Final Results

Baring Emerging Europe PLC Final Results for the year to 30 September 2008 The following represents extracts from the Company's Annual Report & the Financial Statements for the year to 30 September 2008. The full Annual Report and Financial Statements can be accessed via the Company's website at www.bee-plc.com. Copies will be mailed to shareholders shortly. FINANCIAL HIGHLIGHTS 2008 2007 Net asset value per ordinary share ("NAV") 711.41p 921.43p Earnings per ordinary share 10.28p 0.51p Dividends per ordinary share 9.00p 0.50p Share price 630.50p 835.50p Total expense ratio ("TER") (based on average monthly NAV) 1.17% 1.29% PERFORMANCE Year ended 30 September 2008 Net asset value per ordinary share -22.8% Share price -24.5% Benchmark* -24.8% *The benchmark is the MSCI EM 10/40 Index. DISCOUNT AT 30 SEPTEMBER 2008 2007 Discount to net asset value per share 11.4% 9.3% INVESTMENT OBJECTIVE The investment objective of the Company is to achieve long-term capital growth, principally through investment in Emerging European securities. THE INVESTMENT MANAGER The Investment Manager is Baring Asset Management Limited which is authorised and regulated by the Financial Services Authority. FINANCIAL CALENDAR Annual General Meeting for 2008 13 January 2009 Announcement of interim results â€“ May Announcement of final results â€“ December Interim report posted May Annual report posted December The Company's share price is published in the Financial Times. SPECIAL CONSIDERATIONS AND RISK FACTORS Shareholders should be aware that the value of the Company's Shares and the income from them may fluctuate. In addition, there is no guarantee that the market prices of shares in investment trusts will fully reflect their underlying Net Asset Value. The risks inherent in investment by the Company in Emerging Europe are of a nature and degree not typically encountered in investing in securities of companies listed on the major securities markets. Such risks are both political and economic and in addition to the normal risks inherent in any equity investment. Investment in the Company should be regarded as long-term in nature. There can be no guarantee that the Company's investment objectives will be achieved. CHAIRMAN'S STATEMENT COMPANY PERFORMANCE The year to 30 September 2008 proved to be extremely disappointing for investors in Emerging European equities and equity markets generally. Stock markets began to fall during the summer of 2008 and plummeted during September and October as the financial system teetered on the brink of disaster and governments were forced to rescue banks on both sides of the Atlantic. During the year ended 30 September 2008 the NAV of Baring Emerging Europe plc declined by 22.8% to 711.41p per share compared to a decline in the benchmark of 24.8%. At 1 December 2008 the NAV per share (including undistributed income) was 439.69p. On a more positive note, the dividend income from the investment portfolio almost doubled compared to 2007 whilst expenditure, including the investment management fee, increased only slightly. As a result the net revenue available for distribution increased from 0.51p per share for the year to 30 September 2007 to 10.28p per share for the current year (on a weighted average basis of the number of shares outstanding during the year) out of which the Directors are recommending a dividend of 9.00p per share. This level of dividend is obviously significantly much higher than last year and arose from a combination of growth and other one-off factors and should not be taken as an indication of the level of dividend in futureâ€ˆyears. DISCOUNT MANAGEMENT The Board believes that shareholders' interests are best served by containing the volatility of the discount and the Board has been willing to repurchase shares when the discount persistently exceeds the target set by the Board. At the year end the discount was 11.4% and for the year as a whole it averaged 8.1%. During the year ended 30 September 2008 2,061,202 shares were repurchased at a cost of Â£18.5 million. Subsequent to the year end a further 972,978 shares have been repurchased for cancellation. The Board prefers to have the flexibility to hold any shares repurchased in Treasury so that they can be reissued at a later date. The Board understands the concerns about a dilution of NAV by issuing shares at a discount. Therefore at the AGM the Board will again be putting forward resolutions to repurchase shares for cancellation or to be held in Treasury but to be reissued only at NAV or above. The Board recommends that shareholders support these resolutions. INVESTMENT POLICY The United Kingdom Listing Authority (UKLA) requires investment companies to publish a detailed investment policy containing information about the policies relating to asset allocation, risk diversification and gearing. The Company's investment policy was contained in the prospectus issued for the launch of the Company in 2002 and we have not sought to change this policy. The Company's detailed investment policy can be found in the Report of the Directors. VAT In 2007 the European Court of Justice ruled that VAT should not be levied on the management and performance fees of investment trust companies. With