Annual Financial Report

Annual Financial Report

Genesis Emerging Markets Fund Ld

GENESIS EMERGING MARKETS FUND LIMITED

(the “Company”; the “Fund”)

(Registration Number: 20790)

STOCK EXCHANGE ANNOUNCEMENT

ANNUAL FINANCIAL REPORT

The Directors of Genesis Emerging Markets Fund Limited announce the Fund’s results for the year ended 30th June 2012. The Annual Financial Report will shortly be available from the Manager's website “www.giml.co.uk” and also for inspection on the National Storage Mechanism, which is located at http://hemscott.com/nsm.do where users can access the regulated information provided by listed entities.

INVESTMENT OBJECTIVE

The investment approach is to identify companies which are able to take advantage of growth opportunities in emerging markets for the benefit of shareholders, and invest in them when they are trading at an attractive discount to the Manager’s assessment of their intrinsic value.

BENCHMARK

MSCI Emerging Markets (Total Return) Index.

RESULTS

    30th June 2012   30th June 2011
 
Published net asset value* £693.1m £773.1m
Published net assets per Participating Preference Share* £5.14 £5.73
Published net assets per Participating Preference Share*† $8.06 $9.20
Earnings per Participating Preference Share $(1.15) $1.95

*The figures are based on mid-market prices.

†A reconciliation to the net asset value under International Financial Reporting Standards is shown in note 2.

CHAIRMAN’S STATEMENT

Performance

While markets rebounded somewhat during the early months of 2012, the legacy of the challenging investment environment towards the end of 2011 (when emerging stock markets provided no haven from the problems of the developed world) meant that the Fund’s net asset value (“NAV”) per share closed the financial year at £5.14, having fallen 10.3% (from £5.73) over the twelve months.

We have noted in the past how the Manager’s approach (which attempts to identify high quality companies that are being underpriced by the market) has historically been effective in protecting the Fund’s value to a degree when markets are declining. This has continued to be the case during this financial year as the Fund’s performance compares favourably with the 13.7% decline in the MSCI EM (TR) Index.

I refer shareholders to the Manager’s Review on the following pages, which comments on the factors driving these returns, as well as describing the economic environment and some of the changes to the Fund’s holdings over the year.

While shareholders would of course prefer to see positive returns from the Fund’s investments in any given year, in the context of the impressive returns produced by emerging markets in 2009 and 2010, some retracement over the last eighteen months or so should not be particularly surprising.

Clearly, however, it is important to look at performance over the longer term in order to assess whether the Fund is successfully meeting shareholder expectations, and with this in mind, the Directors believe the Manager is performing well for the Fund’s holders. Average returns per annum of 7.9% over the last five years, and 17.1% over the last ten, are both significantly ahead of the MSCI EM (TR) Index. The Board’s view remains, therefore, that – noting the consistency of the Manager’s approach to investment in emerging markets, and the stability of its investment personnel – shareholders’ interests will continue to be well served by the ongoing appointment of the Manager.

The average discount over the period was 7.6%, which was slightly higher than the previous twelve months, reflecting market declines and hence a reduced appetite for emerging markets in general. Trading volumes appeared to have been relatively steady relative to last year, and the shareholder base continues to widen.

The Board

The notice convening the Annual General Meeting (AGM) to be held on 2nd November 2012 will be found at the end of the Annual Financial Report. I would like to draw shareholders’ attention to various items with respect to the Board of Directors, for which we request approval by vote as detailed on the Notice.

Firstly, I would like to remind shareholders of the recent announcement of Hélène Ploix’s nomination as a Director, effective from the date of the AGM.

Hélène Ploix is currently Chairman of Paris-based private equity investment firm Pechel Industries. She has had an extensive career in finance and investment in the public and private sectors, both in France (primarily at the French state-owned Caisse des Dépôts et Consignations) and internationally (notably as an Executive Director at the IMF and of the World Bank and as a Member of the Investments Committee of the UN Joint Staff Pension Fund). She currently is a Non-Executive Director of BNP Paribas, Lafarge and Sofina (Brussels), serves on the Advisory Board of Publicis and previously at a number of other companies, including The Boots Company PLC. Mrs Ploix was educated at the Institut d’Etudes Politiques, the University of California at Berkeley, and INSEAD.

As with other recent appointments to the Board, Mrs Ploix’s appointment is in line with our desire to have a group of Directors who represent a variety of different backgrounds, and my fellow Directors and I feel that her wide experience will make her an extremely valuable member of the Fund’s Board, who will add considerable knowledge and insight to our discussions. Additionally, Mrs Ploix has published a number of articles on corporate governance-related matters, and her expertise in this field will also assist us to maintain proper corporate governance.

