BlackRock Emerging Europe plc
(LEI: 549300OGTQA24Y3KMI14)

Annual results announcement for the year ended 31 January 2017

Information disclosed under Article 4 of the Transparency Directive and DTR 4.1

PERFORMANCE RECORD

FINANCIAL HIGHLIGHTS
 

31 January 2017  31 January 2016  Change % 
Attributable to ordinary shareholders 
Assets
US dollar
Net assets (US$'000) 154,951  113,043  37.1 
Net asset value per ordinary share 431.28c  312.13c  38.2 
MSCI Emerging Europe 10-40 Index (net return) 1  404.84   307.15  31.8 
Ordinary share price (mid-market) 2 378.06c  270.76c  39.6 
Sterling
Net assets (£'000) 2 123,163  79,692  54.5 
Net asset value per ordinary share 2 342.80p  220.04p  55.8 
MSCI Emerging Europe 10-40 Index (net return) 1 321.79  216.53  48.6 
Ordinary share price (mid-market) 2 300.50p  190.88p  57.4 
 --------   --------   -------- 
Discount to net asset value 12.3%  13.3%  – 
 --------   --------   -------- 
Gross market exposure 3 103.1%  106.7%  – 
 ======   ======   ====== 

   

Year ended 
31 January 2017 
Year ended 
31 January 2016 
Change 
Revenue
Net revenue after taxation (US$'000) 2,705  976  177.2 
Revenue return per ordinary share 7.50c  2.69c  178.8 
Final dividend per ordinary share 7.50c  –  – 
Earnings/(loss) per ordinary share 118.81c  (35.23c) 437.2 
Ongoing charges ratio 4 1.2%  1.3%  (7.7)

Source: BlackRock.

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 1.2581 (31 January 2016: 1.4185).
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 2017.

MARKET OVERVIEW

It has been an excellent year for the region, with strong returns underpinned by a substantial rally in the Russian equity market, which rose by 57.4% in US dollar terms. This partly reflected a firmer oil price, but the election of President Trump also held out the prospect of some easing in the sanctions imposed on Russia after the annexation of Crimea. Elsewhere strength in Polish equities was offset by lacklustre returns in Greece, where concerns about the bailout package persist, and Turkey, where political instability combined with a high current account deficit to depress investor interest in the country.

PERFORMANCE

I am pleased to report that the substantial market growth enjoyed in our investment region during the year has been supplemented by the Company out-performing its benchmark by 6.4% in US Dollar terms. The Company’s net asset value (NAV) per share increased by 38.2% in US Dollar terms (55.8% in Sterling terms) which compared favourably with the benchmark return of 31.8% in US Dollar terms (48.6% in Sterling terms). The share price increased by 39.6% in US Dollar terms (57.4% in Sterling terms). The 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.

When compared to the Morningstar peer group of funds investing in Emerging Europe equity at 31 January 2017 the Company was ranked 17/44 over 1 year, 3/43 over 3 years and 6/42 over 5 years.

Stock selection in Russia and Poland was the main contributor to performance, offset by a negative contribution from overweight positions in the Turkish banking sector. Further details on the factors which contributed to performance are set out in the report from BlackRock Investment Management (UK) Limited (the Investment Manager) and the attribution analysis below.

Since the year end and up to the close of business on 24 March 2017 the Company’s NAV per share has increased by 2.8% compared with an increase in the benchmark of 1.1% over the same period (in US Dollar terms).

DISCOUNT

The level of discount showed some improvement over the year and is lower than several of our peer funds, but has remained stubbornly higher than our single digit target despite investment performance and periodic share buybacks. This will be an area of increased focus during the year.

REVENUE RETURN AND DIVIDENDS

Following the change to the policy on the allocation of expenses, the Company’s revenue return for the year amounted to 7.50 cents per share (2016: 2.69 cents). The Board is pleased to declare a final dividend of 7.50 cents per share (2016: nil). The dividend will be paid in Sterling on 28 June 2017 to shareholders on the Company’s register on 19 May 2017; the ex-dividend date is 18 May 2017. 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

It was agreed in June 2013 that 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. The route which will be used to provide shareholders with an exit will depend on various factors including the level of uptake anticipated at the time and will be established following shareholder consultation. This is likely to be achieved through a tender offer or a reorganisation of the Company. In all circumstances, the Board will seek to safeguard the interests of both continuing shareholders and those electing to realise their investment. Further announcements will be made in due course.

If this initial return of capital is not undertaken in conjunction with a liquidation of the Company, the Directors intend to offer shareholders further opportunities to realise the value of their ordinary shares at the applicable NAV per ordinary share less costs, partly through performance based periodic tenders and fully at 5 yearly intervals.

INVESTMENT MANAGEMENT FEE

Following discussions with the Manager, agreement has been reached on a revised management fee. The management fee will be reduced with effect from 1 April 2017 from 1.0% per annum of the Company’s average daily market capitalisation to 0.8% per annum of the Company’s net asset value.

ANNUAL GENERAL MEETING

The AGM will be held at 12.00 noon on 20 June 2017 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

I have commented in previous outlook statements that the patient investor should eventually see a reward. Those that have remained invested have reaped benefits from their patience over the past year. It is encouraging to see investors return to the region, spurred on by the sharp recovery in the Russian market last year.

The Investment Manager’s Report highlights a number of positive factors in the region including the ongoing monetary and fiscal policies in Russia and the opportunity for political stability in Turkey. Based on these factors, your Board believes that the potential for growth for a number of companies in Emerging Europe, in many cases with modest ratings and high dividend yields, should continue to deliver attractive returns for long term investors.

Neil England
Chairman
28 March 2017


STRATEGIC REPORT

The Directors present the Strategic Report of the Company for the year ended 31 January 2017.

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 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, BNY Mellon Trust & Depositary (UK) Limited (BNYMTD), the Fund Accountant and Custodian, Bank of New York Mellon (International) Limited (BNYM), and the Registrar, Computershare Investor Services PLC (Computershare). 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.

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 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.

In June 2013 shareholders approved the use of 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.

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 2017 the average discount to NAV has been 11.9%.

289,100 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$969,000 (£739,000). Since the year end a further 11,800 ordinary shares have been bought back for cancellation at a total cost of US$46,000 (£37,000).

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 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 DIVIDEND

The results for the Company are set out in the Income Statement. The total net profit for the year, after taxation, was US$42,877,000 (2016: a loss of US$12,768,000) of which the revenue return amounted to US$2,705,000 (2016: US$976,000), and the capital return amounted to US$40,172,000 (2016: a loss of US$13,744,000).

The Company’s revenue return amounted to 7.50 cents per share (2016: 2.69 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.

