6% (2017: 10.4%) is Russia's largest bank and is state-owned. It
has branches throughout the country and a 46% share in the retail deposit
market. The bank continues to build on its restructuring strategy that has
driven much of its success over the past few years, improving its services and
the efficiency with which they are delivered.
Lukoil - 9.2% (2017: 6.0%) was formed in 1991 following the merger of three
state-run companies in western Siberia. The three companies were called
Langepasneftegaz, Urayneftegaz, and Kogalymneftegaz and this heritage is
preserved in the company's current name. Today, the company is the largest
privately-owned company by proved oil reserves. Lukoil is a highly competitive
oil producer even at current low oil prices and generates significant free
cashflow.
Gazprom - 8.9% (2017: 9.0%) is Russia's largest gas producer and transporter,
with a pipeline export monopoly. Despite its status as one of the most
profitable companies in the world, Gazprom has been out of favour with
investors. We believe that the risks of Gazprom are more than priced into the
valuation and the company pays an attractive dividend yield.
PKO Bank Polski - 7.4% (2017: 3.8%) is Poland's largest bank. PKO has one of
the strongest deposit franchises in the country, meaning it has a structurally
lower cost of funding than its peers. The bank trades at attractive valuations
and should benefit from inflationary pressures building up in the region.
Bank Pekao - 5.3% (2017: nil) is the second largest bank in Poland with its
headquarters in Warsaw. The bank trades at attractive valuations and should
benefit from inflationary pressures building up in the region.
Novatek - 5.1% (2017: 6.4%) is Russia's largest independent natural gas
producer. The company is set to enter a new phase of growth through launching
its Yamal LNG project and breaking ground on the even larger Arctic LNG2.
Lenta - 4.6% (2017: nil) is one of the largest retail chains in Russia and the
country's largest hypermarket chain founded in 1993 in St. Petersburg. Lenta
operates 195 hypermarkets in 78 cities across Russia and 59 supermarkets in the
Moscow, St. Petersburg, Novosibirsk and the Central region with a total of
approximately 1.38 million sq.m. of selling space. The company continues to
grow its business and should benefit from improved consumer spending on the
back of macro recovery with its stock trading at attractive valuations.
Rosneft Oil Company - 4.2% (2017: nil) is the leader of Russia's petroleum
industry including exploration, production, and refining. The company has been
undergoing a restructuring phase, increasing efficiency, acquiring new assets
within Russia and abroad, whilst disposing of stakes in mature fields. The
production growth profile coupled with improving cash flow make the company
attractive.
PZU - 4.1% (2017: 3.8%) is Poland's largest insurance company, active in both
the life and non-life segments for over 16 million customers. Its scale and
unparalleled distribution network - both through direct sales and 12,000 agents
- provide a strong competitive advantage that enables the company to generate
attractive returns.
Gedeon Richter - 3.7% (2017: nil) is a generic pharmaceuticals producer in
Central Eastern Europe and Russia that is currently in the process of
transforming itself into a specialty pharma company. In the past, it has
largely developed APIs (Active Pharmaceutical Ingredients) and generics, but it
is now starting to generate an increasing share of its profits from higher
margin, innovative drugs both for women's health care and the central nervous
system. We hold the stock on the premise that these higher margin and faster
growing specialty drugs will drive up both the company's revenues and margins.
National Bank of Greece - 3.6% (2017: 2.5%) is a leading banking and financial
services company in Greece. It has one of the strongest capital bases in the
country and has been showing steady improvement in the quality of its loan
book.
Mobile Telesystems (MTS) - 3.6% (2017: nil) is the largest mobile operator in
Russia and CIS. The company provides mobile and fixed line voice and data
telecommunications services, including data transfer, broadband, pay-television
and various value-added services, as well as selling equipment and accessories.
The industry has improving competitive dynamics and the stock pays an
attractive dividend yield.
Alpha Bank - 3.4% (2017: 2.5%) is the third largest Greek bank by total assets,
and the largest by market capitalisation. The bank offers a wide range of
high-quality financial products and services, including retail banking, SMEs
and corporate banking, asset management and private banking, the distribution
of insurance products, investment banking, brokerage and real estate
management.
MHP - 3.1% (2017: 2.5%) is a leader in the Ukrainian poultry market, with a
market share of more than 50% of industrially produced poultry. MHP accounts
for 35% of domestic consumption with one of the strongest and best-recognised
Ukrainian food brands: Nasha Riaba.
Erste Group Bank - 3.0% (2017: nil) is one of the largest financial services
providers in Central and Eastern Europe. We hold the stock with the view that
inflationary pressures are building in Central and Eastern Europe and are
creating the potential for the banking sector to break away from the
destructive low rate environment.
All percentages reflect the value of the holding as a percentage of net assets.
Percentage in brackets represents the value of the holding at 31 January 2017.
Together, the fifteen largest investments represents 78.8% of net assets (31
January 2017: 72.9%).
TOP AND BOTTOM 5 CONTRIBUTORS TO RELATIVE PERFORMANCE
TOP 5 POSITIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Magnit (total effect on relative performance +2.8%) is Russia's largest
retailer operating in four different formats: convenience store, hypermarket,
"Magnit Family" store and cosmetics store. The portfolio benefited from not
holding the stock as the company released weaker than expected results and
continued to miss on expectations.
