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$’000 |
|
|
|
|
|
|
|
|
Gains/(losses) on investments held
at fair value through profit or loss |
8 |
– |
– |
40,597 |
(15,121) |
40,597 |
(15,121) |
Gains on foreign exchange |
|
– |
– |
171 |
22 |
171 |
22 |
Gains/(losses) on contracts for
difference |
|
47 |
(409) |
302 |
1,434 |
349 |
1,025 |
Income from investments held at fair
value through profit or loss |
3 |
3,921 |
3,467 |
– |
– |
3,921 |
3,467 |
Other income |
3 |
20 |
4 |
– |
– |
20 |
4 |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Total income/(expense) |
|
3,988 |
3,062 |
41,070 |
(13,665) |
45,058 |
(10,603) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Expenses |
|
|
|
|
|
|
|
Investment management fee |
4 |
(337) |
(1,144) |
(785) |
– |
(1,122) |
(1,144) |
Operating expenses |
5 |
(502) |
(597) |
(76) |
(79) |
(578) |
(676) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Total operating expenses |
|
(839) |
(1,741) |
(861) |
(79) |
(1,700) |
(1,820) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Net profit/(loss) on ordinary
activities before finance costs and taxation |
|
3,149 |
1,321 |
40,209 |
(13,744) |
43,358 |
(12,423) |
Finance costs |
|
(16) |
(24) |
(37) |
– |
(53) |
(24) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Net profit/(loss) on ordinary
activities before taxation |
|
3,133 |
1,297 |
40,172 |
(13,744) |
43,305 |
(12,447) |
Taxation |
|
(428) |
(321) |
– |
– |
(428) |
(321) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Net profit/(loss) on ordinary
activities after taxation |
|
2,705 |
976 |
40,172 |
(13,744) |
42,877 |
(12,768) |
|
|
------ |
------ |
------ |
------ |
------ |
------ |
Earnings/(loss) per ordinary share
(US$ 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) |
– |
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 |
8 |
157,134 |
118,313 |
|
|
------- |
------- |
Current assets |
|
|
|
Debtors |
9 |
387 |
2,074 |
Cash and cash equivalents |
|
1 |
5 |
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) |
7 |
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 |
1 |
5 |
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 |
1 |
4 |
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 |
7 |
– |
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