2017  2016  2015  2014 
Change in NAV per share 1 +38.2%  -10.1%  -20.2%  -11.8% 
Change in share price 2 +39.6%  -9.9%  -25.4%  -6.1% 
Relative NAV per share performance vs benchmark over 1 year +6.4%  +4.1%  +4.7%  +4.6% 
Relative NAV per share performance vs benchmark over 3 years +14.1%  +9.4%  +7.9%  -3.7% 
Average discount to net asset value 11.9%  11.7%  10.3%  10.3% 
Ongoing charges ratio 3 1.2%  1.3%  1.3%  1.3% 

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.

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 if a counterparty is unable (or unwilling) to perform on its commitments. Due diligence is undertaken before contracts are entered into and exposures 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
Returns achieved are reliant primarily upon the performance of the portfolio.
The Board is responsible for:
-      deciding the investment strategy to fulfil the Company’s objective; and
-      for monitoring the performance of the Investment Manager and the implementation of the investment strategy.
An inappropriate, or poorly executed, investment strategy may lead to:
-      poor performance compared to the Benchmark Index and the Company’s peer group;
-      a loss of capital; and
-      dissatisfied shareholders.
To manage this risk the Board:
-  regularly reviews the Company’s investment mandate and long term strategy;
-  has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on;
-  receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio; and 
-  monitors the maintenance of an adequate 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 & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and 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.
Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the 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 Managers Directive, the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations.
The Investment Manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.
Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored.
The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations.
Operational
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties. Accordingly, it is dependent on the control systems of the Manager, BNYMTD (the Depositary) and the BNYM (the fund accountant), who maintain the Company’s assets, dealing procedures and accounting records.
Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers.
Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board.
BlackRock and BNYM produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee.
The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control.
The Board reviews the overall performance of the Manager, Investment Manager and all 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 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.
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.
The Board considers asset allocation, stock selection, unquoted investments, if any, 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 Investment Manager.
Financial
The Company’s investment activities expose it to a variety of financial risks that include interest rate, currency and liquidity risk. Details of these risks are disclosed in note 18 to the financial statements on pages 56 to 66 of the Annual Report and Financial Statements, together with a summary of the policies for managing these risks.
Marketing
Marketing efforts are inadequate, do not comply with relevant regulatory requirements, and fail to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening discount. The Board focuses significant time on communicating directly with the major shareholders and reviewing marketing strategy and initiatives. All investment trust marketing documents are subject to appropriate review and authorisation.

As required by the UK Corporate Governance Code (the 2014 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 2014 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. 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 the 2018 return of capital is not undertaken in conjunction with a liquidation, the Board is confident that the continuation vote will be passed. Notwithstanding these uncertainties, the Board has conducted this review for the period up to 31 January 2022.

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 2017, 93% 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 business model should remain attractive for much longer than the period up to 31 January 2022, unless there is a significant economic or regulatory change;
-    the Company’s principal risks and uncertainties as set out on pages 9 to 11 of the Company’s Annual Report and Financial Statements are unlikely to change materially;
-    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 GENDER REPRESENTATION

The Directors of the Company as at 31 January 2017, 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 on pages 13 to 20 of the Company’s Annual Report and Financial Statements form part of the Strategic Report.

The Strategic Report was approved by the Board at its meeting on 28 March 2017.

By order of the Board
ANNETTE B. POWLEY
For and on behalf of BlackRock Investment Management (UK) Limited
Company Secretary

28 March 2017

RELATED PARTY TRANSACTIONS

BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BlackRock Investment Management (UK) Limited continues to act as the Company’s Investment Manager under a delegation agreement with BFM. Details of the fees payable in relation to these services are set out in note 4 and note 15.

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 2017 the Chairman received an annual fee of £38,000, the Chairman of the Audit Committee received an annual fee of £28,250 and each other Director received an annual fee of £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 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 2014 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 Audit Committee has reached these conclusions is set out in the Audit Committee’s report on pages 35 to 37 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 2017, taken as a whole, is fair, balanced and understandable and provides 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

28 March 2017

INVESTMENT MANAGER’S REPORT

MARKETS

In the year to 31 January 2017, the MSCI Emerging Europe 10-40 Index returned +31.8% in US Dollar terms and +48.6% in Sterling terms, all percentages with income reinvested. To put this into perspective, the region outperformed Emerging Markets globally, which returned +25.7% in US Dollar terms over the same time period.

The Russian equity market saw a strong recovery in 2016, providing evidence to support the body of academic work that indicates that often the correct time to buy Emerging Markets is when currencies are weak, markets are cheap and GDP growth is depressed. Russia stabilised its economic activity through a sharp economic adjustment. Whilst the cheap currency acted to restore economic competitiveness, the Russian government approved an austere budget containing no nominal growth for three years, and the Central Bank maintained a hawkish stance with a view to tame Russia’s historically high inflation. These actions demonstrated prudent fiscal and monetary policy and, coupled with a recovering oil price, were handsomely rewarded by the market which saw equities rally by 57.4% in US Dollar terms over the year to 31 January 2017, the best performance of any country in the region.

The Russian equity rally was underway for most of the year, however it is probably the events of the fourth quarter which captured most of the headlines. Following the US election of President Trump in early November, the market has been awaiting news as to whether sanctions will be removed. No answer is yet forthcoming, but should they be removed, it appears possible that Russia will see an acceleration in GDP growth.

The second momentous event of that month occurred on 30 November when OPEC agreed to cut oil production. Though not an OPEC member, Russia agreed to enact cuts of its own, strengthening the effectiveness of the cuts. Following OPEC’s announcement, oil prices rose steadily and the Rouble strengthened further from pre-agreement levels. The OPEC agreement is expected to last six months in the hope that global oil demand rises enough to support higher oil prices; however, the participating nations have left the door open to extend the timeframe further if needed. Importantly, despite the higher oil prices, Russia has not backtracked on its fiscal and monetary policies, which should leave the economy in a strong position going forward.

The Polish equity market finished the period up by 19.7% in US Dollar terms despite being significantly impacted by the surprise Brexit vote in June. Markets rallied in the second half of the period, reacting positively to rising global reflation expectations as the Federal Reserve hiked rates by 25 bps and surprised the market by projecting three hikes in 2017 vs the previous two it had forecast in its September dot plot.

The Greek market continues to ebb and flow with the progression on the bailout package. In the first half of the year the market made strong gains on the successful completion of the First Review. Then the spectre of Brexit saw most of these gains lost in June. Through the second half of the period we witnessed a gradual recovery as the market continued to wait for the verdict on the delayed Second Review, ending the full period up by 2.9% in US Dollar terms.