Globaltrans (total effect on relative performance +2.1%) is one of Russia's
leading private freight rail transportation groups operating over 66,000 rail
cars and specialising in oil products, construction materials and metallurgical
cargos. The off?benchmark position continued to contribute to performance in
2017 due to increased transportation tariffs in Russia.
Turkish Airlines (total effect on relative performance +1.8%) is the national
carrier of Turkey with its headquarters in Istanbul. The off benchmark position
added to performance as the stock rallied on positive EPS (earnings per share)
revisions, improving tourism trends and signs of operational improvement.
Mail.Ru (total effect on relative performance +1.3%) owns Russia's leading
social network and associated internet businesses. Our position in Mail.ru was
a large contributor to the relative performance as it reported strong results
and investors gained confidence in management's ability to put adjacent
businesses (Youla, Delivery Club) onto the social networking platform.
PKO Bank Polski (total effect on relative performance +1.2%) is Poland's
largest bank and has one of the strongest deposit franchises in the country,
meaning it has a structurally lower cost of funding than its peers. The
overweight in the bank contributed to relative returns as the company announced
better than expected Q3 results and was able to fulfil the regulator's
guidelines for paying out up to 25% of profits as a dividend.
TOP 5 NEGATIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Eldorado Gold Corporation (total effect on relative performance -2.9%) is a
gold miner with operations in Turkey and Greece. The off-benchmark position
detracted after it downgraded production guidance at the Turkish Kisladag mine,
which is their main cash flow generating asset.
Lenta (total effect on relative performance -1.8%) is one of the largest food
retail chains in Russia and operates the country's largest hypermarket chain.
The stock was down in line with the rest of the retail sector as falling
inflation put pressure on food retail businesses.
Tatneft (total effect on relative performance -1.2%) is a Russian vertically
integrated oil and gas company with headquarters in Almetyevsk, in the Republic
of Tatarstan. It is the sixth largest oil company in Russia and engages in
exploration, development, and production of crude oil primarily in Russia. We
did not have a position in the stock, which rose as the company reported good
production results in 2017.
MD Medical Group (total effect on relative performance -1.0%) is the leading
player in the Russian private healthcare market for women and children offering
a full range of high-quality services including infertility treatment,
diagnostics and familial care. We hold the off-benchmark position in the stock,
which was marginally down over the year as the company continued to expand its
domestic presence and launched new hospitals, which were not fully utilised
yet.
Luxoft (total effect on relative performance -1.0%) is an international
software development and IT outsourcing company with 90% of the company's
employee base in Emerging Europe. Many of the company's customers are global
financial services and automotive firms, and Luxoft has been rapidly capturing
market share as it was able to deploy high-quality human capital at competitive
cost. The company suffered following disappointing earnings and a lowering
guidance as the company was experiencing slowing business trends from their
clients on IT outsourcing.
Total effect on relative performance includes the contribution from asset
allocation, stock selection and interaction relative to the benchmark index.
PORTFOLIO ANALYSIS AS AT 31 JANUARY 2018
% MSCI
Emerging
% Net % Net % Net Europe
% % % % % % current assets assets 10-40
Russia Poland Turkey Greece Ukraine Other assets 31.01.18 31.01.17 Index
31.01.18
Consumer - - 0.5 - - - - 0.5 2.3 4.5
Discretionary
Consumer Staples 4.6 - 2.8 - 3.1 - - 10.5 4.8 4.4
Energy 27.4 (1.7) 0.6 - - - - 26.3 25.3 32.2
Financials 9.6 16.8 2.6 7.0 - 3.0 - 39.0 41.9 34.9
Health Care 2.1 - - - - 3.7 - 5.8 3.2 1.0
Industrials 1.2 - - - - - - 1.2 6.9 2.6
Information 2.4 - - - 0.7 - - 3.1 5.4 0.6
Technology
Materials 2.9 - 1.4 - - - - 4.3 7.4 11.4
Real Estate - - - - - - - - - 0.4
Telecommunication 7.7 - - - - - - 7.7 3.0 4.9
Services
Utilities - - - - - - - - 2.9 3.1
Other - - - - - - 1.6 1.6 (3.1) -
% net assets 57.9 15.1 7.9 7.0 3.8 6.7 1.6 100.0 -
31.01.18
% net assets 48.1 9.0 23.5 7.2 8.8 6.5 (3.1) - 100.0
31.01.17
MSCI EM Europe 49.8 20.8 16.1 5.4 - 7.9 - - - 100.0
10-40 Index
31.01.18
The table above shows the analysis of the net assets as at 31 January 2018 by
sector and region, compared with the net assets as at 31 January 2017 and the
MSCI EM Europe 10-40 Index breakdown as at 31 January 2018.
