BLACKROCK EMERGING EUROPE PLC
Annual results announcement for the year ended 31 January 2015
FINANCIAL HIGHLIGHTS
Attributable to ordinary 31 January 31 January Change
shareholders 2015 2014 %
US dollar
Net assets (US$'000) 125,834 159,056 -20.9
Net asset value per ordinary share 347.20c 438.86c -20.9
- with income reinvested -20.2
MSCI Emerging Europe 10-40 Index
(net return)(1) 357.88 476.66 -24.9
(mid-market)(2) 300.38c 405.94c -26.0
- with income reinvested -25.4
Sterling
Net assets (£'000) 83,783 96,779 -13.4
Net asset value per ordinary share 231.17p 267.03p -13.4
- with income reinvested -12.7
MSCI Emerging Europe 10-40 Index
(net return)(1) 238.28 290.04 -17.8
Ordinary share price
(mid-market)(2) 199.99p 247.00p -19.0
- with income reinvested -18.4
-------- -------- --------
Discount to net asset value 13.5% 7.5% -
-------- -------- --------
Gross market exposure(3) 100.0% 111.5% -
======== ======== ========
Year Year
ended ended
31 31
January January Change
2015 2014 %
Revenue
Net revenue after taxation
(US$'000) 2,288 1,932 18.4
Final dividend per ordinary share n/a 3.50c -
Revenue return per ordinary share 6.31c 5.13c 23.0
Total loss per ordinary share -88.32c -61.57c -43.4
Ongoing charges ratio(4) 1.3% 1.3% -
-------- -------- --------
1. 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.
2. Based on an exchange rate of 1.5019 (31 January 2014: 1.6435).
3. Long positions plus short positions as a percentage of net assets.
4. Calculated in accordance with AIC guidelines.
CHAIRMAN'S STATEMENT
I am pleased to present the Annual Report and Financial Statements to
shareholders for the year ended 31 January 2015.
MARKET OVERVIEW
Most Emerging European markets suffered sharp declines during the year under
review. Nervousness surrounding events in Ukraine increased in March, following
the deposition of President Yanukovych and subsequent Crimean referendum and
declaration of secession. The continuing separatist unrest in eastern Ukraine
and the more recent precipitous fall in the oil price have combined with the
imposition of European and US sanctions to undermine support for Russian
equities in particular.
Elsewhere in the region, on a more positive note, Turkey stood out as a strong
performer. The country is a beneficiary of lower oil prices and the equity
market was also boosted by falling interest rates.
PERFORMANCE
Against this background, the Company's net asset value (NAV) returned -20.2% in
US Dollar terms (-12.7% in sterling terms) which compared favourably with the
benchmark return of -24.9% in US dollar terms and -17.8% in sterling terms. The
share price returned -25.4% (-18.4% in sterling terms), the difference
reflecting a widening of the discount towards the year end, although our
discount control policies have kept the average discount in line with the
previous year. (All percentages with income reinvested.)
Since the year end and up to the close of business on 25 March 2015 the
Company's NAV per share has increased by 6.1% compared with an increase in the
benchmark of 7.3% over the same period (in US dollar terms).
REVENUE RETURN AND DIVIDENDS
The Company's revenue return for the year amounted to 6.31 cents per share
(2014: 5.13 cents). Since the Company has accumulated negative revenue
reserves there is no longer a requirement to pay a dividend in order
to maintain the Company's investment trust status. The Directors have therefore
resolved not to pay a dividend given our investment objective of capital growth
and our views on the opportunities represented by the current investment portfolio.
ALTERNATIVE INVESTMENT FUND MANAGER'S DIRECTIVE
Following a change in regulation, BlackRock Fund Managers Limited (BFM) was
appointed as the Company's Alternative Investment Fund Manager (AIFM or
Manager) on 2 July 2014. The Board has also appointed BNY Mellon Trust &
Depositary (UK) Limited to act as the Company's Depositary (Depositary or
BNYMTD). In complying with its new regulatory obligations, the Board continues
to act independently of the AIFM and the arrangements in respect of the
management fee remain unchanged. BlackRock Investment Management (UK) Limited
(BIM (UK)) continues to act as the Company's Investment Manager under a
delegation agreement with BFM.
ANNUAL GENERAL MEETING
The AGM will be held at 12.00 noon on 23 June 2015 at the offices of BlackRock
at 12 Throgmorton Avenue, London EC2N 2DL. We hope that as many shareholders as
possible will attend. Following the AGM there will be a presentation by Sam
Vecht, the Portfolio Manager, on the Company's performance and the outlook for
the year ahead.
OUTLOOK
The political and economic environment of the region has endured a truly
challenging period. The long-term ramifications of the Ukrainian crisis have
yet to be fully understood, while the Greek sovereign debt issues have yet to
reach a satisfactory resolution. While this does add to future uncertainty,
valuations in the region remain extremely depressed, and equities should
rally strongly if any thaw in political tensions, or perceived improvement in
economic fundamentals, were to materialise. Nor should the headlines over geo-political
issues overshadow continued strong economic fundamentals in countries such as Poland,
hungary and Romania, which continue to lead Europe in terms of economic growth and
competitiveness. It is also important not to let the oft-repeated macro-concerns about
the region overshadow multiple exciting individual companies. Across the region, there
are firms, particularly in the technology sector, which are able to grow revenues,
profits and ultimately generate significant shareholder value almost regardless of the
`bigger picture'. Earlier this month the Board met with several Russian government
ministers and heads of major companies to understand the prospects for the
economy and for specific investments. This reinforced our view of a gradual
normalisation of the political and economic environment to support the
prospects for the broader region during the forthcoming year.
NEIL ENGLAND
Chairman
27 March 2015
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31
January 2015. The aim of the Strategic Report is to provide shareholders with
the information to assess how the Directors have performed their duty to
promote the success of the Company for the collective benefit of shareholders.
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. 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 the Manager. 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 service
providers, including the Manager.
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.
The management of the investment portfolio and the administration of the
Company have been contractually delegated to the Manager. 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, BNY Mellon Trust & Depositary
(UK) Limited, the Administrator, Bank of New York Mellon (International)
Limited, and the Registrar, Computershare Investor Services PLC
(Computershare).
Details of the contractual terms with third party service providers are set out
in the Directors' Report in the 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 to 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 will be 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.
Investment process
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 invest 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 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 Analytics 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 for the meeting 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
In June 2013 shareholders approved the use of a performance triggered tender
offer and periodic opportunities for the return of capital (further details are
given below), together with the use of the Company's share buy back
authorities, where appropriate, as the tools to be used to manage the Company's
discount in the future.
Performance triggered tender offer
The Board will put forward proposals for a tender offer for up to 25% of the
Company's ordinary shares in issue (excluding treasury shares), if the Company
has underperformed its benchmark index by in excess of 3% on a cumulative basis
(measured on a NAV per share total return basis over the 3 year period from 21
June 2013).
Periodic opportunities for return of capital
Prior to 21 June 2018, the Board will formulate and 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. If the first
such return of capital is not undertaken in conjunction with a liquidation of
the Company, the Board intends to offer shareholders further opportunities to
realise the value of their investment in the Company at net asset value less
applicable costs at subsequent 5 yearly intervals.
PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided on pages 15 to 17 of the
Annual Report and Financial Statements.