Turkey started the year strongly as a primary beneficiary of improved emerging markets financing conditions coupled with improving economic data. However, the attempted coup in July followed by the strong US Dollar and steepening of the US yield curve post the US elections had a negative impact on the Turkish Lira in the second half of the period due to the country’s twin deficits and weak external funding position. Turkey ended the period down by 6.3% in US Dollar terms.

PORTFOLIO

In the year to 31 January 2017, the Company’s net asset value (NAV) returned +38.2% in US Dollar terms (+55.8% in Sterling terms, all percentages with income reinvested), outperforming the MSCI Emerging Europe 10-40 Index by +6.4% in US Dollar terms.

Similar to prior years, the largest contributions to relative performance continued to come from positions that are not represented in the benchmark, highlighting the opportunities that exist beyond the index stocks. Strong off benchmark performers included Russian utility Inter RAO which rose by 276% over the period after strong results and the sale of non-core assets. MD Medical Group, a Russian healthcare provider, performed well (+177%) on strong margins and continued domestic expansion supported by the Russian consumer. Globaltrans, Russia’s leading private freight rail transportation, contributed positively as it benefited from rising transportation tariffs in Russia. Ferrexpo, a Ukrainian iron ore producer, also experienced strong returns on the back of recovering iron ore pricing and demonstrating that it can meet its debt obligations. The Company’s investment strategy is built upon identifying and exploiting these off benchmark opportunities across the Emerging Europe universe.

In Poland, we added to performance through selective stock selection. Metals and mining company KGHM performed well, first through rationalising its international capex spend and then benefiting from the rally in silver and copper prices in the second half of the year. Our underweight in Bank Pekao also added to relative performance. Given the weak balance sheet of Pekao’s main shareholder, we avoided the stock on concerns that the asset would be sold, an event which later came to pass.

Stock selection in Turkey and Greece detracted from performance. The ongoing political concerns in Turkey and the subsequent weakening of the Turkish Lira weighed on our positions in Halk Bank and Turkiye Sinai Kalkilma Bank (TSKB). Furthermore, our overweight in the Coca-Cola bottling franchise company, Coca-Cola Icecek, detracted from returns as the company’s operations were negatively impacted by the currency weakness.

In Greece, despite a strong start to the period on the successful completion of the First Review, the banks never fully recovered from the Brexit vote and our positions in Alpha Bank and National Bank of Greece detracted from performance. With the Second Review under way we maintain our position in the banks in the belief that the Greek government can reach a successful conclusion with their creditors.

OUTLOOK

The past few years have been difficult for Emerging European equities. For those investors who endured, 2016’s performance went a long way to rewarding their patience. Following a strong 2016, we continue to be positive on Emerging European market equities going into 2017 as valuations are still below historical trends, investor positioning remains light and the region has the potential to benefit from several positive developments.

In Russia the positive monetary and fiscal policies are ongoing and it is appearing increasingly likely that the Central Bank may reach their inflation target of 4% by year end. For a country that saw inflation peak at 16.9% less than two years ago this is a remarkable achievement. The lower inflation should give the Central Bank room for further rate cuts through the year, allowing the domestic economy and asset prices to continue their recovery. Additionally, the potential remains not only for US sanctions to be eased but also for higher oil prices to be realised if the OPEC agreement is extended beyond its initial six-month term. Despite the strong returns in 2016 the market continues to trade at a discount to Global Emerging market peers despite delivering one of the highest dividend yields of its peer group.

In the Central European economies of Poland, Czech Republic and Hungary the inflationary picture is almost the exact opposite. After several years of near zero inflation, or even a deflationary environment, inflationary pressures are building on the back of accelerating wage growth, low unemployment and a pickup in investment spending. The move back towards 2% inflation is creating the potential for the region’s banking sector to break away from the destructive low rate environment that has bogged them down for the past several years and could create a springboard for both margin and volume expansion.

In Greece, where valuations remain exceedingly cheap, we may see the successful conclusion of the Second Bailout Review. Progress would open up the discussion of further debt relief, the potential admission of Greek bonds into the ECB quantitative easing program and set Greece on a more positive and sustainable growth trajectory. Whilst this outcome is not yet a forgone conclusion, such a cocktail may prove to be just what the banks need to leave behind any questions on solvency and see substantial gains.

For Turkey, 2017 may be the year that the country sees an end to its recent political instability. The attempted coup in July was withstood and its failure demonstrated not only the strength and resilience of the government but the genuine popularity of the AKP party throughout the country. A referendum on the introduction of a presidential system has been called for April which may see Prime Minister Erdogan become President Erdogan. On the international front, the tragic war in Syria appears to be drawing towards a close, relations with Russia have largely been repaired – to the point that both governments have given the green light to the Turk Stream project, a gas pipeline designed to bring Russian gas to the door of Europe through the Turkish waters of the Black Sea. Whilst we still have reservations about the stock of external liabilities, the weak Turkish Lira coupled with attractive valuations and the potential removal of the political discount may deliver surprising returns.

From structural economic improvements in Russia through to Central Europe, and potential political resolution in the countries surrounding the Aegean, we believe that Eastern European equities are in a strong position to deliver attractive returns in 2017. This potential, coupled with high dividend yields, growing earnings, and whilst trading at a discount to emerging and developed market peers, should present an attractive opportunity for investors.

SAM VECHT and CHRISTOPHER COLUNGA
BlackRock Investment Management (UK) Limited
28 March 2017

ATTRIBUTION ANALYSIS





Country 
Contribution to
return against
the benchmark1  Country selection 


Stock 
selection2 


Total 
Effect 




Commentary 
Russia & CIS -1.2 7.3 6.1
Russia -1.1 7.3 6.2 Stock selection in Russia contributed to outperformance. Off-benchmark positioning in Russian utility Inter RAO and private freight rail transportation group Globaltrans, as well as an underweight in food retailer Magnit, were the top contributors to the Company’s relative performance over the year. 
Kazakhstan -0.2 -0.2 Oil company KazMunaiGas detracted from returns following the failure of the parent company’s takeover bid. 
Ukraine 0.1 0.1 The Company’s exposure to Ukraine was positive with performance largely generated by iron-ore producer Ferrexpo, and offset by IT outsourcer Luxoft. 
 ----   ----   ---- 
Central and Eastern Europe -0.2 3.3 3.1
Hungary -0.2 -0.2 The Company had no direct exposure to Hungary, which impacted relative performance. 
Czech Republic 0.3  0.4 0.7 Key index names suffered after negative surprises on dividends. The Company had no exposure to these, which contributed positively to relative returns. 
Poland 0.2 2.9 3.1 Stock selection in Poland contributed to relative outperformance. Specifically, our positioning in metals and mining company KGHM, Bank Pekao and an underweight to utility PGE. 
Romania -0.3 -0.3 The Company’s position in Romanian bank BRD Groupe Société Générale detracted from returns amidst concerns over potential detrimental regulatory changes. 
Lithuania -0.2 -0.2 The position in apparel retailer Apranga PVA was negative for performance as the company delivered little growth. 
 ----   ----   ---- 
Turkey -1.3 -1.2 -2.5 Overweight positions in the Turkish banking sector detracted from performance amidst increased political uncertainty and a weakened currency. 
 ----   ----   ---- 
Greece -0.4 0.2 -0.2 Greek banks detracted from returns due to the European banks’ sell-off post Brexit and uncertainties on the terms and conditions of the country’s bailout review. 
 ----   ----   ---- 
Cash/gearing 0.9
 ----   ----   ---- 
Other factors -1.0
Share buy backs 0.1
Management fee -0.9
Other operating costs -0.2 Includes the impact of operating expenses, taxation and finance charges.
 ----   ----   ---- 
Total -3.1 9.6 6.4
 ----   ----   ---- 