INVESTMENTS AS AT 31 JANUARY 2018
Country of Market % of
operation value net assets
exposure
US$'000
Financials
Sberbank Russia 19,875 9.6
PKO Bank Polski Poland 15,286 7.4
Bank Pekao Poland 11,040 5.3
PZU Poland 8,470 4.1
National Bank of Greece Greece 7,402 3.6
Alpha Bank Greece 6,918 3.4
Erste Group Bank Austria 6,154 3.0
TSKB Turkey 5,415 2.6
Aviva Emeklilik ve Hayat Turkey - 0.0
80,560 39.0
Energy
Lukoil Russia 19,004 9.2
Gazprom Russia 18,412 8.9
Novatek Russia 10,436 5.1
Rosneft Oil Company Russia 8,724 4.2
Tupras Turkey 1,227 0.6
Short CFD Position Poland (3,476) (1.7)
54,327 26.3
Consumer Staples
Lenta Russia 9,533 4.6
MHP Ukraine 6,335 3.1
Migros Ticaret Turkey 5,783 2.8
21,651 10.5
Telecommunication Services
Mobile Telesystems (MTS) Russia 7,394 3.6
Megafon Russia 4,997 2.4
Sistema Russia 3,454 1.7
15,845 7.7
Health Care
Gedeon Richter Hungary 7,718 3.7
MD Medical Group Russia 4,234 2.1
11,952 5.8
Materials
Norilsk Nickel Russia 6,111 2.9
Eldorado Gold Corporation Turkey 2,827 1.4
8,938 4.3
Information Technology
Mail.Ru Russia 5,012 2.4
Luxoft Ukraine 1,347 0.7
6,359 3.1
Industrials
Globaltrans Russia 2,605 1.2
2,605 1.2
Consumer Discretionary
Arcelik Turkey 970 0.5
970 0.5
Total investments - gross exposure 203,207 98.4
Add: gross exposure on CFDs 3,476 1.7
Equity investments held at fair value 206,683 100.1
Net current liabilities (237) (0.1)
Preference shares (19) 0.0
Net assets 206,427 100.0
Long positions 206,683 100.1
Short positions 3,476 1.7
Gross positions 210,159 101.8
The total number of investments (excluding CFD positions) held at 31 January
2018 was 28 (31 January 2017: 29). All investments are in equity shares unless
otherwise stated.
During the year, the Company entered into CFDs to gain long and short exposure
on individual securities. At the year end, one short CFD position was held (31
January 2017: nil) with a fair value loss of US$102,000 and an underlying
market value of US$3,476,000. At the year end, no long CFD positions were held
(31 January 2017: one, with a net fair value profit of US$71,000 and an
underlying market value of US$2,680,000).
The Company did not hold any equity interest comprising more than 3% of any
company's ordinary share capital as at 31 January 2018.
FIFTEEN LARGEST INVESTMENTS AS AT 31 JANUARY 2018
2018 2017
Market Market
value % of value % of
Security Country Sector US$'000 net US$'000 net
assets assets
Sberbank Russia Financials 19,875 9.6 16,101 10.4
Lukoil Russia Energy 19,004 9.2 9,337 6.0
Gazprom Russia Energy 18,412 8.9 14,005 9.0
PKO Bank Polski Poland Financials 15,286 7.4 5,937 3.8
Bank Pekao Poland Financials 11,040 5.3 - -
Novatek Russia Energy 10,436 5.1 9,930 6.4
Lenta Russia Consumer Staples 9,533 4.6 - -
Rosneft Oil Company Russia Energy 8,724 4.2 - -
PZU Poland Financials 8,470 4.1 5,856 3.8
Gedeon Richter Hungary Health Care 7,718 3.7 - -
National Bank of Greece Financials 7,402 3.6 3,909 2.5
Greece
Mobile Telesystems Russia Telecommunication 7,394 3.6 - -
(MTS) Services
Alpha Bank Greece Financials 6,918 3.4 3,895 2.5
MHP Ukraine Consumer Staples 6,335 3.1 3,802 2.5
Erste Group Bank Austria Financials 6,154 3.0 - -
INCOME STATEMENT FOR THE YEARED 31 JANUARY 2018
Revenue Revenue Capital Capital Total Total
Notes 2018 2017 2018 2017 2018 2017
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Gains on investments held at fair 8 - - 49,550 40,597 49,550 40,597
value through profit or loss
Gains on foreign exchange - - 26 171 26 171
(Losses)/gains on contracts for (107) 47 21 302 (86) 349
difference
Income from investments held at 3 7,533 3,921 - - 7,533 3,921
fair value through profit or loss
Other income 3 28 20 - - 28 20
-------- -------- -------- -------- -------- --------
Total income 7,454 3,988 49,597 41,070 57,051 45,058
-------- -------- -------- -------- -------- --------
Expenses
Investment management fee 4 (421) (337) (981) (785) (1,402) (1,122)
Other operating expenses 5 (507) (502) (58) (76) (565) (578)
-------- -------- -------- -------- -------- --------
Total operating expenses (928) (839) (1,039) (861) (1,967) (1,700)
-------- -------- -------- -------- -------- --------
Net profit on ordinary activities 6,526 3,149 48,558 40,209 55,084 43,358
before finance costs and taxation
Finance costs (14) (16) (32) (37) (46) (53)
-------- -------- -------- -------- -------- --------
Net profit on ordinary activities 6,512 3,133 48,526 40,172 55,038 43,305
before taxation
Taxation (822) (428) - - (822) (428)
-------- -------- -------- -------- -------- --------
Net profit on ordinary activities 7 5,690 2,705 48,526 40,172 54,216 42,877
after taxation
-------- -------- -------- -------- -------- --------
Earnings per ordinary share (US$ 9 15.84 7.50 135.11 111.31 150.95 118.81
cents)
======== ======== ======== ======== ======== ========
The total column of this statement represents the Company's profit and loss
account.
The supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies (AIC). All items in the
above statement derive from continuing operations. No operations were acquired
or discontinued during the year. All income is attributable to the equity
holders of the Company.