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 form part of this
Strategic Report and includes 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 for the year
The results for the Company are set out in the Income Statement. The total net
loss for the year, after taxation, was US$32,009,000 (2014: a loss of US$23,172,000)
of which the revenue return amounted to US$2,288,000 (2014: US$1,932,000), and the
capital loss amounted to US$34,297,000 (2014: a loss of US$25,104,000).
The Company's revenue return amounted to 6.31 cents per share (2014: 5.13 cents).
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.
2015 2014 2013
Change in net asset value(1) -20.2% -11.8% +13.3%
Change in share price(2) -25.4% -6.1% +8.8%
Relative NAV performance vs
benchmark over 1 year +4.7% +4.6% -1.9%
Relative NAV performance vs
benchmark over 3 years +7.9% -3.7% -4.3%
Average discount to net asset value 10.3% 10.3% 10.4%
Ongoing charges ratio(3) 1.3% 1.3% 1.2%
1. Calculated in US Dollar terms on a total return basis.
2. Calculated in US Dollar terms on a mid to mid basis and on a total return basis.
3. Calculated in accordance with AIC guidelines.
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 above, 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.
The portfolio of the Company is not constructed with any yield target.
PRINCIPAL RISKS
The key risks faced by the Company are set out below. The Board regularly
reviews and agrees policies for managing each risk, as summarised below.
Market risk - Market risk arises from volatility in the prices of the
Company's investments. It represents the potential loss the Company might
suffer through realising investments in the face of negative market movements.
Investment in securities of issuers in eastern Europe (including Ukraine),
Russia, Central Asia and Turkey involves significant risks and special
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.
In order to mitigate this risk the Board considers asset allocation, stock
selection and levels of gearing on a regular basis and has set investment
restrictions and guidelines which are monitored and reported on by
the Investment Manager. The Board monitors the implementation and results of
the investment process with the Manager.
Political risk - 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.
In order to mitigate this risk the Board considers asset allocation, stock
selection and levels of gearing on a regular basis and has set investment
restrictions and guidelines which are monitored and reported on by the Manager.
The Board monitors the implementation and results of the investment process
with the Manager.
Performance risk - The Board is responsible for deciding the investment
strategy to fulfil the Company's objectives and monitoring the performance of
the Investment Manager. An inappropriate strategy may lead to poor performance.
To manage this risk the Investment Manager provides an explanation of
significant stock selection decisions and the rationale for the composition of
the investment portfolio. The Board monitors and maintains an adequate spread
of investments in order to minimise the risks associated with particular
countries or factors specific to individual companies and sectors, based on the
diversification requirements inherent in the Company's investment policy. Past
performance is not necessarily a guide to future performance and the value of
your investment in the Company and the income from it can fluctuate as the
value of the underlying investments fluctuate.
Financial risk - The Company's investment activities expose it to a variety
of financial risks which include foreign currency risk, credit risk and
interest rate risk. Further details are disclosed in note 19 on pages 54 to 63
of the Annual Report and Financial Statements, together with a summary of the
policies for managing these risks.
Operational risk - In common with most other investment trust companies, the
Company has no employees. The Company therefore relies upon the services
provided by the Manager, BNY Mellon Trust & Depositary (UK) Limited (the
Depositary) and The Bank of New York Mellon (International) Limited (the
administrator) who maintain the Company's accounting records.
The security of the Company's assets, dealing procedures, accounting records
and maintenance of regulatory and legal requirements, depends on the effective
operation of these systems. These have been regularly tested and monitored
throughout the year as evidenced through their Service Organisation Control
(SOC) reports and reported on by their service auditors which gives assurance
regarding the effective operation of controls. The Board also considers
succession arrangements for key employees of the Manager and the business
continuity arrangements for the Company's key service providers.
Regulatory risk - The Company operates as an investment trust in accordance
with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company
is exempt from capital gains tax on the profits realised from the sale of its
investments. The Investment Manager monitors the amount of retained income to
ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act
2010 are not breached and the results are reported to the Board at each
meeting.
Following authorisation under the Alternative Investment Fund Managers'
Directive (the Directive), the Company and its appointed Alternative Investment
Fund Manager (AIFM or Manager) are subject to the risk that the requirements of
this directive are not correctly complied with. The performance of the Manager
in respect of the Directive is overseen by the Depositary and the Board
receives regular reports from the Depositary which confirm whether the Company
has been managed in accordance with the Directive.
The Board and Investment Manager also monitor changes in government policy and
legislation which may have an impact on the Company.
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.
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 page 29 of the Annual
Report and Financial Statements.
DIRECTORS AND EMPLOYEES AND GENDER REPRESENTATION
The Directors of the Company on 31 January 2015, all of whom held office
throughout the year, are set out in the governance structure and Directors'
biographies on page 18 of the Annual Report and Financial Statements. The Board
consists of four men and one woman. The Company does not have any employees.
The information set out on pages 10 to 17 of the Annual Report and Financial
Statements including the Chairman's Statement and Investment Manager's Report,
forms part of the Strategic Report.
The Strategic Report was approved by the Board at its meeting on 27 March 2015.
BY ORDER OF THE BOARD
BlackRock Investment Management (UK) Limited
Company Secretary
27 March 2015
RELATED PARTY TRANSACTIONS
BlackRock Investment Management (UK) Limited (BIM (UK)) provided management and
administration services to the Company under a contract which was terminated
with effect from 2 July 2014. BlackRock Fund Managers Limited (BFM) was
appointed as the Company's AIFM with effect from 2 July 2014. BIM (UK)
continues to act as the Company's Investment Manager under a delegation
agreement with BFM. Further details of the investment management contract are
disclosed in note 4.
The investment management fee due to BIM (UK) and BFM for the year ended 31
January 2015 amounted to US$1,396,000 (2014: US$1,451,000). At the year end,
an amount of US$298,000 was outstanding in respect of the management fee
(2014: US$405,000).
The Company contributes to a focused investment trust sales and marketing
initiative operated by BIM (UK) on behalf of the investment trusts under its
management, which commenced on 1 November 2013. The Company's contribution to
the consortium element of the initiative, which enables the trusts to achieve
efficiencies by combining certain sales and marketing activities, represented
0.03% per annum of its net assets (£113.0 million) as at 31 October 2013 and
this contribution is matched by BIM (UK). In addition, a budget of up to a
further 0.04% of net assets as at 31 October 2013 has been allocated for
Company specific sales and marketing activity.
The purpose of the programme overall is to ensure effective communication with
existing shareholders and to attract new shareholders to the Company. This has
the benefit of improving liquidity in the Company's shares and helps sustain
the stock market rating of the Company. The total fees paid or payable for
these services for the year ended 31 January 2015 amounted to US$117,000
including VAT (2014: US$32,000) of which US$149,000 (2014: US$32,000) was
outstanding at 31 January 2015.
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. The Chairman receives an annual fee of £37,000, the Chairman
of the Audit Committee/Senior Independent Director receives an annual fee of
£27,500 and each other Director receives an annual fee of £23,500. With effect
from 1 February 2015 the annual remuneration of the Chairman was increased to
£38,000, the Chairman of the Audit Committee/Senior Independent Director to
£28,250 and the other Directors to £24,000. 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 20,131 ordinary shares,
Mark Bridgeman holds 3,650 ordinary shares, Philippe Delpal holds 12,000
ordinary shares and Robert Sheppard holds 10,000 ordinary shares.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each financial year.