Mrs Ploix’s appointment is, naturally, subject to shareholder approval at the AGM; I wholeheartedly endorse her election to the Board.

One impact of Mrs. Ploix’s appointment will be to bring the Board’s total remuneration close to the limit provided for by the Fund’s Articles of Association. We have therefore taken the view that it would be prudent to increase the provision for Directors’ total remuneration to $400,000 from the current $200,000. Such an increase will allow us the flexibility to ensure smooth succession planning by adding new Directors to the Board as necessary, and will give us the ability to set remuneration levels closer to the market rate when and as appropriate.

In accordance with regulatory requirements, the other five Directors of the Fund also offer themselves for re-election at the Annual General Meeting. All have been highly valuable members of the Board during their time as Directors, and I have no hesitation in recommending to shareholders that they continue to serve on the Board.

I hope that shareholders will also feel able to vote in favour of my re-election and allow me to continue to serve them as Chairman of the Board of Directors.

We will be holding an Information Meeting in London on 26th October 2012 and we hope to see as many shareholders as possible at this event.

Outlook

The 2012-13 financial year has seen modest market gains thus far, but continued investor nervousness about the global economy (reflected in the underperformance of more cyclical sectors) and uninspiring economic data seem likely to continue to weigh on market returns in the short-term.

That said, we feel the outlook for emerging markets remains positive, and these stockmarkets’ potential to generate continued steady returns remains very much in place. Naturally, companies in different parts of the world face a variety of headwinds, ranging from slowing growth, to increasing regulation and higher levels of competition (in particular, in many cases, from developed market companies). Despite these, however, the long-term attractions of investing in the right emerging markets companies continue to be compelling. The Manager remains confident that the companies in the Fund’s portfolio of holdings generally remain attractively-priced, given their growth opportunities.

Accordingly, as a Board, we firmly believe that the Fund is well-placed to continue generating attractive returns for shareholders over the medium to long term.

Coen Teulings
Chairman
September 2012

DIRECTORS’ REPORT

RESULTS

The total loss for the year for the Fund amounted to $155,642,000 compared to a total profit of $262,844,000 in the previous year. The Directors do not recommend the payment of a dividend in respect of the year ended 30th June 2012 (2011: nil).

CAPITAL VALUES

At 30th June 2012, the value of Equity Shareholders’ Funds was $1,081,560,000 (2011: $1,237,202,000), the Equity per Participating Preference Share was $8.02 (2011: $9.17).

PRINCIPAL RISKS AND UNCERTAINTIES

The investment objective of the Fund is to achieve capital growth over the medium to long term, primarily through investment in equity securities quoted on emerging markets. The main risks to the value of its assets arising from the Fund’s investment in financial instruments are unanticipated adverse changes in market prices and foreign currency exchange rates and an absence of liquidity. The Board reviews and agrees with the Manager policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of the period to which these financial statements relate.

The economies, the currencies and the financial markets of a number of developing countries in which the Fund invests may be extremely volatile. To manage the risks posed by adverse price fluctuations the Fund’s investments are geographically diversified, and will continue to be so. The Fund will not normally invest more than 25% of its assets (at the time the investment is made) in any one country. Further, the exposure to any one company or group (other than an investment company, unit trust or mutual fund) is unlikely to exceed 5% of the Fund’s net assets at the time the investment is made. The Articles of Incorporation place a limit of 10% for securities issued by one company but the Directors use 5% for monitoring purposes.

The Fund’s assets will be invested in securities of companies in various countries and income will be received by the Fund in a variety of currencies. However, the Fund will compute its net asset value and make any distributions in US dollars. The value of the assets of the Fund as measured in US dollars may be affected favourably or unfavourably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies.

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stock markets of the developed world. This lower level of liquidity exaggerates the fluctuations in the value of investments described previously. The restrictions on concentration and the diversification requirements detailed above also serve normally to protect the overall value of the Fund from the risks created by the lower level of liquidity in the markets in which the Fund operates.

The Fund’s key operational risk is custody risk. Custody risk is the risk of loss of securities held in custody occasioned by the insolvency or negligence of the custodian. Although an appropriate legal framework is in place that eliminates the risk of loss of value of the securities held by the custodian, in the event of its failure, the ability of the Fund to transfer the securities might be temporarily impaired. The day to day management of these risks is carried out by the Manager under policies approved by the Board.