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 – 10.4% (2016: 8.0%) is Russia’s largest bank and is state-owned. It has branches throughout the country and a 50% 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.

Gazprom – 9.0% (2016: 5.3%) 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.

Novatek – 6.4% (2016: 6.8%) is Russia’s largest independent natural gas producer. The company is set to enter a new phase of growth through its Yamal LNG project, whilst the capital expenditure burden for the company is set to become much lighter, allowing the company to generate increasing amounts of free cashflow.

Lukoil – 6.0% (2016: 6.1%) 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.

Garanti Bank – 5.0% (2016: 3.3%) is Turkey’s second-largest private bank. Garanti has a long track record of delivering high returns on equity and has increasing contributions from associated financial services such as leasing and asset management.

Moneta Money Bank – 4.8% (2016: nil) is a leading retail and expanding SME bank in the Czech Republic with a well-established position in Czech consumer finance and a growing position in SME lending. The Group operates through a well-dispersed nationwide network in the Czech Republic of branches and ATMs with a well-recognised presence in smaller cities and towns, as well as through alternative distribution channels.

Globaltrans – 4.2% (2016: 4.4%) is a leading freight rail transportation group with operations in Russia, the CIS and the Baltic countries. The company provides services to more than 500 customers and its key customers include companies in, or suppliers to, a number of large Russian industrial groups in the metals and mining and the oil products and oil sectors.

PKO Bank Polski – 3.8% (2016: 6.7%) 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 relative to other Polish banks.

Ferrexpo – 3.8% (2016: nil) is a Ukrainian iron ore producer and a top three supplier of iron ore pellets to the steel industry globally. The company went through a cash crunch in 2015 when some of its funds were locked in a Ukrainian bank that went into administration. This, coupled with the collapse in iron ore prices in late 2015, has put the company’s debt sustainability at risk. Since then it has significantly reduced the cost base, continued to improve its product mix and focused on servicing its debt load.

PZU – 3.8% (2016: 5.7%) 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.

Halk Bank – 3.6% (2016: 7.2%) is a state-controlled Turkish Bank. The bank has a long history of delivering attractive returns and is one of the most profitable companies in the sector, particularly in its high margin SME banking operation.

MD Medical Group – 3.2% (2016: 0.8%) is the leading player in the Russian private healthcare market for women and children. The company offers a full range of high-quality services from infertility treatment to diagnostics and treatment for all family members in a number of Russia’s regions. The company has a strong expansion pipeline and pricing power.

Turkcell – 3.0% (2016: nil) is the leading Turkish GSM-based mobile phone operator. It is an integrated communication and technology services player, operating a converged mobile and fixed network platform and offering a wide range of innovative products and services.

Tupras – 3.0% (2016: 3.7%) is the leading Turkish oil refiner that dynamically sources the optimal crude oil mix both from seaborne and pipeline supplies and distributes this domestically both through wholesale and via its own retail platform. The refining facilities have been recently improved through a major upgrade program which should deliver higher returns in the future.

Inter RAO – 2.9% (2016: 2.2%) is a diversified energy holding with a presence across multiple sectors in Russia and abroad. In Russia, it is a leader in the export and import of electricity and is actively expanding its operations generation and distribution segments, while also developing new business.

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 2016. Together, the fifteen largest investments represent 72.9% of net assets (31 January 2016: 78.3%).

TOP AND BOTTOM FIVE CONTRIBUTORS TO RELATIVE PERFORMANCE

TOP FIVE LARGEST POSITIVE CONTRIBUTORS TO RELATIVE PERFORMANCE

Inter RAO (total effect on relative performance +5.1%) is a leader in the export and import of electricity and is actively expanding its operations, generation, and distribution segments, while also developing new business in Russia. This off-benchmark position was the top contributor on the back of continually beating its operational performance, selling off non-core assets, the capital investment cycle is nearing an end and management is expected to announce a new dividend policy.

Magnit (total effect on relative performance +1.6%) is Russia’s largest retailer operating in four different formats: convenience store, hypermarket, “Magnit Family” store and cosmetics store. The Company benefited from its underweight position after Magnit released weaker than expected results and continued to miss on expectations.

Globaltrans (total effect on relative performance +1.5%) 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. This off-benchmark position contributed to performance as it benefited from rising transportation tariffs in Russia.

Ferrexpo (total effect on relative performance +1.5%) is a Ukrainian iron ore producer and a top three supplier of iron ore pellets to the steel industry globally. The company delivered solid first half 2016 financial results, paid off one of its trade finance loans and demonstrated that it was able to meet the remaining debt obligations going forward. The higher iron ore price and improved investor perception of debt sustainability also contributed to performance.

MD Medical Group (total effect on relative performance +1.4%) is the leading player on the Russian private healthcare market for women and children. The company offers a full range of high-quality services from infertility treatment to diagnostics and treatment for all family members in a number of Russia’s regions. The company has a strong expansion pipeline and pricing power and is trading on attractive valuations.

TOP FIVE LARGEST NEGATIVE CONTRIBUTORS TO RELATIVE PERFORMANCE
 

Halk Bank (total effect on relative performance -2.7%) & TSKB (total effect on relative performance -1.5%) were impacted by the attempted coup in July and the weak currency. The global reflation trade and steepening of the US yield curve also had a negative effect on Turkish bank valuations, the country is sensitive to the cost of external funding.

Mail.Ru (total effect on relative performance -1.9%) owns Russia’s leading social network and associated internet businesses. The company delivered disappointing results in the games business in 2016.