Under that law 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 period. 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 18 of the 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 2012 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 fulfils these requirements. The process
by which the Committee has reached these conclusions is set out in the Audit
Committee's report on pages 31 to 33 of the 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 2015, taken as a whole, is
fair, balanced and understandable and provide the information necessary for
shareholders to assess the Company's performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
NEIL ENGLAND
Chairman
27 March 2015
INVESTMENT MANAGER'S REPORT
MARKET OVERVIEW
In the year to 31 January 2015, the MSCI Emerging Europe 10-40 Index fell by
24.9% in US dollar terms (17.8% in sterling terms) as the tension between
Russia and Ukraine continued to mount during the year (all percentages with
income reinvested).
Turkey was the stand-out market, enjoying a good run of performance as the
bourse recovered strongly from the weakness seen at the end of 2013. Investment
returns were also boosted by the appreciation in the Lira from its early 2014
lows. The strength in the currency was driven by a long awaited return to a
positive real interest rate environment, as the Central Bank took the bold
decision to raise interest rates sharply. Inflation expectations subsided in
response, subsequently allowing a return to lower market interest rates to
boost the attractiveness of equities. The market received further support from
the European Central Bank's decision to begin its program of Quantitative
Easing, which should help Turkey's financing environment. In the latter part of
the year, the oil price fell from levels above US$100 to as low as US$45 per
barrel. Turkey, as a major energy importer, benefited hugely from this
tailwind.
In contrast, the Russian market, despite several sharp rallies, fell
considerably during the year. The Crimean situation, already problematic in
late 2013, worsened and widespread fighting across eastern Ukraine led to
sanctions being placed on Russia which were intensified following the Malaysia
Airlines disaster in July. It is important to be clear these sanctions do not
currently prevent the Company from owning any Russian shares, nor do the
sanctions cripple the economy or banking sector. They have however reduced the
ability of Russian corporates to refinance external debt, which has raised the
cost of financing in the economy.
However, since its December 2014 low, the Russian market has rallied 35% and
the market has begun to price in a somewhat improved political environment
following talks in Minsk. Unlike the previous agreement, "Minsk 2" specifies a
roadmap to a permanent ceasefire. While there remains potential for the
implementation to fail, it is clearly a step in the right direction and could
eventually open the door for sanctions to be lifted.
Greece meanwhile endured a volatile year. The Company did not have any exposure
to the Greek market for the vast majority of 2014. In particular, we believed
that the assumptions needed to justify the Greek banks' valuations were overly
optimistic. This was vindicated as the market fell by nearly 60%. The left-wing
political party, Syriza, won the general election at the beginning of 2015 and,
despite their populist rhetoric prior to the election, they have engaged in
negotiations with the European Union to try to solve the country's debt
problems.
Countries like Poland and Hungary on the other hand spent less time in the
headlines, but both made good progress. Poland recording 2014 GDP growth of
3.3%, almost double the pace of the previous year, whilst Hungary grew 3.7% -
the highest rate for almost a decade. This is particularly impressive compared
to almost zero growth in the European Union, indicating the sustainable
competitiveness of these countries.
PORTFOLIO
In the year to 31 January 2015, the Company's net asset value (NAV) returned
-20.2%, outperforming the benchmark by 4.7%, in US Dollar terms (all percentages
with income reinvested).
The Company's positioning in Russia contributed strongly to relative
outperformance. In the first half of the year we built a modest overweight
position in anticipation of the initial ceasefire, which unfortunately did not
subsequently hold. In line with our process we visited Ukraine when events on
the ground developed contrary to our expectations. Our conclusions were that
Russian-backed rebels had not yet achieved their strategic goals and that a
continuation of the conflict in the short-term was likely. The Company thus
entered the second half of the year significantly underweight in Russia and the
conviction in this underweight position grew as the oil price fell.
As usual, the question for us when considering any investment is `what is
already reflected in the price?' In December, we re-appraised the outlook for
Russia. Whilst we did not think the economic picture was particularly bright
for Russia, much of the bad news had already been reflected in the market. The
oil price began to recover and the political environment started to improve at
the margin. As a result, we reduced the large underweight exposure
significantly, taking advantage of unusually attractive stock valuations.
The Company's absolute performance was also assisted by the overweight position
in Turkey. The position was predicated on the extremely depressed valuations in
the financial sector in January and the likelihood that the Central Bank,
having exhausted all other possibilities, would take the correct decision to
increase interest rates. In the face of opposition from Prime Minister Erdogan,
the Bank increased rates by circa 4%, although this has since been partially
reversed as inflation expectations came under control. Valuations have
recovered from the Lehman-crisis levels seen at the beginning of the reporting
period, the long-term potential of Turkey remains undiminished and we retain an
overweight position.
The Company's initial zero weight position in Greece was also a positive
relative contributor. We conducted a research trip to Greece in January 2015
and our conclusions were that Syriza would eventually become more pragmatic in
their dealing with the European institutions monitoring the bail-out
conditions, and that a Eurozone exit is less likely than some fear, although
considerable risks remain. As a result, the Company opened a position in
National Bank of Greece, which has the strongest capital position of its peers.
Subsequent to the reporting year, it is worth highlighting that one of our most
significant holdings, Dragon Oil, has received an approach to acquire the company
from its parent firm, ENOC. Whilst the terms of any possible offer are yet to be
disclosed, the approach is an illustration of the under-appreciated value present
in many stocks in our region. Given that it is a stock that is not present in the
benchmark, it also highlights the opportunities offered by the focused and
unconstrained investment strategy of the Company.
OUTLOOK
At the time of writing, the situation in the east of Ukraine remains calmer
under the Minsk 2 agreement. The Russian economy will likely have a truly
difficult 2015 but the worst pressure for the financial markets could be behind
us. We continue to identify stocks for investment, concentrating on cash
generative exporters and domestic stocks that can deliver growth even without
rising oil prices. Despite the problems, much of the bad news appears to be
already priced in. Valuations are very low, dividend yields are high and a
re-rating is possible if the ceasefire is preserved.
The difficult economic environment is also providing an impetus for improved
governance at a company level, something which is important to our process as it
is a foundation of the ability to generate sustainable shareholder value. We discuss
our approach on environmental, social and governance matters in more detail in the
Strategic Report.
We retain a positive outlook for Turkey which should continue to benefit from
lower oil prices and accelerating economic growth. However, upcoming
parliamentary elections have the potential to upset the market, so our positive
view on the country is more moderate than it was last year. Over the past 18
months, the Company has benefited from correct positioning through the interest
rate cycle. Such movements are likely to be less pronounced in the coming
months and so opportunities away from the financial sector are becoming
increasingly interesting.
In Greece, it is the necessary political will to provide financing which will
ultimately generate confidence in the markets. Both the European Union and
Greece lose from Greece's exit, so we think an agreement is likely to be
found. We believe that the Greek government is most likely to make reform
concessions in order to gain some fiscal flexibility, which could then be used
to support economic growth and social measures. Excluding the possibility of a
Greek exit from the Eurozone, valuations in selected stocks are now at levels
which are extremely interesting. If a solution, even a partial one, to the debt
challenges, is found the market has the potential to be one of the best performers
globally. We note the extreme disparity between 5 year Greek bonds that have a yield
over 15% at the time of writing, whilst countries like Portugal, Ireland, Italy and
Spain are circa 1%. If the political and economic situation were to allow some
harmonisation between these levels of yield, the market could rally sharply.