The net profit for the year disclosed above represents the Company's total
comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEARED 31 JANUARY 2018
Called up Share Capital
share premium redemption Capital Revenue
Notes capital account reserve reserves reserve Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
For the year ended 31 January
2018
At 31 January 2017 4,133 41,684 5,889 114,768 (11,523) 154,951
Total comprehensive income:
Profit for the year - - - 48,526 5,690 54,216
Transactions with owners,
recorded directly to equity:
Shares purchased and cancelled 12 (1) - 1 (46) - (46)
Treasury shares cancelled 12 (40) - 40 - - -
Dividend paid1 6 - - - - (2,694) (2,694)
-------- -------- -------- -------- -------- --------
At 31 January 2018 4,092 41,684 5,930 163,248 (8,527) 206,427
-------- -------- -------- -------- -------- --------
For the year ended 31 January
2017
At 31 January 2016 4,162 41,684 5,860 75,565 (14,228) 113,043
Total comprehensive income:
Profit for the year - - - 40,172 2,705 42,877
Transactions with owners,
recorded directly to equity:
Shares cancelled 12 (29) - 29 (969) - (969)
-------- -------- -------- -------- -------- --------
At 31 January 2017 4,133 41,684 5,889 114,768 (11,523) 154,951
-------- -------- -------- -------- -------- --------
======== ======== ======== ======== ======== ========
1. Final dividend paid in respect of the year ended 31 January 2017 of 7.50
cents per share was declared on 28 March 2017 and paid on 28 June 2017.
BALANCE SHEET AS AT 31 JANUARY 2018
Notes 2018 2017
US$'000 US$'000
Fixed assets
Investments held at fair value through profit or loss 8 206,683 157,134
-------- --------
Current assets
Debtors 9 7,000 387
Derivative financial assets - 71
Cash and cash equivalents 1 1
-------- --------
7,001 459
-------- --------
Creditors - amounts falling due within one year
Bank overdraft (4,794) (1,496)
Derivative financial liabilities (102) -
Other creditors 10 (2,342) (1,127)
-------- --------
(7,238) (2,623)
-------- --------
Net current liabilities (237) (2,164)
Total assets less current liabilities 206,446 154,970
-------- --------
Creditors - amounts falling due after more than one year
Preference shares of GBP1.00 each (one quarter paid) 11 (19) (19)
-------- --------
Net assets 206,427 154,951
-------- --------
Capital and reserves
Called up share capital 12 4,092 4,133
Share premium account 13 41,684 41,684
Capital redemption reserve 13 5,930 5,889
Capital reserves 13 163,248 114,768
Revenue reserve 13 (8,527) (11,523)
-------- --------
Total shareholders' funds 206,427 154,951
-------- --------
Net asset value per ordinary share (US$ cents) 7 574.75 431.28
======== ========
STATEMENT OF THE CASH FLOW FOR THE YEARED 31 JANUARY 2018
2018 2017
US$'000 US$'000
Operating activities
Net profit before taxation 55,038 43,305
Add back finance costs 46 53
Gains on investments held at fair value through profit or loss (49,613) (40,945)
Gains on foreign exchange (26) (171)
Sales of investments 121,276 77,638
Purchase of investments (127,378) (76,329)
Realised gains on contracts for difference 2,425 1,026
Realised losses on contracts for difference (2,189) (837)
Decrease in debtors 190 21
Increase/(decrease)in other creditors 742 (848)
Net movement in collateral pledged with brokers - 204
Tax on investment income (1,049) (414)
-------- --------
Net cash (used)/generated in operating activities (538) 2,703
-------- --------
Financing activities
Ordinary shares purchased and cancelled (46) (1,039)
Interest paid (46) (53)
Dividend paid (2,694) -
-------- --------
Net cash used in financing activities (2,786) (1,092)
-------- --------
(Decrease)/increase in cash and cash equivalents (3,324) 1,611
-------- --------
Cash and cash equivalents at the beginning of the year (1,495) (3,277)
Effect of foreign exchange rate changes 26 171
-------- --------
Cash and cash equivalents at end of year (4,793) (1,495)
-------- --------
Comprised of:
Cash at bank 1 1
Bank overdraft (4,794) (1,496)
-------- --------
(4,793) (1,495)
-------- --------
NOTES TO THE FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company
within the meaning of section 1158 of the Corporation Tax Act 2010.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set out below.
(a) Basis of preparation
Notwithstanding the material uncertainty in respect of the cash exit in June
2018 which is detailed on page 24 of the Company's Annual Report and Financial
Statements, the financial statements have been prepared on a going concern
basis in accordance with FRS 102, the revised Statement of Recommended Practice
- 'Financial Statements of Investment Trust Companies and Venture Capital
Trusts' (SORP) issued by the Association of Investment Companies (AIC) in
November 2014 and the provisions of the Companies Act 2006.
The Company's Articles of Association require that an ordinary resolution be
put to the Company's shareholders to approve the continuation of the Company
every three years. The Directors are satisfied that the Company has adequate
resources to continue in operational existence for the foreseeable future and
therefore consider the going concern assumption to be appropriate. The last
resolution was put to shareholders at the 2016 AGM and the next such resolution
will be put to shareholders at the AGM in 2019. (See page 22 of the Company's
Annual Report and Financial Statementsfor further details.) The Directors have
no reason to believe that this resolution will not be passed.
The principal accounting policies adopted by the Company are set out below.
Unless specified otherwise, the policies have been applied consistently
throughout the year and are consistent with those applied in the preceding
year. All of the Company's operations are of a continuing nature.
The Company's financial statements are presented in US dollars, which is the
functional and presentation currency of the Company. The US Dollar is the
functional currency because it is the currency most related to the primary
economic environment in which the Company operates. All values are rounded to
the nearest thousand dollars (US$'000) except where otherwise stated.