Coca-Cola Icecek (total effect on relative performance -1.2%) is the Coca-Cola bottling franchise with sole responsibility for Turkey. The company also has operations in rapidly-growing frontier markets such as Pakistan, Iraq, the CIS and across the Middle East and North African region. The company’s operations were negatively impacted by the local currency weakness through its portfolio.

Luxoft (total effect on relative performance -1.1%) 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 due to the exposure to its biggest clients, European banks, which sold off after Brexit.

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 2017





Russia 




Turkey 




Poland 




Ukraine 




Greece 




Other 


% Net 
current 
liabilities 


% net 
assets 
31.01.17 


% net 
assets 
31.01.16 
% MSCI 
Emerging 
Europe 
10-40 Index 
31.01.17 
Consumer Discretionary  –   0.1   –  –   2.2   –   –   2.3   8.4   4.1 
Consumer Staples  –   2.3   –   2.5   –   –   –   4.8   7.1   8.0 
Energy  22.3   3.0   –   –   –   –   –   25.3   28.1   34.6 
Financials  10.4   12.4   7.6   –   5.0   6.5   –   41.9   45.0   30.3 
Health Care  3.2   –   –   –   –   –   –   3.2   0.8   0.8 
Industrials  4.2   2.7  –   –   –   –   –   6.9   4.4   2.7 
Information Technology  2.9   –   –   2.5   –   –   –   5.4   5.2   – 
Materials  2.2   –   1.4   3.8   –   –   –   7.4   5.5   8.6 
Real Estate  –  –   –   –   –   –   –   –  –   0.6 
Telecommunications Services  –   3.0   –   –   –   –   –   3.0   –   6.0 
Utilities  2.9   –   –   –   –   –  –   2.9   2.2   4.3 
Other  –   –   –   –   –   –  (3.1) (3.1) (6.7)  – 
 -----   -----   -----   -----   -----   -----   -----   -----   -----   ----- 
Net assets 31.01.17  48.1   23.5   9.0   8.8   7.2   6.5  (3.1)  100.0   –   – 
 -----   -----   -----   -----   -----   -----   -----   -----   -----   ----- 
Net assets 31.01.16  44.3   24.4   16.0   2.8   10.3   8.9  (6.7)  –   100.0   – 
 -----   -----   -----   -----   -----   -----   -----   -----   -----   ----- 
MSCI EM Europe 10?40 Index 31.01.17  49.9   19.6   20.1   –   4.7   5.7  –   –   –   100.0 
 ====   ====  ====   ====   ====   ====   ====   ====   ====   ==== 

The table above shows the analysis of the net assets as at 31 January 2017 by sector and region, compared with the net assets as at 31 January 2016 and the MSCI EM Europe 10-40 Index breakdown as at 31 January 2017.

INVESTMENTS AS AT 31 JANUARY 2017

Country of
operation 
Market value/
exposure US$’000
% of
net assets 
Financials
Sberbank Russia  16,101  10.4% 
Garanti Bank Turkey  7,820  5.0% 
Moneta Money Bank Czech Republic  7,445  4.8% 
PKO Bank Polski Poland  5,937  3.8% 
PZU Poland  5,856  3.8% 
Halk Bank Turkey  5,610  3.6% 
National Bank of Greece Greece  3,909  2.5% 
Alpha Bank Greece  3,895  2.5% 
TSKB Turkey  3,480  2.3% 
Long CFD position – BRD Groupe Société Générale Romania  2,680  1.7% 
Aviva Emeklilik ve Hayat Turkey  2,245  1.5% 
 -------   ------- 
64,978  41.9% 
 -------   ------- 
Energy
Gazprom Russia  14,005  9.0% 
Novatek Russia  9,930  6.4% 
Lukoil Russia  9,337  6.0% 
Tupras Turkey  4,640  3.0% 
Volga Gas Russia  1,434  0.9% 
 -------   ------- 
39,346  25.3% 
 -------   ------- 
Materials
Ferrexpo Ukraine  5,902  3.8% 
Norilsk Nickel Russia  3,397  2.2% 
KGHM Poland  2,207  1.4% 
 -------   ------- 
11,506  7.4% 
 -------   ------- 
Industrials
Globaltrans Russia  6,547  4.2% 
Turk Hava Yollari Turkey  4,208  2.7% 
 -------   ------- 
10,755  6.9% 
 -------   ------- 
Information Technology
Mail.Ru Russia  4,427  2.9% 
Luxoft Ukraine  3,895  2.5% 
 -------   ------- 
8,322  5.4% 
 -------   ------- 
Consumer Staples
MHP Ukraine  3,802  2.5% 
Coca Cola Icecek Turkey  3,506  2.3% 
 -------   ------- 
7,308  4.8% 
 -------   ------- 
Health Care
MD Medical Group Russia  4,892  3.2% 
 -------   ------- 
4,892  3.2% 
 -------   ------- 
Telecommunication Services
Turkcell Turkey  4,668  3.0% 
 -------   ------- 
4,668  3.0% 
 -------   ------- 
Utilities
Inter RAO Russia  4,434  2.9% 
 -------   ------- 
4,434  2.9% 
 -------   ------- 
Consumer Discretionary
OPAP Greece  3,387  2.2% 
Ford Otosan Turkey  218  0.1% 
 -------   ------- 
3,605  2.3% 
 -------   ------- 
Total investments - gross exposure 159,814  103.1% 
 ======   ====== 
Less: gross exposure on CFDs (2,680) (1.7%)
 ======   ====== 
Equity investments held at fair value 157,134  101.4% 
Net current liabilities (2,164) (1.4%)
Preference shares (19) (0.0%)
 -------   ------- 
Net assets 154,951  100.0% 
 ======   ====== 

The total number of investments (excluding CFD positions) held at 31 January 2017 was 29 (31 January 2016: 30). All investments are in equity shares unless otherwise stated.

During the year, the Company entered into CFDs to gain long exposure on individual securities. At the year end, one long CFD position was held (31 January 2016: one) with a net fair value profit of US$71,000 (31 January 2016: net fair value loss of US$88,000) and an underlying market value of US$2,680,000 (31 January 2016: US$2,332,000).

The Company did not hold any equity interest comprising more than 3% of any company’s ordinary share capital as at 31 January 2017.