In Poland, the economic benefit from the European recovery is finally arriving.
The country will be further helped by the oil price move, and also by the
prospects of lower yields due to the European version of QE policies recently
announced. Inflation remains subdued but relative to other countries valuations
may not offer the most interesting opportunities. We continue to see select
opportunities in countries such as Romania, where the banking sector should
benefit from entering a new credit cycle, with more loan growth and lower cost
of bad debt, and Lithuania, where economic growth continues on a steady path despite
the difficulties in neighbouring Ukraine.
In summary, the outlook for emerging Europe equities is better than it has been for some
time. There are few areas of the world that have been de-rating for 8 years and
could yet surprise on the upside in 2015. As a result, whilst we are aware that
many of the issues that arose in 2014 remain live concerns, we are optimistic
for the coming 12 months.
SAM VECHT and DAVID REID
BlackRock Investment Management (UK) Limited
27 March 2015
PERFORMANCE ATTRIBUTION
Contribution to return against
the benchmark (1)
Country Stock Total
selection selection (2) Effect
Country % % % Commentary
Russia & CIS 1.63 0.37 2.00
Russia 3.36 0.37 3.73 Overall, the Company's
positioning in Russia
contributed to performance.
However, the contribution from
the first half of the year was
negative due to the ongoing
crisis in Ukraine but this was
more than offset in the second
half of the year by a
significantly underweight
position and the conviction in
this position grew as the oil
price fell.
Turkmenistan (3) -0.53 - -0.53 Dragon Oil remains attractively
valued but the share price fell
as the oil price declined
resulting in a negative total
effect.
Ukraine (3) -1.20 - -1.20 Positions in Ukraine detracted
from performance. However, the
Company had limited exposure to
Ukraine with portfolio holdings
being restricted to agriculture
exporters which will regain a
strong competitive position once
the political environment
calms.
-------- -------- --------
Central and 0.65 -1.93 -1.28
Eastern Europe
Hungary -0.71 0.24 -0.47 The normalisation of financial
risk across Europe and the
recovery in the northern
European region has been
beneficial for Hungary
particularly. This has had a
positive impact on the investee
companies held in the Company's
portfolio although the overall
total effect is negative as the
portfolio had an underweight
position in Hungary.
Czech Republic 0.17 - 0.17 The Company had no exposure to
the Czech Republic over the
year.
Poland 1.69 -2.17 -0.48 Stock selection in Poland hurt
performance, with supermarket
operation, Jeronimo Martins a
notable detractor. We
underestimated the pressures of
the competitive environment and
sold the position.
Romania (3) -0.17 - -0.17 The Company's position in
Romanian financial BRD Groupe
Société Générale detracted from
performance over the year.
Lithuania (3) -0.33 - -0.33 The position in apparel retailer
Apranga was negative for
performance in the year.
-------- -------- --------
Turkey 1.59 0.30 1.89 Overweight positions in the
Turkish banking sector added to
performance.
-------- -------- --------
Greece 3.50 -0.46 3.04 The Company's initial
zero-weight position in Greece
was a positive contributor which
was offset by a position in the
National Bank of Greece which
has the strongest capital
position of its peers.
-------- -------- --------
Cash/gearing 0.12
-------- -------- --------
Other factors -1.07
Management fees -0.98
-------- -------- --------
Other operating -0.09 Includes the impact of operating
costs expenses, taxation and finance
charges.
-------- -------- --------
Total 7.37 -1.72 4.70
-------- -------- --------
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.
3. Holdings in non-benchmark stocks are included in country selection rather
than stock selection.
TEN LARGEST EQUITY INVESTMENTS
Halk Bank - 8.7% (2014: 7.1%) is a state controlled Turkish Bank. Like its
peer, Garanti Bank, the company has a long history of delivering attractive
returns, particularly in its highly profitable SME banking operation.
Lukoil - 8.3% (2014: nil) 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 proven oil reserves. We had previously avoided
exposure due to Lukoil's extensive capital expenditure programme. This capital
expenditure cycle is coming to an end and there has been a shift in management
attitudes towards greater investment discipline.
Dragon Oil - 8.3% (2014: 7.2%) headquartered in Dubai, UAE, Dragon Oil is a
100% operator of the Cheleken Contract Area, offshore Turkmenistan, where it
re-develops two oil fields. The company has a strong record of double digit
production growth which looks set to continue.
PKO Bank Polski - 6.9% (2014: 3.6%) is Poland's largest bank. PKO is well
capitalised and has a strong retail franchise. The bank trades at attractive
valuations relative to other Polish banks and generates superior returns on
equity.
TSKB - 6.4% (2014: 3.1%) is a Turkish development bank which focused on lending
to infrastructure projects. The banks' high-margin, stable revenue projects
combined with their long funding maturities mean that the company has one of
the most sustainable earnings streams in the Turkish banking sector.
Garanti Bank - 5.6% (2014: 7.7%) is Turkey's second largest private bank.
Garanti Bank has a long track record of delivering high returns on equity and
dynamic management of capital.
Sberbank - 5.2% (2014: 10.0%) is Russia's largest bank. The bank which is
state-owned has branches throughout the country and a 50% share in the retail
deposit market. Sberbank 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.
BRD Groupe Société Générale - 4.9% (2014: 3.8%) is the second largest Romanian
Bank, with over 2 million clients and 900 branches. The normalization of credit
conditions in Romania will result in positive earnings momentum and potential
for the stock to re-rate.
Surgutneftegaz (preference shares) - 4.1% (2014: 6.7%) is one of the largest
oil producers in Russia. The company is attractive under a number of valuation
metrics. However, we are most encouraged by the company's free cash flow
generation and track record of dividend payment. Surgutneftegaz generates the
highest free cash flow per barrel of all Russian oil companies.
Gazprom - 3.9% (2014: 8.3%) is Russia's largest gas producer and transporter,
with an export monopoly. Despite its status as one of the most profitable
companies in the world, the company has, until recently, been out of favour
with investors. We believe that the risks associated with Gazprom are more than
priced into the valuation.
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 2015.
Together, the ten largest investments represents 62.3% of net assets (ten
largest investments at 31 January 2014: 64.4%).
TOP AND BOTTOM 5 CONTRIBUTORS TO RELATIVE PERFORMANCE
TOP 5 LARGEST POSITIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Halk Bank (total effect on relative performance 2.1%) & Garanti Bank (total
effect on relative performance 2.0%). Halk Bank and Garanti Bank both have long
track records of delivering high returns on equity. A correction in the Turkish
markets driven by monetary tightness meant that the stocks traded at the lower
end of historical ranges. This represented a rare opportunity to buy stable
banks with strong franchises at depressed book values at their lowest point in
5 years. As monetary policy normalised, both Turkish banks rallied strongly.