MANAGER

In the opinion of the Directors, in order to achieve the investment objective of the Fund, and having taken into consideration the performance of the Fund, the continuing appointment of the Manager is in the interests of the shareholders as a whole. A more detailed commentary of important events that have occurred during the year and their impact on these accounts are contained in the Manager’s Review.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the financial statements for each financial year so that they give a true and fair view, in accordance with applicable Guernsey Law and International Financial Reporting Standards as adopted by the European Union (“IFRS”), of the state of affairs of the Fund and of the profit or loss of the Fund for that year.

In the preparation of these financial statements, the Directors are required to:

  • select suitable accounting policies and then apply them consistently;
  • make judgments and estimates that are reasonable and prudent;
  • ensure the financial statements are prepared on a going concern basis unless it is inappropriate to presume that the Fund will continue in business; and
  • state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements.

The Directors confirm that they have complied with the above requirements in preparing the financial statements. The Directors are responsible for ensuring that the Fund keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Fund and enable them to ensure that the financial statements comply with The Guernsey Companies Law, 2008. They are also responsible for ensuring the safeguarding of the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on the website www.giml.co.uk, which is maintained by the Fund’s Investment Adviser. The maintenance and integrity of the website is, so far as relates to the Fund, the responsibility of the Investment Adviser. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

AUDITORS AND DISCLOSURE OF INFORMATION TO AUDITORS

In the case of each of the persons who are Directors at the time when the report is approved, the following applies:

  • so far as the Director is aware, there is no relevant audit information of which the Fund’s auditors are unaware; and
  • they have taken all steps that ought to have been taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Fund’s auditors are aware of that information.

DIRECTORS' INTERESTS

The following Directors who served throughout the period under review (except Saffet Karpat who was appointed on 1st October 2011 and The Hon. John Train who resigned on 28th October 2011) had a beneficial interest in the share capital of the Fund at 30th June 2012:

  Participating
Directors Preference Shares
Coen Teulings 40,000
Michael Hamson (including family interests) 8,700
Saffet Karpat -
Dr. John Llewellyn -
Dr. Geng Xiao -
The Hon. John Train (including family interests, resigned on 28th October 2011) 20,510

MANAGER’S REVIEW

Following the second half of 2011 when the developed world’s debt problems dominated investor sentiment and pushed the MSCI Emerging Markets (Total Return) Index down by some 16%, the start of 2012 provided some brief respite before euro concerns triggered a further retreat of risk appetite. The MSCI Emerging Markets (Total Return) Index closed the twelve-month period down 13.7% in sterling terms, with the Fund falling 10.3%.

Amongst the major emerging markets, Russia and Brazil performed particularly badly over the year in sterling terms as sentiment focused on Brazil’s currency weakness and current account deficit, and political unrest and a lack of reform in Russia (as well as its proximity to Europe). The Indian market also struggled, reflecting its poor economic numbers, whereas markets perceived as more ‘defensive’ – Mexico, Malaysia, South Africa – performed relatively well. From a sector perspective, energy stocks struggled as the price of Brent crude oil fell to below US$100 per barrel, and the International Energy Agency revised down its demand forecasts in the face of increasing supply, particularly from Saudi Arabia. In contrast, as well as the defensive consumer staples and telecoms sectors, IT stocks also did reasonably well, as investors became more aware of the scale of penetration of mobile devices in many developing countries.

Portfolio changes over the twelve months featured significant buying in Brazil as the market fell, particularly in Itau Unibanco and in one new holding: rail concession All America Latina Logistica. India was another country where macro-driven market weakness produced some attractive stock opportunities: a further new introduction to the portfolio was Kotak Mahindra Bank, and we also increased the portfolio’s weights in IT businesses Infosys and Tata Consulting Services. The relative underperformance of many materials stocks in recent weeks also enabled us to add to a number of holdings, including Anglo American, First Quantum Minerals, and Chinese cement companies Anhui Conch and China Resources Cement. In contrast, given their strong performance this year, we lightened up the Fund’s holdings in TSMC and Samsung Electronics, and reduced a number of positions in banking and cement companies in Indonesia for the same reason.

There is plenty in the emerging markets outlook for investors to be negative about, quite apart from the potential impact of financial stresses in Europe. Recent economic data from China have disappointed investors, and it remains uncertain how much genuine reform aimed at higher-quality domestic growth can be achieved by the new leadership in the face of still-considerable vested interests. Many people in India are adamant that the country faces a major crisis, as a combination of fiscal imbalances, slowing growth and political paralysis has led to two rating agencies putting India on negative watch for a potential downgrade to below investment grade status. Economic data from elsewhere are mostly similarly uninspiring.