FIFTEEN LARGEST INVESTMENTS AS AT 31 JANUARY 2017




Security



Country 



Sector 
2017
Market value
US$’000 


% of
net assets 
2016
Market value
US$’000 

% of
net
assets 
Sberbank Russia  Financials   16,101  10.4%   9,037  8.0% 
Gazprom Russia  Energy   14,005  9.0%   6,000  5.3% 
Novatek Russia  Energy   9,930  6.4%   7,679  6.8% 
Lukoil Russia  Energy   9,337  6.0%   6,947  6.1% 
Garanti Bank Turkey  Financials   7,820  5.0%   3,782  3.3% 
Moneta Money Bank Czech Republic  Financials   7,445  4.8%  –  – 
Globaltrans Russia  Industrials   6,547  4.2%   4,970  4.4% 
PKO Bank Polski Poland  Financials   5,937  3.8%   7,580  6.7% 
Ferrexpo Ukraine  Materials   5,902  3.8%  –  – 
PZU Poland  Financials   5,856  3.8%   6,404  5.7% 
Halk Bank Turkey  Financials   5,610  3.6%   8,166  7.2% 
MD Medical Group Russia  Health Care   4,892  3.2%   860  0.8% 
Turkcell Turkey  Telecommunication Services   4,668  3.0%  –  – 
Tupras Turkey  Energy   4,640  3.0%   4,256  3.7% 
Inter RAO Russia  Utilities   4,434  2.9%   2,533  2.2% 

INCOME STATEMENT FOR THE YEAR ENDED 31 JANUARY 2017



Notes 
Revenue 
2017 
US$’000 
Revenue 
2016 
US$’000 
Capital 
2017 
US$’000 
Capital 
2016 
US$’000 
Total 
2017 
US$’000 
Total 
2016 
US$’000 
Gains/(losses) on investments held at fair value through profit or loss 8 –  –  40,597  (15,121) 40,597  (15,121)
Gains on foreign exchange –  –  171  22  171  22 
Gains/(losses) on contracts for difference 47  (409) 302  1,434  349  1,025 
Income from investments held at fair value through profit or loss 3,921  3,467  –  –  3,921  3,467 
Other income 20  –  –  20 
    ------  ------   ------   ------   ------   ------ 
Total income/(expense) 3,988  3,062  41,070  (13,665) 45,058  (10,603)
    ------  ------   ------   ------   ------   ------ 
Expenses
Investment management fee (337) (1,144) (785) –  (1,122) (1,144)
Operating expenses (502) (597) (76) (79) (578) (676)
    ------  ------   ------   ------   ------   ------ 
Total operating expenses (839) (1,741) (861) (79) (1,700) (1,820)
    ------  ------   ------   ------   ------   ------ 
Net profit/(loss) on ordinary activities before finance costs and taxation 3,149  1,321  40,209  (13,744) 43,358  (12,423)
Finance costs (16) (24) (37) –  (53) (24)
    ------  ------   ------   ------   ------   ------ 
Net profit/(loss) on ordinary activities before taxation 3,133  1,297  40,172  (13,744) 43,305  (12,447)
Taxation (428) (321) –  –  (428) (321)
    ------  ------   ------   ------   ------   ------ 
Net profit/(loss) on ordinary activities after taxation 2,705  976  40,172  (13,744) 42,877  (12,768)
    ------  ------   ------   ------   ------   ------ 
Earnings/(loss) per ordinary share (US$ cents) 7 7.50  2.69  111.31  (37.92) 118.81  (35.23)
    =====   =====   =====   =====   =====   ===== 

The total column of this statement represents the profit and loss 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 and no operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.

The Company does not have any other recognised gains and losses. The net profit/(loss) for the year disclosed above represents the Company’s total comprehensive income.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JANUARY 2017




Notes 
Called up 
share 
capital 
US$’000 
Share 
premium 
account 
US$’000 
Capital 
redemption 
reserve 
US$’000 

Capital 
reserves 
US$’000 

Revenue 
reserve 
US$’000 


Total 
US$’000 
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 purchased and cancelled 12  (29) –  29  (969) –  (969)
    ------   ------   ------   ------   ------   ------- 
At 31 January 2017 4,133  41,684  5,889  114,768  (11,523) 154,951 
    ------   ------   ------   ------   ------   ------- 
For the year ended 31 January 2016
At 31 January 2015 4,164  41,684  5,858  89,332  (15,204) 125,834 
Total comprehensive income:
(Loss)/profit for the year –  –  –  (13,744) 976  (12,768)
Transactions with owners, recorded directly to equity:
Shares purchased and cancelled 12  (2) –  (70) –  (70)
Tender offer and subscription share issue costs written back –  –  –  47  –  47 
    ------   ------   ------   ------   ------   ------- 
At 31 January 2016 4,162  41,684  5,860  75,565  (14,228) 113,043 
    =====   =====   =====   =====   =====   ====== 

BALANCE SHEET AS AT 31 JANUARY 2017


Notes 
2017 
US$’000 
2016 
US$’000 
Fixed assets
Investments held at fair value through profit or loss 157,134  118,313 
    -------   ------- 
Current assets
Debtors 9 387  2,074 
Cash and cash equivalents
Collateral pledged in respect of contract for difference –  204 
Derivative financial assets 71  – 
    -------   ------- 
459  2,283 
    -------   ------- 
Creditors – amounts falling due within one year
Bank overdraft (1,496) (3,282)
Derivative financial liabilities –  (88)
Other creditors 10 (1,127) (4,164)
    -------   ------- 
(2,623) (7,534)
    -------   ------- 
Net current liabilities (2,164) (5,251)
Total assets less current liabilities 154,970  113,062 
    -------   ------- 
Creditors – amounts falling due after more than one year
Preference shares of £1.00 each (one quarter paid) 11 (19) (19)
    -------   ------- 
Net assets 154,951  113,043 
    -------   ------- 
Capital and reserves
Called-up share capital 12  4,133  4,162 
Share premium account 13  41,684  41,684 
Capital redemption reserve 13  5,889  5,860 
Capital reserves 13  114,768  75,565 
Revenue reserve 13  (11,523) (14,228)
    -------   ------- 
Total shareholders’ funds 154,951  113,043 
    -------   ------- 
Net asset value per ordinary share (US$ cents) 431.28  312.13 
    ======   ====== 

The financial statements on pages 44 to 67 of the Company’s Annual Report and Financial Statements were approved and authorised for issue by the Board of Directors on 28 March 2017 and signed on its behalf by Neil England, Chairman.