Gazprom (total effect on relative performance 1.9%) & Novatek (total effect on
relative performance 1.4%). The movement in the oil price has been attracting
the majority of investment headlines in recent months. Our view of the
commodity complex 12 months ago was that volatility was set to rise. Our
analysis suggested that the most likely movement was down given the supply
growth from US shale oil and non-OPEC producers like Iraq. Oil demonstrated the
lowest realised volatility for 10 years. That said we were surprised by the
speed and scale of the change. This is one of the major reasons why we reduced
the Company's exposure to Russia significantly over the course of the calendar
year. Underweight positions in both Novatek and Gazprom were the largest
contributors to relative Russian outperformance.
Mobile Telesystems (MTS) (total effect on relative performance 1.3%). The
Company had no exposure to MTS at the time chairman of conglomerate Sistema,
Vladimir Evtushenkov was placed under house arrest. Share prices in all
Sistema's subsidiaries, including MTS, fell heavily as speculation grew that
assets would be confiscated by the state. MTS was not affected operationally
and Sistema have now resolved many of the issues.
TOP 5 LARGEST NEGATIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
Globaltrans (total effect on relative performance -1.5%). The stock suffered as
bulk cargoes declined in an environment of increasing rail-car supply. The
overhang in supply was caused by the delay of legislation designed to limit the
life of transport containers. Towards the end of the reporting period, the
legislation passed, removing some excess supply. In addition the weakness in
the Ruble had increased demand for Russian metals the miners of which comprise
a large proportion of Globaltrans client base and the stock has recovered some
of the lost ground.
Jeronimo Martins (total effect on relative performance -1.3%), is the operator
of the largest chain of discount supermarkets in Poland. The company is looking
to expand its stores in Poland to 3,200 in 2016 from 2,800 currently. The
investment case was predicated on the company's exposure to the ongoing
improvement in the Polish economic landscape. However, an increasingly
competitive landscape weighed on company earnings and the stock did not perform
well.
MHP (total effect on relative performance -1.2%). The stock corrected on
Russian tensions. In addition, the stock reacted to a government proposal to
reduce agricultural subsidies available to the company; the proposal was
subsequently changed to exclude changes to the agricultural tax regime.
Mail.Ru (total effect on relative performance -1.0%). The stock fell on
concerns that the slowing Russian economy would impact advertising spending.
Volga Gas (total effect on relative performance -0.9%). The company's tender
process ended unsuccessfully which weighed on the share price. Toward the end
of the year, the company opened a gas processing plant and the company is now
free cash flow positive and growing.
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 2015
%
% MSCI
Net % % Emerging
current net net Europe
% % % % % assets/ assets assets 10-40 Index
Russia Turkey Poland Turkmenistan Other (liabilities) 31.01.15 31.01.14 31.01.15
Consumer
Discretionary - - - - 1.9 - 1.9 2.0 4.1
Consumer
Staples 1.3 - - - 3.5 - 4.8 11.5 7.2
Energy 17.9 - - 8.3 2.8 - 29.0 31.2 29.9
Financials 6.7 23.0 6.9 - 8.1 - 44.7 42.6 34.1
Healthcare 0.9 - - - - - 0.9 1.5 0.7
Industrials 2.2 2.5 - - - - 4.7 5.7 3.1
Information
Technology 5.5 - - - - - 5.5 8.8 -
Materials 2.8 (2.8) 1.9 - - - 1.9 6.2 9.5
Telecommunications
Services 2.8 3.8 - - - - 6.6 2.0 6.6
Utilities - - - - - - - - 4.8
Other - - - - - - - (11.5) -
---- ---- ---- ---- ---- ---- ----- ----- ----
Net assets
31.01.15 40.1 26.5 8.8 8.3 16.3 - 100.0 - -
---- ---- ---- ---- ---- ---- ----- ----- ----
Net assets
31.01.14 50.7 21.8 14.8 7.2 17.0 (11.5) - 100.0 -
---- ---- ---- ---- ---- ---- ----- ----- ----
MSCI Emerging
Europe 10-40
Index
31.01.15 44.0 24.9 21.2 - 9.9 - - - 100.0
==== ==== ==== ==== ==== ==== ===== ==== =====
The table above shows the analysis of the net assets as at 31 January 2015 by
sector and region, compared with the net assets as at 31 January 2014 and the
MSCI Emerging Europe 10-40 Index breakdown as at 31 January 2015.
INVESTMENTS AS AT 31 JANUARY 2015
Long Short Net % of
Country of exposure exposure exposure net
operation US$'000 US$'000 US$'000 assets
Financials
Halk Bank Turkey 10,998 - 10,998 8.7
PKO Bank Polski Poland 8,662 - 8,662 6.9
TSKB Turkey 8,032 - 8,032 6.4
Garanti Bank Turkey 7,043 - 7,043 5.6
Sberbank Russia 6,495 - 6,495 5.2
National Bank of Greece Greece 4,043 - 4,043 3.2
Aviva SA Emeklilik ve Hayat Turkey 2,905 - 2,905 2.3
Moscow Exchange Russia 1,898 - 1,898 1.5
Long CFD position - BRD
Groupe Société Générale Romania 6,129 - 6,129 4.9
-------- -------- -------- --------
56,205 - 56,205 44.7
-------- -------- -------- --------
Energy
Lukoil Russia 10,455 - 10,455 8.3
Dragon Oil Turkmenistan 10,408 - 10,408 8.3
Surgutneftegaz
(preference shares) Russia 5,113 - 5,113 4.1
Gazprom Russia 4,937 - 4,937 3.9
MOL Hungary 3,545 - 3,545 2.8
Volga Gas Russia 1,997 - 1,997 1.6
-------- -------- -------- --------
36,455 - 36,455 29.0
-------- -------- -------- --------
Consumer Staples
MHP Ukraine 4,453 - 4,453 3.5
Magnit Russia 1,630 - 1,630 1.3
-------- -------- -------- --------
6,083 - 6,083 4.8
-------- -------- -------- --------
Information Technology
Luxoft Russia 4,712 - 4,712 3.7
Mail.Ru Russia 2,239 - 2,239 1.8
-------- -------- -------- --------
6,951 - 6,951 5.5
-------- -------- -------- --------
Materials
Uralkali Russia 3,537 - 3,537 2.8
KGHM Poland 2,350 - 2,350 1.9
Short CFD position Turkey - (3,465) (3,465) (2.8)
-------- -------- -------- --------
5,887 (3,465) 2,422 1.9
-------- -------- -------- --------
Industrials
Dogan Holding Turkey 3,164 - 3,164 2.5
Globaltrans Russia 2,613 - 2,613 2.1
HMS Group Russia 124 - 124 0.1
-------- -------- -------- --------
5,901 - 5,901 4.7
-------- -------- -------- --------
Telecommunications
Services
Turkcell Turkey 4,797 - 4,797 3.8
Sistema Russia 2,309 - 2,309 1.8
Mobile Telesystems Russia 1,273 - 1,273 1.0
-------- -------- -------- --------
8,379 - 8,379 6.6
-------- -------- -------- --------
Consumer Discretionary
Apranga PVA Lithuania 2,366 - 2,366 1.9
-------- -------- -------- --------
2,366 - 2,366 1.9
-------- -------- -------- --------
Health Care
MD Medical Group Russia 1,186 - 1,186 0.9
-------- -------- -------- --------
1,186 - 1,186 0.9
-------- -------- -------- --------
Total investments - gross exposure 129,413 (3,465) 125,948 100.0
======== ======== ======== ========
Less: gross exposure on CFDs (6,129) 3,465 (2,664) (2.1)
======== ======== ======== ========
Equity investments held at fair value 123,284 - 123,284 97.9
Net current assets 2,569 - 2,569 2.1
Preference shares (19) - (19) 0.0
-------- -------- -------- --------
Net assets 125,834 - 125,834 100.0
-------- -------- -------- --------
Long positions 129,413 102.8
Short positions 3,465 2.8
-------- -------- -------- --------
Gross positions 132,878 105.6
======== ======== ======== ========
The total number of investments (excluding CFD positions) held at 31 January
2015 was 28 (31 January 2014: 27). All investments are in equity shares unless
otherwise stated.