effect from 1 October 2007, VAT is no longer payable on these fees and the Company also has the right to reclaim VAT it has paid on these fees since its launch in December 2002. The Board is in discussion with the Investment Manager about the recovery of this VAT and although progress has been made a number of procedural matters have still to be resolved. Therefore no amount is, as yet, being recognised in the net asset value. Further information can be found in note 20 of the financial statements. ANNUAL GENERAL MEETING The next Annual General Meeting will be held on Tuesday, 13 January 2009 at 155 Bishopsgate, London EC2M 3XY commencing at 2.30pm. The formal business will be preceded by a presentation from the Investment Manager, after which there will be an opportunity for shareholders to raise any specific issues with the Investment Manager or with any member of the Board. BOARD On 23 July 2008 we appointed Jonathan Woollett as a Director of the Company. Jonathan was previously a director with the European Bank for Reconstruction and Development in London and has considerable experience within the region. His CV can be found in the Report of Directors on page 20. We are pleased to welcome him to the Board. INVESTMENT MANAGER On 1 December 2008 the Board was advised by Baring Asset Management ("Barings") that Martin Majdaniuk, the Company's portfolio manager, would be leaving Barings and would be replaced by Mathias Siller. I would like to thank Martin for his contribution to the running of the Company. Mr Siller joined Barings in October 2006 and is an investment manager within their Emerging European Equities team. He has eleven years of investment experience specialising in Central Europe and Turkey. The Board looks forward to working with him. OUTLOOK The investment environment in Emerging Europe remains extremely challenging. There are early signs that the co-ordinated global package to rescue the financial system has helped, but confidence remains fragile, and the effects of the "credit crunch" on the real economy are only now starting to be felt. The global recessionary environment is not helpful for the investment case for Emerging Europe. However we believe that the long-term drivers for the region remain intact, underpinned by high levels of infrastructure investment and demand for resources from the world's developing countries once global recession has worked its way through. Iain Saunders Chairman 3 December 2008 REPORT OF THE INVESTMENT MANAGER for the year ended 30 September 2008 INVESTMENT APPROACH At Baring Asset Management, we believe that a sound research process is the starting point of any successful investment approach. Some investment managers like to concentrate their research resources either on analysing companies, or on an assessment of which countries offer the most attractive returns. In our view it is most effective to analyse both companies and countries, with the goal of investing in the most attractive companies in the most attractive countries. Furthermore, we look at both companies and countries in the same way, in order to identify the optimal mix. Our research focuses on Growth at a Reasonable Price, on sensitivity to currency movements, and to other external factors; on the soundness or otherwise of government policy (in the case of a country), or business plan (in the case of a company); and last but not least, on the level of valuation. This research gives rise to an assessment of the fundamental drivers of return, and to this we add our own judgement as to the level of return we expect from each asset in which we might invest. We also check that the resulting rankings are consistent with the broader thematic developments we expect as a firm. These rankings then allow us to construct a disciplined, concentrated portfolio of our most attractive candidates. Construction of the portfolio also takes into account the risk side of the equation. Your Board has laid down for us certain limits and guidelines on the Company's investments which are designed to control excessive risk. We also pay close attention to the need to run a diversified portfolio, which is at the core of any approach to risk management. We invest in traditionally volatile markets, and it is important that your Company is not excessively exposed to any one company, country or sector. REVIEW OF THE PAST YEAR During the year under review, the NAV per share of your Company decreased by 22.8% from 921.43p to 711.41p, while the MSCI Emerging Europe 10/40 Index decreased by 24.8%. Although the absolute return is clearly disappointing, there was a relative out-performance of 2.0% during the period. Both asset allocation and stock selection contributed positively to this result. Although the global investment backdrop has deteriorated rapidly during the year, your Company made a number of portfolio changes in order to protect capital and maintain its investment focus on robust companies in difficult market conditions. Markets - Investment Summary The past financial year proved to be very challenging for Emerging European equities, as both domestic and international investment conditions deteriorated rapidly. The crisis did not start in Emerging Europe, where markets