(b) Presentation of Income Statement
In order to better reflect the activities of an investment trust company and in
accordance with guidance issued by the AIC, supplementary information which
analyses the Income Statement between items of a revenue and a capital nature
has been presented alongside the Income Statement.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business being investment business.
(d) Income
Dividends receivable on equity shares are treated as revenue for the year on an
ex-dividend basis. Where no ex-dividend date is available, dividends receivable
on or before the year end are treated as revenue for the year. Provisions are
made for dividends not expected to be received. The return on a debt security
is recognised on a time apportionment basis.
Special dividends are recognised on an ex-dividend basis and are treated as
capital or revenue items depending on the facts or circumstances of each
dividend.
Dividends are accounted for in accordance with section 29 of FRS 102 on the
basis of income actually receivable, without adjustment for tax credits
attaching to the dividends. Dividends from overseas companies continue to be
shown gross of withholding tax.
Deposit Interest receivable is accounted for on an accruals basis.
Where the Company has elected to receive its dividends in the form of
additional shares rather than in cash, the cash equivalent of the dividend
foregone is recognised in the revenue column of the Income Statement. Any
excess in the value of the shares over the amount of the cash dividend is
recognised in capital reserves.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses have been treated
as revenue except as follows:
* expenses which are incidental to the acquisition or disposal of an
investment are treated as capital. Details of transaction costs on the
purchases and sales of investments are disclosed in note 8;
* the investment management fee has been allocated 70% to the capital column
and 30% to the revenue column of the Income Statement in line with the
Board's expected long term split of returns, in the form of capital gains
and income respectively, from the investment portfolio.
(f) Finance costs
Finance costs are accounted for on an effective yield method and on an accrual
basis. Finance costs are allocated, insofar as they relate to the financing of
the Company's investments, 70% to the capital column and 30% to the revenue
column of the Income Statement, in line with the Board's expected long term
split of returns, in the form of capital gains and income respectively, from
the investment portfolio.
(g) Taxation
The current tax effect of different items of expenditure is allocated between
capital and revenue on the marginal basis using the Company's effective rate of
corporation taxation for the accounting period.
Deferred taxation is recognised in respect of all timing differences at the
financial reporting date, where transactions or events that result in an
obligation to pay more taxation in the future or right to less taxation in the
future have occurred at the balance sheet date. Deferred tax is measured on a
non-discounted basis, at the average tax rates that are expected to apply in
the periods in which the timing differences are expected to reverse based on
tax rates and laws that have been enacted or substantively enacted by the
balance sheet date. This is subject to deferred taxation assets only being
recognised if it is considered more likely than not that there will be suitable
profits from which the future reversal of the timing differences can be
deducted.
(h) Investments held at fair value through profit or loss
The Company's investments are classified as held at fair value through profit
or loss in accordance with section 11 and 12 of FRS 102 and are managed and
evaluated on a fair value basis in accordance with its investment strategy.
All investments are designated upon initial recognition as held at fair value
through profit or loss. Purchases of investments are recognised on a trade date
basis. Sales of assets are recognised at the trade date of the disposal.
Proceeds will be measured at fair value, which will be regarded as the proceeds
of sale less any transaction costs.
The fair value of the financial investments is based on their quoted bid price
at the balance sheet date on the exchange on which the investment is quoted,
without deduction for the estimated future selling costs.
Changes in the value of investments held at fair value through profit or loss
and gains and losses on disposal are recognised in the Income Statement as
'Gains or losses on investments held at fair value through profit or loss'.
Also included within this heading are transaction costs in relation to the
purchase or sale of investments.
The fair value hierarchy has the following three categories:
Level 1 - Quoted market price for identical instruments in active markets
Level 2 - Valuation techniques using observable inputs
Level 3 - Valuation techniques using significant unobservable inputs
(i) Valuation of derivative financial instruments
Derivatives are initially accounted and measured at fair value on the date the
derivative contract is entered into and subsequently measured at fair value.
The gain or loss on re-measurement is taken to the Income Statement. The
sources of the return under the derivative contract (e.g. notional dividends,
financing costs, interest returns and capital charges) are allocated to the
revenue and capital columns of the Income Statement in alignment with the
nature of the underlying source of income and in accordance with the guidance
given in the AIC SORP.
(j) Preference shares
The Company's preference shares are classified as a liability under Section 22
of FRS 102.
(k) Dividends payable
Under Section 32 of FRS 102, final dividends should not be accrued in the
financial statements unless they have been approved by shareholders before the
balance sheet date. Dividends payable to equity shareholders are recognised in
the Statement of Changes in Equity when they have been approved by the
shareholders and become a liability of the Company. Interim dividends are only
recognised in the financial statements in the period in which they are paid.
(l) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a
functional currency being the currency in which the Company predominately
operates. The functional and reporting currency is US dollars, reflecting the
primary economic environment in which the Company operates. Transactions in
foreign currencies are translated in US dollars at the rates of exchange ruling
on the date of the transaction. Foreign currency monetary assets and
liabilities are translated into sterling at the rates of exchange ruling at the
Balance Sheet date. Profits and losses thereon are recognised in the capital
column of the Income Statement and taken to the capital reserve.
(m) Shares repurchased and held in treasury
The full cost of shares repurchased and held in treasury is charged to capital
reserves. Where treasury shares are subsequently reissued, any surplus is taken
to the share premium account.