At 31 January 2015, the Company did not hold any equity interests representing
more than 3% of any company's share capital.
During the period, the Company entered into CFDs to gain long and short
exposure on individual securities. At the period end, 1 short CFD was
outstanding (31 January 2014: nil) with a net fair value profit of US$515,000
(31 January 2014: nil); and an underlying market value of US$3,465,000 (31
January 2014: nil). In addition, 1 long CFD position was held (31 January 2014:
1) with a net fair value profit of US$36,000 (31 January 2014: net fair value
profit of US$928,000) and an underlying market value of US$6,129,000 (31
January 2014: US$6,069,000).
TEN LARGEST INVESTMENTS
2015 2014
Market % of Market % of
value net value net
Security Country Sector US$'000 assets US$'000 assets
Halk Bank Turkey Financials 10,998 8.7 11,265 7.1
Lukoil Russia Energy 10,455 8.3 - -
Dragon Oil Turkmenistan Energy 10,408 8.3 11,384 7.2
PKO Bank Polski Poland Financials 8,662 6.9 5,718 3.6
TSKB Turkey Financials 8,032 6.4 4,957 3.1
Garanti Bank Turkey Financials 7,043 5.6 12,209 7.7
Sberbank Russia Financials 6,495 5.2 15,849 10.0
Long CFD position
BRD Groupe Société
Générale Romania Financials 6,129 4.9 6,069 3.8
Surgutneftegaz
(preference shares) Russia Energy 5,113 4.1 10,881 6.7
Gazprom Russia Energy 4,937 3.9 13,147 8.3
INCOME STATEMENT FOR THE YEAR ENDED 31 JANUARY 2015
Revenue Revenue Capital Capital Total Total
2015 2014 2015 2014 2015 2014
Notes US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Losses on investments
held at fair value
through profit or loss - - (32,280) (25,842) (32,280) (25,842)
Exchange (losses)/gains - - (187) 122 (187) 122
Net returns on
contracts for
difference (318) (340) (1,776) 598 (2,094) 258
Income from investments
held at fair value
through profit or loss 3 5,564 5,416 - - 5,564 5,416
Interest receivable 3 6 1 - - 6 1
Investment management
fees 4 (1,396) (1,451) - 24 (1,396) (1,427)
Other operating
expenses 5 (619) (1,103) (54) (6) (673) (1,109)
-------- -------- -------- -------- -------- --------
Net return/(loss)
before finance costs
and taxation 3,237 2,523 (34,297) (25,104) (31,060) (22,581)
Finance costs (52) (65) - - (52) (65)
-------- -------- -------- -------- -------- --------
Net return/(loss) on
ordinary activities
before taxation 3,185 2,458 (34,297) (25,104) (31,112) (22,646)
Taxation (897) (526) - - (897) (526)
-------- -------- -------- -------- -------- --------
Net return/(loss) on
ordinary activities
after taxation 2,288 1,932 (34,297) (25,104) (32,009) (23,172)
======== ======== ======== ======== ======== ========
Return/(loss) per
ordinary share - basic 7 6.31 5.13 (94.63) (66.70) (88.32) (61.57)
(cents) ======== ======== ======== ======== ======== ========
The total column of this statement represents the Profit and Loss Account of
the Company.
The supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies (AIC). The Company had no
recognised gains or losses other than those disclosed in the Income Statement.
All items in the above statement derive from continuing operations. All income
is attributable to the equity holders of BlackRock Emerging Europe plc. There
is no material difference between the loss (2014: loss) on ordinary activities
before taxation and the loss (2014: loss) for the financial year stated above
and their historical cost equivalents.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE YEAR END
31 JANUARY 2015
Called
up Share Capital
share premium redemption Capital Revenue
capital account reserve reserves reserve Total
Note US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
For the year ended
31 January 2015
At 1 February 2014 4,164 41,684 5,858 124,842 (17,492) 159,056
Net (loss)/return for
the year - - - (34,297) 2,288 (32,009)
Tender offer and
subscription share
issue costs written
back - - - 56 - 56
Dividend paid (a) 6 - - - (1,269) - (1,269)
-------- -------- -------- -------- -------- --------
At 31 January 2015 4,164 41,684 5,858 89,332 (15,204) 125,834
-------- -------- -------- -------- -------- --------
For the year ended
31 January 2014
At 1 February 2013 4,692 41,406 5,324 165,956 (19,424) 197,954
Net (loss)/return for
the year - - - (25,104) 1,932 (23,172)
Shares purchased and
held in treasury (334) - 334 (12,796) - (12,796)
Shares purchased and
cancelled (15) - 15 (641) - (641)
Tender offer and
subscription share
issue costs - - - (31) - (31)
Conversion of
subscription shares 6 278 - - - 284
Subscription shares
lapsed (185) - 185 - - -
Dividend paid (b) 6 - - - (2,542) - (2,542)
-------- -------- -------- -------- -------- --------
At 31 January 2014 4,164 41,684 5,858 124,842 (17,492) 159,056
======== ======== ======== ======== ======== ========
a. Final dividend of 3.50 cents per share for the year ended 31 January 2014,
declared on 24 March 2014 and paid on 1 July 2014.
b. Final dividend of 6.50 cents per share for the year ended 31 January 2013,
declared on 25 March 2013 and paid on 28 June 2013.