remained relatively robust until the summer. It was only as the tremors from the credit crunch in the developed world brought financial institutions to their knees that investors began to understand that the combination of frozen credit markets, leveraged investors and worsening economic conditions were a toxic cocktail for emerging stock markets as well. Although the effects have been very severe, the causes are familiar: excessive amounts of borrowing and poor lending practices in the financial system globally triggered a crisis of confidence. Investor appetite for risk collapsed, and banks stopped lending to each other, concerned at the risk of default in this environment. The authorities around the world undertook measures to restore confidence in the banking system by committing more than US$1 trillion in support of the sector. This financial rescue was crucial in order to avoid a collapse of the banking system. However, the global economic outlook remains bleak. Many economies are either in recession or rapidly revising downwards their short and medium term expectations. As described, the Emerging European markets proved to be quite resilient in the early stages of the crisis, as Russia was supported by high commodity prices, while strong economic momentum in Central Europe and Turkey delivered good earnings growth. This was not to last, however as it became apparent that banking problems were not isolated to a few developed countries but would spread to most, if not all, asset classes globally. The first evidence that the crisis was spreading came as commodity prices fell on the back of worsening news from the real economy or "Main Street" as the Americans call it. Speculative capital which had exaggerated the upturn in prices was recalled by lenders as their own balance sheets deteriorated. The Russian economic situation and investment climate was also hurt by political interference in business and by the military intervention in Georgia. The Central European and Turkish case would have normally benefited from what were now falling energy prices, but the decision of many investors to reduce exposure to "risky" assets put substantial pressure on their currencies. It also started to become clear that the European Union, the main trading partner for these countries, was likely to head into recession, depressing estimates of future economic activity in the region. PORTFOLIO REVIEW Investment conditions were exceptionally difficult during the reporting period. Your Company was able to deliver returns ahead of both the index and comparable peers, but the weakness experienced in markets still meant that the portfolio declined in value along with equities across the Emerging Europe region. Stock selection was the main factor behind this better performance, highlighting the importance of focusing on high quality investments. The Investment Manager's research efforts allowed a concentration of portfolio holdings in investments where confidence was high. Asset allocation also had a positive effect, but this year it was less important than stock selection. The stocks contributing most positively to returns during the year were ENRC (a producer of ferrochrome in Kazakhstan), Tekfen Holdings (construction and fertilizer in Turkey), International Personal Finance (personal lending in Central Europe) and Eurocash (Polish food retail). These companies, along with others which contributed positively, share key characteristics: strong focus on shareholder return; high management quality; and an ability to generate free cash flow. These are the main points on which our investment process focuses. The main detractors from performance were Gazprom (Russian gas producer), Peter Hambro (gold mining in Russia) and Ferrexpo (Ukrainian iron ore producer); all three of these companies suffered from a collapse in investor confidence and sharply falling commodity prices during the reporting period. While strong businesses, all these companies were overwhelmed by global events. The majority of the portfolio (54%) at the end of the period remains invested in Russia. The second largest exposure is Poland with a 12% weighting, followed by Turkey and Czech Republic with around 10% each. The Hungarian exposure remains very limited due to economic concerns. The country allocation has not added significantly to performance. However, the timely disposal of Hungarian assets and a reduction in Russian exposure did benefit marginally. The underweight position in Turkey and Poland relative to the index detracted from performance, although stock selection in these countries added value. At a sector level, the largest absolute exposure has been to energy, financials and telecommunications, whereas the largest contribution to performance has been from the consumer, industrial and utility sectors. We remain slightly cautious on the energy sector since cash generation by Russian producers is likely to be less positive than previously. Nevertheless, we are less cautious than we were, as share price valuations in the sector are now compelling, in our view, and deep value has started to emerge. Materials exposure was a major driver of performance earlier in the year, and our decision to take profits and