(n) Debtors
Debtors include sales for future settlement, other debtors, pre-payments and
accrued income 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.
(o) Creditors
Creditors include purchases for future settlements, interest payable, share
buyback costs and accruals in the ordinary course of business. Creditors are
classified as creditors - amounts due within one year if payment is due within
one year or less. If not, they are presented as creditors - amounts falling due
after more than one year.
(p) Cash and cash equivalents
Cash comprises cash in hand, on demand deposits and bank overdrafts repayable
on demand. Cash equivalents include short term, highly liquid investments, that
are readily convertible to known amounts of cash and that are subject to an
insignificant risk of change in value.
3. INCOME
2018 2017
US$'000 US$'000
Investment income:
UK listed dividends 2 -
UK listed special dividends 21 -
Overseas listed dividends 7,370 3,620
Overseas listed special dividends 140 301
-------- --------
7,533 3,921
-------- --------
Other income:
Bank interest 28 1
Other income - 19
-------- --------
Total 7,561 3,941
======== ========
Dividends and interest received during the period amounted to US$7,740,000 and
US$28,000 (2017: US$3,881,000 and US$1,000).
No special dividends have been recognised in capital (2017: nil).
4. INVESTMENT MANAGEMENT FEE
2018 2017
Revenue Capital Total Revenue Capital Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Investment management fee 421 981 1,402 337 785 1,122
======== ======== ======== ======== ======== ========
With effect from 1 April 2017, the management fee has been reduced from 1.0%
per annum of the Company's daily market capitalisation to 0.8% per annum of the
Company's daily net asset value. Any charges in respect of BlackRock managed
funds are deducted from the management fee.
The management fee is allocated 70% to capital reserve and 30% to the revenue
reserve.
5. OTHER OPERATING EXPENSES
2018 2017
US$'000 US$'000
Taken to revenue:
Custody fee 80 67
Custody fee - write back (33) -
Depositary fees 19 15
Audit fee 41 39
Registrar's fees 29 29
Directors' emoluments 189 171
Directors' emoluments - write back (28) -
Marketing fees 45 27
Marketing fees - write back (5) (60)
Other administrative costs 170 214
-------- --------
507 502
-------- --------
Taken to capital:
Transaction costs 58 76
-------- --------
565 578
======== ========
The Company's ongoing charges - calculated as a percentage of 1.1% 1.2%
average shareholders' funds and including management fees, and
operating expenses but excluding finance costs and taxation were:
======== ========
A significant proportion of the Company's operating expenses are paid in
sterling and are therefore subject to exchange rate fluctuations.
The Company has no employees.
6. DIVIDS
2018 2017
Record date Payment date US$'000 US$'000
2017 Final dividend of 7.50 cents 19 May 2017 28 June 2017 2,694 -
======== ======== ======= =======
= =
The Directors have proposed a final dividend of 15.00 cents in respect of the
year ended 31 January 2018. The proposed dividend will be paid on 28 June 2018,
subject to shareholders' approval on 20 June 2018, to shareholders on the
Company's register on 18 May 2018. The proposed final dividend has not been
included as a liability in these financial statements, as final dividends are
only recognised in the financial statements when they have been approved by
shareholders.
The total dividends payable in respect of the year which form the basis of
determining retained income for the purpose of section 1158 of the Corporation
Tax Act 2010 and section 833 of the Companies Act 2006, and the amount proposed
for the year ended 31 January 2018, meet the relevant requirements as set out
in this legislation.
2018 2017
Dividends paid or proposed on equity shares US$'000 US$'000
Final proposed of 15.00 c* (2017: 7.50 cents) 5,387 2,694
======= =======
= =
* Based on 35,916,028 ordinary shares (excluding treasury shares) in issue
on 21 March 2018.
All dividends paid or payable are distributed from the Company's distributable
reserves.
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital returns per share are shown below and have been calculated
using the following:
2018 2017
Net revenue profit attributable to ordinary shareholders (US$'000) 5,690 2,705
Net capital profit attributable to ordinary shareholders (US$'000) 48,526 40,172
-------- --------
Total profit attributable to ordinary shareholders (US$'000) 54,216 42,877
-------- --------
Equity shareholders' funds (US$'000) 206,427 154,951
-------- --------
The weighted average number of ordinary shares in issue during the 35,916,352 36,087,772
year on which the return per ordinary share was calculated was:
-------- --------
The actual number of ordinary shares in issue at the year end on 35,916,028 35,927,828
which the net asset value per share was calculated was:
-------- --------
The number of ordinary shares in issue, including treasury shares, 40,916,028 41,327,828
at the year end was:
======== ========
2018 2017
Revenue Capital Total Revenue Capital Total
cents cents cents cents cents cents
Earnings per share
Calculated on weighted 15.84 135.11 150.95 7.50 111.31 118.81
average number of ordinary
shares
Calculated on actual number 15.84 135.11 150.95 7.53 111.81 119.34
of ordinary shares in issue
at the year end
-------- -------- -------- -------- -------- --------
Net asset value per share 574.75 431.28
Ordinary share price* 549.64 378.06
======== ======== ======== ======== ======== ========
* The Company's ordinary share price is quoted in sterling and the above
represents the US dollar equivalent using an exchange rate of 1.4221 to GBP1
(2017: 1.2581 to GBP1).
8. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
2018 2017
US$'000 US$'000
Valuation of overseas listed investments at 31 January 206,683 157,134
-------- --------
Valuation brought forward 157,134 118,313
Investment and derivative holding losses 3,706 42,232
-------- --------
Opening cost of investments and derivatives 160,840 160,545
Additions at cost 127,851 74,210
Disposals at cost (116,791) (73,915)
-------- --------
Cost carried forward 171,900 160,840
Closing investment holding gains/(losses) 34,783 (3,706)
-------- --------
Closing valuation of investments and derivatives 206,683 157,134
======== ========
During the year, the Company incurred purchase transaction costs of US$222,000
(2017: US$150,000) and sale transaction costs of US$160,000 (2017: US$98,000).
All transaction costs have been included within capital reserve.
Gains on investments held at fair value through profit or loss
2018 2017
US$'000 US$'000
Realised gains on sales 11,061 2,071
Decreases in investment holding losses 38,489 38,526
-------- --------
49,550 40,597
======== ========
9. DEBTORS
2018 2017
US$'000 US$'000
Sales for future settlement 6,721 145
Prepayments and accrued income 39 229
Taxation recoverable 240 13
-------- --------
7,000 387
======== ========
10. CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR
2018 2017
US$'000 US$'000
Purchases for future settlement 968 495
Accrued expenditure 1,374 632
-------- --------
2,342 1,127
======== ========
11. CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
2018 2017
Non-equity share capital US$'000 US$'000
Allotted, issued and one quarter paid: 19 19
-------- --------
Shares in issue at 31 January 2018 and 31 January 2017, 50,000 19 19
preference shares of GBP1.00 each
======== ========
The preference shares confer no right to receive notice of or attend or vote at
any general meeting of the Company except upon any resolution to vary the
rights attached to the preference shares. They carry the right to receive a
fixed dividend of US$0.01 per preference share per annum, payable on demand. On
a winding up or return of capital, the preference shares confer the right to be
paid, out of the assets of the Company available for distribution, the capital
paid up on such shares pari passu with and in proportion to any amounts of
capital paid to ordinary shareholders, but do not confer any right to
participate in the surplus assets of the Company. In the year to 31 January
2018 and the previous year, the preference shareholders waived their rights to
any preference dividend.
12. SHARE CAPITAL
Ordinary Treasury Total Nominal
shares shares shares value
number number number US$'000
Allotted, called up and fully paid share capital
comprised:
Ordinary shares of 10 cents each:
At 31 January 2017 35,927,828 5,400,000 41,327,828 4,133
-------- -------- -------- --------
Shares purchased and cancelled (11,800) - (11,800) (1)
-------- -------- -------- --------
Treasury shares cancelled - (400,000) (400,000) (40)
-------- -------- -------- --------
At 31 January 2018 35,916,028 5,000,000 40,916,028 4,092
======== ======== ======== ========
During the year, 11,800 ordinary shares were repurchased and cancelled (2017:
289,100) for a total consideration of US$46,000 (2017: US$969,000).
Additionally 400,000 treasury shares were cancelled during the year (2017:
nil). The number of ordinary shares in issue at the year end was 40,916,028
(2017: 41,327,828) of which, 5,000,000 were held in treasury (2017: 5,400,000).
13. RESERVES
Capital
Capital reserve
reserve (arising on
Share Capital (arising on revaluation
premium redemption investments of Revenue
account reserve sold)* investments reserve *
US$'000 US$'000 US$'000 held)* US$'000
US$'000
At 31 January 2017 41,684 5,889 118,405 (3,637) (11,523)
Movement during the year:
Shares repurchased and cancelled - 41 (46) - -
Gains on realisation of investments - - 11,061 - -
Change in investment holdings gains - - - 38,489 -
Gains on foreign currency transactions - - 24 2 -
Gains/(losses)on contracts for - - 194 (173) -
difference
Finance costs and expenses charged to - - (1,071) - -
capital
Net profit for the year - - - - 5,690
Dividend paid during the year - - - - (2,694)
-------- -------- -------- -------- --------
At 31 January 2018 41,684 5,930 128,567 34,681 (8,527)
======== ======== ======== ======== ========
* Represents the Company's distributable reserves.
14. Valuation of financial instruments
Financial assets and financial liabilities are either carried in the Balance
Sheet at their fair value (investments) or at an amount which is a reasonable
approximation of fair value (due from brokers, dividends and interest
receivable, due to brokers, accruals, cash and cash equivalents and
overdrafts). Section 11 of FRS 102 requires the Company to classify fair value
measurements using a fair value hierarchy that reflects the significance of
inputs used in making the measurements. The valuation techniques used by the
Company are explained in the accounting policies note on page 50 of the
Company's Annual Report and Financial Statements.
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 fair value hierarchy has the following levels:
Level 1 - Quoted market price for identical instruments in active markets.
A financial instrument is regarded as quoted in an active market if quoted
prices are readily and regularly available from an exchange, dealer, broker,
industry group, pricing service or regulatory agency and those prices represent
actual and regularly occurring market transactions on an arm's length basis.
These include exchange traded derivatives. The Company does not adjust the
quoted price for these instruments.
Level 2 - Valuation techniques using observable inputs.
This category includes instruments valued using quoted prices for similar
instruments in markets that are considered less than active; or other valuation
techniques where all significant inputs are directly or indirectly observable
from market data.
Valuation techniques used for non-standardised financial instruments such as
over-the-counter derivatives, include the use of comparable recent arm's length
transactions, reference to other instruments that are substantially the same,
discounted cash flow analysis, option pricing models and other valuation
techniques commonly used by market participants making the maximum use of
market inputs and relying as little as possible on entity specific inputs.