BALANCE SHEET AS AT 31 JANUARY 2015
2015 2014
Notes US$'000 US$'000
Non current assets
Investments held at fair value through profit or
loss 123,284 171,233
-------- --------
Current assets
Cash at bank 2,665 1
Amounts due in respect of contracts for difference 551 928
Other receivables 3,059 2,690
-------- --------
6,275 3,619
-------- --------
Current liabilities
Bank overdraft (4) (13,257)
Net collateral received in respect of contracts
for difference (4) (428)
Other payables (3,698) (2,092)
-------- --------
(3,706) (15,777)
-------- --------
Net current assets/(liabilities) 2,569 (12,158)
-------- --------
Total assets less current assets/(liabilities) 125,853 159,075
Creditors - amounts falling due after more than (19) (19)
one year -------- --------
Net assets 125,834 159,056
======== ========
Capital and reserves
Called up share capital 8 4,164 4,164
Share premium account 9 41,684 41,684
Capital redemption reserve 9 5,858 5,858
Capital reserves 9 89,332 124,842
Revenue reserve 9 (15,204) (17,492)
-------- --------
Total shareholders' funds 125,834 159,056
======== ========
Net asset value per ordinary share (cents) 7 347.20 438.86
======== ========
CASH FLOW STATEMENT FOR THE YEAR ENDED 31 JANUARY 2015
2015 2014
Notes US$'000 US$'000
Net cash inflow from ordinary activities 5(b) 3,032 2,216
Returns on investment and servicing of finance
Overdraft interest (52) (56)
CFD financing interest (250) (241)
-------- --------
(302) (297)
Taxation paid (747) (602)
-------- --------
Capital expenditure and financial investment
Purchase of investments (146,840) (188,505)
Proceeds from sale of investments 163,014 200,922
-------- --------
Net cash inflow from capital expenditure and 16,174 12,417
financial investment -------- --------
Equity dividends paid (1,269) (2,542)
-------- --------
Net cash inflow before financing 16,888 11,192
-------- --------
Financing
Repurchase of shares - (13,437)
Proceeds from conversion of subscription shares - 284
Tender and subscription share issue costs (360) (176)
-------- --------
Net cash outflow from financing (360) (13,329)
======== ========
Increase/(decrease) in cash in the year 16,528 (2,137)
======== ========
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
(a) Basis of preparation
The Company's financial statements have been prepared on a going concern basis
and on the historical cost basis of accounting, modified to include the
revaluation of fixed asset investments and derivatives at fair value through
profit or loss in accordance with the Companies Act 2006, applicable accounting
standards in the United Kingdom (UK GAAP) and with the Statement of Recommended
Practice `Financial Statements of investment trust companies' and venture
capital trusts (SORP), revised in January 2009.
The principal accounting policies adopted by the Company are set out below. 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 closely related to the
primary economic environment in which the Company invests. All values are
rounded to the nearest thousand dollars (US$'000) except where otherwise
indicated.
In 2012, 2013 and 2014 the Financial Reporting Council (FRC) revised financial
reporting standards in the United Kingdom and Republic of Ireland. The
revisions fundamentally reformed financial reporting, replacing the extant
standards with a number of new Financial Reporting Standards. The only new
standard relevant to the Company is FRS 102. The Financial Reporting Standard
applicable in the UK and Republic of Ireland. FRS 102 is effective for
accounting periods beginning on or after 1 January 2015 with early adoption
permitted. The Company does not plan to early adopt FRS 102. The Manager is
currently evaluating the new standard to determine the impact it will have on
the Company's financial statements.
(b) Presentation of the Income Statement
In order to reflect better 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 (including, where appropriate, overseas withholding taxes)
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 treated as a capital receipt or revenue receipt depending
on the facts or circumstances of each particular case.
Dividends are accounted for in accordance with Financial Reporting Standard 16
`Current Taxation' (FRS 16) on the basis of income actually receivable, without
adjustment for tax credits attaching to the dividend. Dividends from overseas
companies continue to be shown gross of withholding tax.
Interest income 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 amount of the cash dividend foregone
is recognised as income. Any excess in the value of the shares received over
the amount of the cash dividend foregone is recognised in capital reserves.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses which are
incidental to the acquisition of an investment are charged to the capital
column of the Income Statement. Expenses incurred on the sale of investments
are deducted from the proceeds of the sale of the investments. The Board has
decided that capital profits should not reflect the indirect costs incurred in
generating capital returns therefore fees payable to the Investment Manager are
charged to the revenue column of the Income Statement except for any
performance fees, which were payable until 1 July 2013, which were charged to
the capital column of the Income Statement to the extent that performance was
generated through capital returns from the investment portfolio.
Transaction charges in relation to the purchase and sale of investments are
charged to the capital column of the Income Statement.
(f) Finance costs
Finance costs are accounted for on an accruals basis in the revenue column of
the Income Statement using the effective interest rate method.
(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 tax is recognised in respect of all timing differences at the balance
sheet date, where transactions or events that result in an obligation to pay
more tax in the future or right to pay less tax in the future have occurred at
the balance sheet date. Deferred tax assets are recognised only when, on the
basis of available evidence, it is more likely than not that there will be
taxable profits in the future against which the deferred tax asset can be
offset. Deferred tax assets and liabilities are not discounted to reflect the
time value of money. Deferred tax is provided at the amount expected to be paid
/recovered using the tax rates and laws which have been enacted or
substantially enacted at the balance sheet date.
(h) Investments held at fair value through profit or loss
The Company's investments (fixed assets and current assets) are classified as
held at fair value through profit or loss in accordance with FRS 26 -
`Financial Instruments: Recognition and Measurement' 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. 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 capital column of the
Income Statement as `gains/(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.
In order to improve the disclosure of how companies measure the fair value of
their financial investments, the disclosure requirements in FRS 29 have been
extended to include a fair value hierarchy. The fair value hierarchy consists
of the following three levels:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or
liabilities
Level 2 - inputs other than quoted prices included within level 1 that are
observable for the asset or liability
Level 3 - inputs for the asset or liability that are not based on observable
market data
Fair values for unquoted investments, or investments for which the market is
inactive, are established by using various valuation techniques. These may
include recent arm's length market transactions or the current fair value of
another instrument which is substantially the same. Where no reliable fair
value can be estimated for such instruments, they are carried at cost subject
to any provision for impairment.
(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 Financial
Reporting Standard 25: `Financial Instruments: Disclosure and Presentation'.
(k) Dividends payable
Under FRS 21 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 Reconciliation
of Movements in Shareholders' Funds 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
All transactions in foreign currencies are translated into US dollars at the
rates of exchange ruling on the dates of such transactions. Foreign currency
assets and liabilities at the balance sheet date are translated into US dollars
at the exchange rates ruling at that date. Exchange differences arising on the
revaluation of investments held as fixed assets are included in the capital
column of the Income Statement. Exchange differences arising on the translation
of foreign currency assets and liabilities are taken to the capital column of
the Income Statement.
(m) Cash and cash equivalents
Cash comprises cash in hand and on demand deposits. Cash equivalents are
short-term, highly liquid investments that are readily convertible to known
amounts of cash and that are subject to an insignificant risk of changes in
value.
(n) Capital redemption reserve
The nominal value of ordinary share capital for cancellation is transferred out
of share capital and into the capital redemption reserve.
(o) 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.
(p) Capital reserves
The following transactions are accounted for in capital reserves:
- gains and losses on the disposal of fixed asset investments;
- realised exchange differences of a capital nature;
- cost of professional advice, including irrecoverable VAT, relating to the
capital structure of the Company;
- other capital charges and credits charged or credited to this reserve in
accordance with the above policies;
- cost of purchases of own ordinary shares;
- increases and decreases in the valuation of investments held at the year end;
- unrealised exchange differences of a capital nature; and
- payment of dividends.
(q) Debtors
Debtors are 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 (or in the normal operating cycle of the business if longer),
they are classified as current assets. If not, they are presented as
non-current assets. Debtors are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest rate
method.
(r) Creditors
Creditors are purchases for future settlements, interest payable, share buyback
cost and accruals in the ordinary course of business. Creditors are classified
as current liabilities if payment is due within one year or less (or in the
normal operating cycle of the business if longer). If not, they are presented
as non-current liabilities. Creditors are recognised initially at fair value
and subsequently measured at amortised cost using the effective interest rate
method.