BlackRock Emerging Europe plc
Registered in England, number 02984526

CASH FLOW STATEMENT FOR THE YEAR ENDED 31 JANUARY 2017

2017 
US$’000 
2016 
US$’000 
Operating activities
Net profit/(loss) before taxation * 43,305  (12,447)
Add back finance costs 53  24 
(Gains)/losses on investments and derivatives held at fair value through profit or loss (40,945) 13,687 
Net gains on foreign exchange (171) (22)
Sales of investments held at fair value through profit or loss 77,638  129,123 
Purchases of investments held at fair value through profit or loss (76,329) (138,093)
Realised gains on contracts for difference 189  2,072 
Decrease/(increase) in debtors 21  (163)
(Decrease)/increase in other creditors (848) 323 
Net movement in collateral pledged with brokers 204  (208)
Taxation on investment income (414) (232)
 ------   ------ 
Net cash generated/(used) in operating activities 2,703  (5,936)
 ------   ------ 
Financing activities
Ordinary shares purchased and cancelled (1,039) – 
Interest paid (53) (24)
 ------   ------ 
Net cash used in financing activities (1,092) (24)
 ------   ------ 
Increase/(decrease) in cash and cash equivalents 1,611  (5,960)
 ------   ------ 
Cash and cash equivalents at the start of the year (3,277) 2,661 
Effect of foreign exchange rate changes 171  22 
 ------   ------ 
Cash and cash equivalents at end of year (1,495) (3,277)
 ------   ------ 
Comprised of:
Cash at bank
Bank overdraft (1,496) (3,282)
 ------   ------ 
(1,495) (3,277)
 ------   ------ 

* Includes dividends and interest received in the year of US$3,881,000 and US$1,000 (2016: US$3,036,000 and US$4,000) respectively.    

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

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 Statements for 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. 

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 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 designated as 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 Company has early adopted the amendments to FRS 102 ‘Fair value hierarchy disclosure’ effective for annual periods beginning on or after 1 January 2017. These amendments improve the consistency of fair value disclosure for financial instruments compared with those required by EU adopted IFRS.

The fair value hierarchy has the following 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 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 into 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 current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities.

(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

2017 
US$’000 
2016 
US$’000 
Investment income:
UK dividends –  26 
Overseas dividends 3,620  3,441 
Overseas special dividends 301  – 
 ------   ------ 
3,921  3,467 
 ------   ------ 
Other income:
Bank interest
Other income 19  – 
 ------   ------ 
Total 3,941  3,471 
 =====   ===== 

4. INVESTMENT MANAGEMENT FEE

2017
Revenue 
US$’000 
2017
Capital 
US$’000 
2017
Total 
US$’000 
2016
Revenue 
US$’000 
2016
Capital 
US$’000 
2016
Total 
US$’000 
Investment management fee 337  785  1,122  1,144  –  1,144 

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, BIM (UK) was appointed as Investment Manager and Company Secretary on 1 May 2009. BIM (UK) continues to act as the Company’s Investment Manager under a delegation agreement with BFM. BIM (UK) also acted as the Secretary of the Company throughout the year.

The Manager receives a basic annual management fee of 1.0% of the Company’s average daily market capitalisation. Any charges in respect of BlackRock managed funds are deducted from the management fee. With effect from 1 February 2016, 70% of management fees have been allocated to the Company’s capital reserve.

The management fee will be reduced with effect from 1 April 2017 from 1.0% per annum of the Company’s average daily market capitalisation to 0.8% per annum of the Company’s average daily net asset value.

5. OPERATING EXPENSES

2017 
US$’000 
2016 
US$’000 
Allocated to revenue:
Custody fee 67  51 
Depositary fees 15  15 
Audit fee 39  40 
Registrar’s fees 29  34 
Directors’ emoluments 171  254 
Marketing fees* (33) 20 
Other administrative costs 214  183 
 -----   ----- 
502  597 
 -----   ----- 
Allocated to capital:
Transaction costs 76  79 
 -----   ----- 
578  676 
 =====   ===== 
The Company’s ongoing charges – calculated as a percentage of average shareholders’ funds and including management fees and operating expenses but excluding finance costs and taxation were: 1.2%  1.3% 
 -----   ----- 

* The marketing fees include marketing expenses of US$27,000 in respect of the year ending 31 January 2017 and the write-back of marketing expenses of US$60,000 in respect of the year ending 31 January 2016. In respect of the year ending 31 January 2016, the marketing fees included marketing expenses of US$78,000 and the write-back of marketing expenses of US$58,000 in respect of the year ending 31 January 2015.
 

A significant proportion of the Company’s operating expenses are paid in Sterling and are therefore subject to exchange rate fluctuations.

6. DIVIDENDS

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. However, the Directors are recommending the payment of a final dividend in respect of the year ended 31 January 2017 of 7.50 cents per share (2016: nil) on 28 June 2017 to shareholders on the Company’s register on 19 May 2017. The recommended final dividend has not been included as a liability in these financial statements, as final dividends are only recognised in the financial statements once they have been approved by shareholders, or in the case of interim dividends, recognised when they are paid to shareholders.

2017 
US$’000 
2016 
US$’000 
Dividend payable on equity shares:
Final dividend payable 7.50 cents (2016: nil) 2,694 – 
 ------   ------ 
2,694  – 
 ------   ------ 

* Based on 35,916,028 ordinary shares in issue at 28 March 2017

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:

2017  2016 
Net revenue profit attributable to ordinary shareholders (US$’000) 2,705  976 
Net capital profit/(loss) attributable to ordinary shareholders (US$’000) 40,172  (13,744)
 -------   ------- 
Total profit/(loss) attributable to ordinary shareholders (US$’000) 42,877  (12,768)
 -------   ------- 
Equity shareholders’ funds (US$’000) 154,951  113,043 
 --------------   -------------- 
The weighted average number of ordinary shares in issue during the year, on which the return per ordinary share was calculated was: 36,087,772  36,242,714 
 --------------   -------------- 
The actual number of ordinary shares in issue at the year end, on which the net asset value per share was calculated was: 35,927,828  36,216,928 
 --------------   -------------- 
The number of ordinary shares in issue, including treasury shares, at the year end was: 41,327,828  41,616,928 
 =========   ========= 

   

2017
Revenue 
cents 
2017
Capital 
cents 
2017
Total 
cents 
2016
Revenue 
cents 
2016
Capital 
cents 
2016
Total 
cents 
Earnings per share
Calculated on weighted average number of ordinary shares 7.50  111.31  118.81  2.69  (37.92) (35.23)
Calculated on actual number of ordinary shares in issue at the year end 7.53  111.81  119.34  2.69  (37.94) (35.25)
 ------   ------ 
Net asset value per share 431.28  312.13 
Ordinary share price* 378.06  270.76 
 =====   ===== 


* The Company’s ordinary share price is quoted in Sterling and the above represents the US dollar equivalent using an exchange rate of 1.2581 (2016: 1.4185).