Against this, there are some brighter spots. Lower inflation in many developing countries (India being a notable exception) gives scope for monetary stimulus to boost growth: for example, the People’s Bank of China cut its benchmark deposit and lending rates by 50 basis points at the beginning of June. And despite the gloom in the financial markets in Russia, for example, the companies we have been meeting there in recent months (for example, in property, construction, food retail, pharmaceuticals and telecoms) suggested robust domestic demand. Banks are also indicating strong demand for loans in most segments (Sberbank’s April retail loan book was up 49% year-on-year) although to some extent the stresses incurred in 2008 are apparently still present, and corporate loan growth remains somewhat subdued.

Fundamentally, the Fund is trading at an attractive discount to our assessment of its intrinsic value, and continues to hold a large variety of attractively-priced, high-quality businesses whose management teams have demonstrated an ability to add value for shareholders over the long term. Looking past the short-term outlook, we remain confident that the Fund will continue to generate the returns that the Fund’s holders have come to expect.

Genesis Asset Managers, LLP
September 2012

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 30th June 2012

      2012       2011
Note $’000 $’000
 
ASSETS
Current Assets
Financial assets at fair value through profit or loss 1,068,101 1,219,925
Amounts due from brokers 3,952 5,340
Dividends receivable 2,810 5,003
Other receivables and prepayments 160 162
Cash and cash equivalents 10,407 13,495
TOTAL ASSETS 1,085,430 1,243,925
 
LIABILITIES
Current Liabilities
Amounts due to brokers 160 2,636
Capital gains tax payable 1,664 2,053
Payables and accrued expenses 2,046 2,034
TOTAL LIABILITIES 3,870 6,723
 
TOTAL NET ASSETS 1,081,560 1,237,202
 
EQUITY
Share premium 134,349 134,349
Capital reserve 916,195 1,068,728
Revenue account 31,016 34,125
 
TOTAL EQUITY 1,081,560 1,237,202
 
EQUITY PER PARTICIPATING
PREFERENCE SHARE* 2 $8.02 $9.17

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2011: 134,963,060)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30th June 2012

      2012       2011
$’000 $’000
INCOME

Net change in financial assets at fair
value through profit or loss

(152,351) 265,037
Net exchange losses (182) (554)
Dividend income 19,504 25,396
Deposit interest 7 21
Miscellaneous income 98 -
(132,924) 289,900
 
EXPENSES
Management fees (16,598) (17,629)
Custodian fees (1,406) (1,476)
Transaction costs (1,275) (990)
Directors' fees and expenses (289) (414)
Administration fees (198) (172)
Audit fees (88) (53)
Other expenses (140) (182)
TOTAL OPERATING EXPENSES (19,994) (20,916)
 
OPERATING (LOSS)/PROFIT (152,918) 268,984
 
FINANCE COSTS
Bank charges (1) (1)
TOTAL FINANCE COSTS (1) (1)
 
Capital gains tax (923) (3,340)
Withholding taxes (1,800) (2,799)
TOTAL TAXATION (2,723) (6,139)
   

(LOSS)/PROFIT AFTER TAX FOR THE YEAR
ATTRIBUTABLE TO PARTICIPATING
PREFERENCE SHARES

 (155,642) 262,844
 
Other Comprehensive Income - -
TOTAL COMPREHENSIVE (LOSS)/INCOME (155,642) 262,844
 
EARNINGS PER PARTICIPATING PREFERENCE SHARE* $(1.15) $1.95

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2011: 134,963,060).

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 30th June 2012

 

2012

           
Share Capital Revenue Total
Premium Reserve Account
$’000 $’000 $’000 $’000
 
Balance at the beginning of the year 134,349 1,068,728 34,125 1,237,202
 
Total Comprehensive Loss - - (155,642) (155,642)
 
Transfer from Capital Reserve - (152,533) 152,533 -
       
Balance at the end of the year 134,349 916,195 31,016 1,081,560
 
 

 

2011

       
Share Capital Revenue Total
Premium Reserve Account
$’000 $’000 $’000 $’000
 
 
Balance at the beginning of the year 134,349 804,245 35,764 974,358
 
Total Comprehensive Income - - 262,844 262,844
 
Transfer to Capital Reserve - 264,483 (264,483) -
       
Balance at the end of the year 134,349 1,068,728 34,125 1,237,202

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 30th June 2012

  2012       2011
$’000 $’000
 
OPERATING ACTIVITIES
Dividends received 21,795 22,288
Taxation paid (3,112) (4,119)
Purchase of financial assets (208,526) (202,054)
Proceeds from sale of financial assets 206,911 204,663
Interest received 7 21
Operating expenses paid (19,981) (20,438)
Foreign exchange loss - (1)
   