3. INCOME
2015 2014
US$'000 US$'000
Investment income:
UK dividends 96 -
Overseas dividends 5,468 5,416
-------- --------
5,564 5,416
-------- --------
Interest receivable:
Deposit interest 6 1
-------- --------
5,570 5,417
======== ========
4. INVESTMENT MANAGEMENT FEES
2015 2014
Revenue Capital Total Revenue Capital Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Investment management
fee 1,396 - 1,396 1,451 - 1,451
Performance fee - - - - (24) (24)
-------- -------- -------- -------- -------- --------
1,396 - 1,396 1,451 (24) 1,427
======== ======== ======== ======== ======== ========
BlackRock Fund Managers Limited (BFM) was appointed as the Company's AIFM with
effect from 2 July 2014, having been authorised as an AIFM by the FCA on 1 May
2014. The management contract is terminable by either party on six months'
notice. Prior to this, BlackRock Investment Management (UK) Limited (BIM (UK))
was appointed as Investment Manager and Company Secretary on 1 May 2009.
The Manager receives a basic annual management fee of 1.0% of the Company's
average daily market capitalisation. Investment management fees were paid to
BIM (UK) until 1 July 2014 and thereafter are payable to BFM. Any charges in
respect of BlackRock managed funds are deducted from the management fee. These
fee arrangements will be reviewed in June 2015 following the second anniversary
of shareholder approval for the amendments to the Company's investment policy.
In the previous year there was a write back of the performance fee due to the
Manager of US$24,000 in respect of the performance fee of US$297,000 which had
been accrued in relation to tendered assets on which a fee had crystallised in
the year ended 31 January 2012.
5. OTHER OPERATING EXPENSES
2015 2014
US$'000 US$'000
(a) Other operating expenses:
Custody fee 68 173
Directors' fees and expenses 227 300
Auditors' remuneration:
fees for statutory audit 39 41
Marketing fees 117 62
Depositary fees 9 -
Other administrative costs 159 527
-------- --------
619 1,103
Transaction charges - capital 54 6
-------- --------
673 1,109
======== ========
The Company's ongoing charges, calculated as a percentage
of average net assets for the year and using expenses,
excluding performance fee and interest costs were: 1.3% 1.3%
======== ========
No fees were paid to the Auditors for other services in respect of the year
under review (2014: US$ nil). The underlying audit fee is invoiced in sterling
and is therefore susceptible to exchange rate fluctuations.
Expenses of US$54,000 (2014: US$6,000) charged to the capital column of the
Income Statement relate to transaction costs charged by the custodian on the
purchases and sales of investments, and other administrative costs.
2015 2014
US$'000 US$'000
(b) Reconciliation of net return before finance costs and
taxation to net flow from operating activities:
Net loss before finance costs and taxation (31,060) (22,581)
Add: capital loss before finance costs and taxation 34,297 25,104
-------- --------
Net revenue return before finance costs and taxation 3,237 2,523
Contracts for difference financing payable 250 241
Expenses (charged)/credited to capital (54) 18
Increase in accrued income (31) -
(Increase)/decrease in other debtors (56) 10
Decrease in creditors (314) (576)
-------- --------
Net cash inflow from operating activities 3,032 2,216
======== ========
6. DIVIDENDS
Dividend on ordinary 2015 2014
shares Register date Payment date US$'000 US$'000
2013 final of 6.50 cents 24 May 2013 28 June 2013 - 2,542
2014 final of 3.50 cents 23 May 2014 1 July 2014 1,269 -
-------- --------
1,269 2,542
======== ========
The Directors have not proposed a final dividend (2014: 3.50 cents).
Following changes to the taxation rules in July 2013 the Company is not
required to pay a dividend to meet the requirements of section 1158 of the
Corporation Tax Act 2010 until such time as it has positive revenue reserves.
2015 2014
US$'000 US$'000
Dividends payable on equity shares:
Final dividend of nil cents per ordinary share (2014: 3.50 cents) - 1,269
----- -----
- 1,269
----- -----
7. RETURN AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital returns per share are shown below and have been calculated
using the following:
2015 2014
-------- --------
Net revenue return attributable to ordinary shareholders
(US$'000) 2,288 1,932
Net capital (loss)/return attributable to ordinary
shareholders (US$'000) (34,297) (25,104)
-------- --------
Total loss (US$'000) (32,009) (23,172)
-------- --------
Total shareholders' funds (US$'000) 125,834 159,056
-------- --------
The weighted average number of ordinary shares in issue
during each year on which the return per ordinary share
was calculated was: 36,242,928 37,636,613
========== ==========
The actual number of ordinary shares in issue at the end
of each year on which the net asset value was calculated
was: 36,242,928 36,242,928
========== ===========
2015 2014
Revenue Capital Total Revenue Capital Total
cents cents cents cents cents cents
Calculated on
weighted average
number of shares 6.31 (94.63) (88.32) 5.13 (66.70) (61.57)
Calculated on actual
number of shares 6.31 (94.63) (88.32) 5.33 (69.26) (63.93)
-------- -------- -------- -------- -------- --------
Net asset value per
share 347.20 438.86
Ordinary share price* 300.38 405.94
======== ======== ======== ======== ======== ========
* The Company's ordinary share price is quoted in sterling and the above
represents the US dollar equivalent using an exchange rate of 1.5019 (2014:
1.6435).
8. CALLED UP SHARE CAPITAL
Ordinary
shares Treasury Total Nominal
in issue shares shares value
(number) (number) in issue US$'000
Allotted, called up and fully paid
share capital comprised:
Ordinary shares of 10 cents each:
At 1 February 2014 36,242,928 5,400,000 41,642,928 4,164
-------- -------- -------- --------
At 31 January 2015 36,242,928 5,400,000 41,642,928 4,164
======== ======== ======== ========
No ordinary shares were issued, purchased or cancelled in the year.
9. RESERVES
Capital
Capital reserve
reserve (arising on
Share Capital (arising on revaluation of
premium redemption investments investments Revenue
account reserve sold) held) reserve
US$'000 US$'000 US$'000 US$'000 US$'000
At 1 February 2014 41,684 5,858 138,005 (13,163) (17,492)
Net return for the year - - - - 2,288
Movement during the year:
Realised losses on sales - - (9,912) - -
Movements in investment
holdings losses - - - (22,368) -
Gains/(losses) on foreign
currency transactions - - 34 (221) -
Losses on contracts for
difference - - (1,399) (377) -
Tender offer and
subscription share issue
costs written back - - 56 - -
Interest and expenses
charged to capital after
taxation - - (54) - -
Dividends paid during the
year - - (1,269) - -
-------- -------- -------- -------- --------
At 31 January 2015 41,684 5,858 125,461 (36,129) (15,204)
======== ======== ======== ======== ========
10. CONTINGENT LIABILITIES AND ASSETS
There were no contingent liabilities or assets at 31 January 2015 (2014: US$ nil).
11. 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 2015 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 2015 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 2014, which have
been filed with the Registrar of Companies, unless otherwise stated. The report
of the Auditor 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 27 March 2015.
12. 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.
13. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton
Avenue, London EC2N 2DL on Tuesday, 23 June 2015 at 12 noon.
ENDS
The Annual Report and Financial Statements will also be available on the
BlackRock 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 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
Emma Phillips, Media & Communication, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2922
Henrietta Guthrie, Lansons Communications
Tel: 020 7294 3612
27 March 2015
12 Throgmorton Avenue
London EC2N 2DL