Level 3 - Valuation techniques using significant unobservable inputs.
This category includes all instruments where the valuation technique includes
inputs not based on observable data and the unobservable inputs could have a
significant impact on the instrument's valuation.
This category also includes instruments that are valued based on quoted prices
for similar instruments where significant entity determined adjustments or
assumptions are required to reflect differences between the instruments and
instruments for which there is no active market. The Investment Manager
considers observable data to be that 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.
The level in the fair value hierarchy within which the fair value measurement
is categorised in its entirety is determined on the basis of the lowest level
input that is significant to the fair value measurement. For this purpose, the
significance of an input is assessed against the fair value measurement in its
entirety. If a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that measurement is a
Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement
in its entirety requires judgement, considering factors specific to the asset
or liability. The determination of what constitutes 'observable' inputs
requires significant judgement by the Investment Manager.
Contracts for difference have been classified as Level 2 investments as their
valuation has been based on market observable inputs represented by the
underlying quoted securities to which these contracts expose the Company.
The table below sets out fair value measurements using the FRS102 fair value
hierarchy.
Level 1 Level 2 Level 3 Total
Financial assets/(liabilities)at fair value US$'000 US$'000 US$'000 US$'000
through profit or loss at 31 January 2018
Assets:
Equity investments 206,683 - - 206,683
-------- -------- -------- --------
Liabilities:
-------- -------- -------- --------
Contracts for difference (gross exposure) - (3,476) - (3,476)
-------- -------- -------- --------
206,683 (3,476) - 203,207
======== ======== ======== ========
Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit or US$'000 US$'000 US$'000 US$'000
loss at 31 January 2017
Assets:
Equity investments 157,134 - - 157,134
-------- -------- -------- --------
Contracts for difference (gross exposure) - 2,680 - 2,680
-------- -------- -------- --------
157,134 2,680 - 159,814
======== ======== ======== ========
There were no transfers between levels for financial assets and financial
liabilities during the period recorded at fair value as at 31 January 2018 and
31 January 2017.
The Company did not hold any level 3 securities throughout the financial year
or as at 31 January 2018 (2017: nil).
15. TRANSACTION WITH MANAGER AND INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) provides management and administration
services to the Company under a contract which is terminable on six months'
notice. BFM has (with the Company's consent) delegated certain portfolio and
risk management services, and other ancillary services, to BlackRock Investment
Management (UK) Limited (BIM (UK)). Further details of the investment
management contract are disclosed in Note 4.
The investment management fee due to BFM for the year ended 31 January 2018
amounted to US$1,402,000 (2017: US$1,122,000). At the year end, US$1,053,000
was outstanding in respect of the management fee (2017: US$258,000).
In addition to the above services, BlackRock has provided the Company with
marketing services. The total fees paid or payable for these services for the
year ended 31 January 2018 amounted to US$45,000 excluding VAT (2017:
US$27,000). Marketing fees of US$47,000 (2017: US$29,000) were outstanding at
31 January 2018.
16. RELATED PARTIES DISCLOSURES AND TRANSACTIONS WITH DIRECTORS
Disclosures of the Directors' interests in the ordinary shares of the Company
and fees and expenses payable to the Directors are set out in the Directors'
Remuneration Report on pages 28 to 30 of the Company's Annual Report and
Financial Statements . At 31 January 2018, an amount of US$17,000 (2017: US$
nil) was outstanding in respect of Directors' fees.
17. CONTINGENT LIABILITIES AND ASSETS
There were no contingent liabilities or assets at 31 January 2018 (2017: nil).
18. PUBLICATION OF NON-STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute
statutory accounts as defined in the Companies Act 2006. The 2018 annual
report and financial statements will be filed with the Registrar of Companies
shortly.
The report of the Auditors for the year ended 31 January 2018 contains no
qualification or statement under Section 498(2) or (3) of the Companies Act
2006.
The comparative figures are extracts from the audited financial statements of
BlackRock Emerging Europe plc for the year ended 31 January 2017, which have
been filed with the Registrar of Companies, unless otherwise stated. The
report of the Auditors on those financial statements contained no qualification
or statement under Section 498 of the Companies Act.
This announcement was approved by the Board of Directors on 23 March 2018.
19. ANNUAL REPORT
Copies of the annual report will be sent to members shortly and will also be
available from the registered office, c/o The Company Secretary, BlackRock
Emerging Europe plc, 12 Throgmorton Avenue, London EC2N 2DL.
20. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton
Avenue, London EC2N 2DL on Tuesday, 20 June 2018 at 12:00 noon.
ENDS
The Annual Report will also be available on the BlackRock Investment Management
website at http://www.blackrock.co.uk/beep. Neither the contents of the
Investment Manager's website nor the contents of any website accessible from
hyperlinks on the Investment Manager's website (or any other website) is
incorporated into, or forms part of, this announcement.
For further information, please contact:
Simon White, Managing Director, Investment Trusts, BlackRock Investment
Management (UK) Limited
Tel: 020 7743 5284
Press Enquiries:
Lucy Horne, Lansons Communications - Tel: 020 7294 3689
E-mail: lucyh@lansons.com
23 March 2018
12 Throgmorton Avenue
London EC2N 2DL
END
(END) Dow Jones Newswires
March 23, 2018 07:47 ET (11:47 GMT)
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