move to an underweight position proved well timed. In particular, we have been actively reducing exposure to base metals such as copper, nickel and aluminium in anticipation of weakening demand in a recessionary environment. We also reduced exposure to banks and real estate during the period, as the economic downturn is expected to reduce earnings growth in these sectors. The Emerging Europe banking institutions have not invested directly in low quality bond investments, but they do feel the ripple effects in the form of reduced access to funding and overall negativity towards the banking sector. COUNTRY REVIEW AND OUTLOOK Although the current global environment does not provide a great deal of comfort for equity investors, we believe the long-term fundamental drivers for Emerging Europe remain intact. Short-term developments may bring further deterioration as investors adjust to the idea of global recession, but we believe there will still be scope to generate returns from careful stock selection. Investor confidence is very low, but so are valuations. Once the scale of the downturn is more apparent, we believe that equity markets will be able to make progress. Russia The Russian equity market was disappointing during the period as it declined by 40% in US dollar terms, underperforming regional and global peers. The "perfect storm" for the Russian equity market unfolded as a string of negative events took place in fairly rapid succession. The global credit crunch dramatically reduced investors' appetite for risk and Russia could not avoid experiencing rapid capital outflows. As the crude oil price climbed to a record US$147 per barrel in July 2008, investors' expectations for superior economic performance rose. The sharp reversal to below US$100 per barrel by the end of the period quashed these expectations. Meanwhile, the military intervention in Georgia further damaged investor sentiment and prompted capital flight, although it had no economic impact on the investment case. Finally, Mr Putin added fuel to the fire by openly criticising coal company Mechel for its pricing policy. This combination of international and domestic developments put severe selling pressure on Russian assets, including the Rouble, which had benefited from petro-currency status. Economic performance in Russia is as always largely dependent on the direction of the oil price and the global liquidity squeeze will inevitably exert pressure on growth. Russian GDP is still on course for a 7% increase in 2008, but the outlook is less buoyant with the oil price (at the time of writing) at around US$50 per barrel and with talks about a gradual rouble devaluation into 2009, GDP growth is expected to fall to between 3% and 4% in 2009, although this is still impressive in a global context. There is a caveat, however, which is that forecasting is very difficult at present: global banking worries are not yet resolved; and the oil price needs to stabilise after its very turbulent performance since the late spring. Russian foreign exchange reserves of US$540 billion at the end of the period are expected to serve as an economic cushion during the global slow-down. They will be used to help maintain currency stability, to shore up bank capital and to invest in important infrastructure projects which will raise potential growth in the future. The political landscape in Russia changed in spring 2008 as Mr Putin's second term as President ended and Mr Medvedev took over as the new leader. As expected, Mr Putin has not departed the political scene and continues as Russia's Prime Minister. The current situation remains stable. Responsibilities are divided between the two camps, and future political stability relies on the ability of these two leaders to act in concert. This is likely, in our view, as Mr Medvedev behaves like a loyal protÃ©gÃ©, while the vast majority of power is still concentrated in Mr Putin's hands. Although the macroeconomic and political backdrop remains supportive for Russia, your Company is currently underweight its benchmark in Russian equities. In this highly uncertain world, where investor appetite for risk is likely to remain low, and where economic growth everywhere is likely to slow or turn negative, we believe a degree of caution on the immediate prospects for the Russian market is warranted. Turkey The return from Turkish equities during the reporting period also proved to be disappointing, with a 36% decline in US dollar terms. Turkey remains one of the highest risk opportunities in the region because of its large current account deficit and inadequate access to funding. The deficit is largely driven by high energy prices, as Turkey imports around 90% of its oil and gas needs while reliable funding from foreign direct investments and portfolio flows is likely to be severely challenged in an environment of risk aversion. Although the falling oil price provides relief to Turkey, it still remains at a high level in absolute terms. We believe further deterioration would trigger weakness in the Turkish Lira and a further erosion of investor confidence. After a positive outcome from elections in 2007, the Turkish political landscape looked to be stable. During spring 2008, the market