NET CASH (OUTFLOW)/INFLOW FROM

OPERATING ACTIVITIES

(2,906) 360
 
Effect of exchange losses on cash and cash equivalents (182) (554)
   
NET DECREASE IN

CASH AND CASH EQUIVALENTS

(3,088) (194)
 
Net cash and cash equivalents at the

beginning of the year

13,495 13,689
   

NET CASH AND CASH EQUIVALENTS AT THE END
OF THE YEAR

 10,407 13,495
 
Comprising:
 
Cash and cash equivalents 10,407 13,495

1. BASIS OF PREPARATION

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) and interpretations by the International Financial Reporting Interpretations Committee of the International Accounting Standards Board.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss.

The preparation of consolidated financial statements in conformity with IFRS may require management to make critical accounting judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions about the future which are made by management relating to unlisted securities, are made using models generally recognised as standard within the industry and inputs are based on the historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

2. RECONCILIATION OF PUBLISHED NET ASSET VALUE ATTRIBUTABLE TO EQUITY SHAREHOLDERS TO THE IFRS EQUIVALENT

  2012   Per Participating
Total Preference Share
$’000 $
Published net asset value 1,087,287 8.06
Change from mid-market pricing to bid pricing for investments (5,727) (0.04)
Net asset value under IFRS 1,081,560 8.02
 
2011 Per Participating
Total Preference Share
$’000 $
Published net asset value 1,241,698 9.20
Change from mid-market pricing to bid pricing for investments (4,496) (0.03)
Net asset value under IFRS 1,237,202 9.17

3. SIGNIFICANT AGREEMENTS AND RELATED PARTIES

MANAGER’S REMUNERATION AND TERMS OF APPOINTMENT

The Manager’s appointment is under a rolling contract which may be terminated by three months written notice given by the Fund and twelve months by the Manager.

Under the Management Agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly in arrears and is equal to 1.5% per annum, calculated and accrued on the net asset value of the Fund as at each weekly Valuation Day, except for investments in other funds, where the Manager will absorb the expenses of the management of other such funds to a maximum of 1% per annum of the value of the Fund’s holding in the relevant fund at the relevant time. The effective management fee on the average net assets of the Fund was 1.49% (2011: 1.49%). Where, in order to gain access to a particular market, investment is made in a vehicle directly managed by Genesis, no fee will be payable by the Fund on that proportion of its assets so invested, unless no management fee is charged to that vehicle.

ADMINISTRATION FEES

The Administrator, HSBC Securities Services (Guernsey) Limited, is entitled to receive a fee, payable monthly, based on time incurred. Administration fees were $198,000 (2011: $172,000) for the year.

CUSTODIAN FEE

Under the Custodian Agreement, HSBC Custody Services (Guernsey) Limited, as Custodian to the Fund, is entitled to receive a fee payable monthly, based on the net asset value of the Fund. Under the agreement between the Custodian and the Sub-Custodian, JP Morgan Chase Bank, the latter is also entitled to receive a fee calculated on the same basis as the Custodian’s fee. The Fund also reimburses the charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.13% (2011: 0.12%) per annum of the average net assets of the Fund.

DIRECTORS’ FEES AND EXPENSES

Included in Directors’ fees and expenses are Directors’ fees for the year of $173,000 in total (2011: $170,000). Also included are travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Fund.

RELATED PARTIES

The Genesis Indian Investment Company Limited and Genesis Smaller Companies SICAV were related parties of the Fund by virtue of having a common Manager in Genesis Asset Managers, LLP. The Fund’s holdings in these Funds are summarised in the portfolio statement of the Annual Financial Report, subscriptions and redemptions during the year under review are detailed below. There were no other transactions between the Fund and such related parties during the year except as noted above and there are no outstanding balances between these entities at 30th June 2012.

  2012
Subscriptions   Redemptions
$’000 $’000
Genesis Indian Investment Company Limited - 24,085
Genesis Smaller Companies SICAV 1,639 7,218
 
2011
Subscriptions Redemptions
$’000 $’000
Genesis Indian Investment Company Limited 11,003 8,458
Genesis Smaller Companies SICAV 1,000 25,149

These are not the statutory accounts. The Annual Financial Report for the year ending 30th June 2012 will be sent to shareholders and will be available for inspection at the registered office: Arnold House, St. Julian’s Avenue, St. Peter Port, Guernsey, GY1 3NF.

For Genesis Emerging Markets Fund Limited
HSBC Securities Services (Guernsey) Limited, Secretary
September 2012

END

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