8. INVESTMENT HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

2017 
US$’000 
2016 
US$’000 
Value of overseas listed investments at 31 January 157,134  118,313 
 -------   ------- 
Valuation brought forward 118,313  123,284 
Investment holding losses 42,232  36,459 
 -------   ------- 
Opening cost of investments 160,545  159,743 
Additions at cost 74,210  138,214 
Disposals at cost (73,915) (137,412)
 -------   ------- 
Cost carried forward 160,840  160,545 
Closing investment holding losses (3,706) (42,232)
 -------   ------- 
Closing valuation of investments 157,134  118,313 
 ======   ====== 

During the year, the Company incurred purchase transaction costs of US$150,000 (2016: US$209,000) and sale transaction costs of US$98,000 (2016: US$278,000). All transaction costs have been included within capital reserve.

Gains/(losses) on investments held at fair value through profit or loss

2017 
US$’000 
2016 
US$’000 
Realised gains/(losses) on sales 2,071  (9,348)
Changes in investment holding gains/(losses) 38,526  (5,773)
 ------   ------ 
40,597  (15,121)
 =====   ===== 

9. DEBTORS

2017 
US$’000 
2016 
US$’000 
Sales for future settlement 145  1,797 
Prepayments and accrued income 229  250 
Taxation recoverable 13  27 
 ----   ----- 
387  2,074 
 ====   ==== 

10. CREDITORS - AMOUNTS FALLING DUE WITHIN ONE YEAR

2017 
US$’000 
2016 
US$’000 
Purchases for future settlement 495  2,614 
Accrued expenditure 632  1,480 
Share buyback costs payable –  70 
 -----   ----- 
1,127  4,164 
 ====   ==== 

11. CREDITORS - AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Non-equity share capital 2017 
US$’000 
2016 
US$’000 
Allotted, issued and one quarter paid: 19  19 
 ----   ---- 
Shares in issue at 31 January 2017 and 2016, 50,000 preference shares of £1.00 each 19  19 
 ====   ==== 

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 2017 and the previous year, the preference shareholders waived their rights to any preference dividend.

12. CALLED UP SHARE CAPITAL

Ordinary 
shares 
number 
Treasury 
shares 
number 
Total 
shares 
number 
Nominal 
value 
US$’000 
Allotted, called up and fully paid share capital comprised:
Ordinary shares of 10 cents each:
At 31 January 2016 36,216,928  5,400,000  41,616,928  4,162 
 ----------   ---------   ----------   ------ 
Shares repurchased and cancelled (289,100) –  (289,100) (29)
 ----------   ---------   ----------   ------ 
At 31 January 2017 35,927,828  5,400,000  41,327,828  4,133 
 ========   ========   ========   ===== 

During the year, 289,100 ordinary shares were repurchased and cancelled (2016: 26,000) for a total consideration of US$969,000 (2016: US$70,000). A further 11,800 ordinary shares have been repurchased for cancellation since the year end for a total consideration of US$46,000. The number of ordinary shares in issue at the year end was 41,327,828 (2016: 41,616,928) of which 5,400,000 were held in treasury (2016: 5,400,000). No treasury shares were either cancelled or re-issued during the year (2016: nil). Subsequent to the year end, 400,000 treasury shares have been cancelled.

13. RESERVES




Share 
premium 
account 
US$’000 



Capital 
redemption 
reserve 
US$’000 

Capital 
reserve 
(arising on 
investments 
sold)* 
US$’000 
Capital 
reserve 
(arising on 
revaluation of 
investments 
held)* 
US$’000 




Revenue 
reserve* 
US$’000 
At 1 February 2016 41,684  5,860  117,894  (42,329) (14,228)
Movement during the year:
Net profit for the year –  –  –  –  2,705 
Shares repurchased and cancelled –  29  (969) –  – 
Gains on realisation of investments –  –  2,071  –  – 
Change in investment holdings gains –  –  –  38,526  – 
Gains on foreign currency transactions –  –  164  – 
Gains on contracts for difference –  –  143  159  – 
Finance costs, transaction costs, investment management fee charged to capital –  –  (898) –  – 
 ------   ------   -------   ------   ------ 
At 31 January 2017 41,684  5,889  118,405  (3,637) (11,523)
 ------   ------   -------   ------   ------ 

* Represents the Company's distributable reserves.

14. VALUATION OF FINANCIAL INSTRUMENTS

The Company has early adopted the amendments to FRS 102 ‘Fair Value Hierarchy disclosures’ effective for the annual periods beginning on or after 1 January 2017. These amendments improve the consistency of fair value disclosures from financial instruments with those required by EU adopted IFRS.

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 49 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.

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.


Financial assets at fair value through profit or loss at 31 January 2017 
Level 1 
US$’000 
Level 2 
US$’000 
Level 3 
US$’000 
Total 
US$’000 
Assets:
Equity investments  157,134  –   –  157,134 
 -------   ------   ------   ------- 
Contracts for difference (gross exposure)  –   2,680  –  2,680 
 -------   ------   ------   ------- 
157,134  2,680  –  159,814 
 ======   =====   =====   ====== 

   


Financial assets at fair value through profit or loss at 31 January 2016 
Level 1 
US$’000 
Level 2 
US$’000 
Level 3 
US$’000 
Total 
US$’000 
Assets:
Equity investments 118,313   –  –  118,313 
Contracts for difference (gross exposure)  –   2,332  –  2,332 
 -------   ------   ------   ------- 
118,313  2,332  –  120,645 
 ======   =====   =====   ====== 

There were no transfers between levels for financial assets and financial liabilities during the period recorded at fair value as at 31 January 2017 and 31 January 2016.

During the year ended 31 January 2016, the holding in the Greek company Motor Oil was classified as a level 3 security due to the closure of the Greek stock exchange. The security moved from level 3 back to level 1 when the Greek market re-opened. The Company did not hold any other level 3 securities throughout the financial year or as at 31 January 2016.

15. TRANSACTION WITH THE INVESTMENT MANAGER AND THE AIFM

BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BIM (UK). Details of the fees payable to BFM are set out in note 4.

The investment management fee due to BFM for the year ended 31 January 2017 amounted to US$1,122,000 (2016: US$1,144,000). At the year end, US$258,000 was outstanding in respect of the management fee (2016: US$854,000).

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 2017 amounted to US$27,000 excluding VAT (2016: expense US$20,000). In addition there was a write back in 2016 of US$60,000 in respect of previous year’s fees. Marketing fees of US$29,000 (2016: US$87,000) were outstanding at 31 January 2017.

16. RELATED PARTIES DISCLOSURES AND TRANSACTIONS WITH DIRECTORS

Transactions with the Directors and fees payable 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 2017, an amount of US$ nil (2016: US$ nil) was payable to Directors in respect of their annual fees.

17. CONTINGENT LIABILITIES AND ASSETS

There were no contingent liabilities or assets at 31 January 2017 (2016: 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 2017 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 2017 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 2016, 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 28 March 2017.

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 2017 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

28 March 2017

12 Throgmorton Avenue
London EC2N 2DL


 

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