was surprised by an unexpected court decision against the ruling AKP party on the basis of its anti-secular policies. Although in the end, the decision was reversed, the political uncertainty pushed Turkish assets lower and resulted in capital outflows. The credit crunch provided a fresh set of worries. Although Turkish banks did not expose themselves to poor quality US debt and retain high capital adequacy ratios, they have been unable to avoid the global weakness in equity markets. Turkey has been a favourite market for investors who chose to participate in the so-called "carry trade" - borrowing money cheaply in a foreign currency such as the Swiss Franc or Japanese Yen, and investing the proceeds in high yielding assets such as Turkish bonds or bills. This worked well while markets were relatively stable, but in the current environment, investors have sought to reduce their investment risk. Turkish assets have not been spared, in spite of the value they offer. Your Company remains underweight its benchmark in Turkey, because of economic uncertainty and heavy reliance on external funding. Stock selection, though, has been positive, and we are monitoring investment opportunities which enable exposure to the broader Middle East region. Examples include companies like Enka and Tekfen. Central Europe (Poland, Hungary, Czech Republic) The equity returns for the three main markets in Central Europe accurately reflected their economic performance. Polish and Czech equities were the region's best performers, as economic activity in these two countries remained robust. GDP growth in these economies is also expected to moderate in 2009 although at this point we do not forecast a "recession", but rather an orderly slowdown to 2-3% in Poland and 1-2% for the Czech Republic. Hungarian equities, on the other hand, fell sharply as an already weak economy was further depressed by currency headwinds and high commodity prices. The Polish economic climate remained fairly robust even through global turbulence. The three structural forces for growth held steady. Domestic consumption, EU-driven investments and remittances from overseas workers, all contributed positively. The Polish consumer operates without significant levels of debt and, because of significant labour shortages, real income growth continues to support economic activity. Funds from the European Union channelled to infrastructure-related projects continued to flow in. The outlook is likely to deteriorate in-line with the weakening global cycle, but the financial sector in Poland remains healthy and the economy is not burdened with debt, so we expect the effect to be relatively mild. Although the Polish Zloty has come under some pressure, the country's low dependence on foreign trade (exports are 25% of GDP compared with 50-60% in the Czech Republic), should help insulate it from the storm outside. The portfolio is positioned to benefit from relative economic stability in Poland, and has notable exposure to Polish banks. The Czech economy proved its resilience in a similar manner to the Polish economy as domestic momentum and foreign inflows boosted activity even as Western Europe faltered. The outlook is deteriorating, however, as the economy is largely dependent on international trade because of its heavy reliance on exports. Even so, we believe that, with careful stock selection, the high dividend yield and steady cash generation of many Czech companies warrant a sizeable portfolio exposure in this environment. Finally, the Hungarian economy continued to struggle as domestic consumption remained subdued for a third year running. The size of the twin deficits in Hungary and lack of substantial foreign exchange reserves to defend its deteriorating position does not bode well for the future. The combination of low economic growth in Western Europe and lack of any domestic stimulus creates a serious currency and funding risk in Hungary. Your Company retains a very low exposure, and the current environment suggests that full withdrawal may be necessary as the investment risk is increasing. In summary, Emerging European equities have been hurt by the global turmoil. The financial crisis has left nowhere to hide, and those countries with weak finances are still vulnerable to a flight from risk. Nevertheless, we remain optimistic about the long term outlook for the region although the short term picture remains unpredictable. We look now to take advantage of the opportunity to buy well managed companies at distressed prices. The sell-off has been indiscriminate, and with volatility at extreme levels, our research is focused on finding such opportunities. INVESTMENT PORTFOLIO The Company's portfolio at 30 September 2008, is set out in the following table: Country Market % of Value Holding of Listing Â£000 Portfolio 1 Gazprom Russia 29,626 10.94 2 Lukoil Holdings Russia 25,863 9.56 3 Sberbank Russia 17,055 6.30 4 CEZ Czech 16,946 6.26 Republic 5 Mobile Telesystems Russia 14,792 5.46 6 Rosneft Russia 12,427 4.59 7 Powszechna Kasa Poland 11,591 4.28 8 Vimpel Comm Russia 10,737 3.97 9 Garanti Bank Turkey 8,065 2.98 10 Bank Pekao Poland 7,752 2.86 11 Evraz Russia 6,799 2.51 12 Norilsk Nickel Russia 6,764 2.50 13 OTP Bank Hungary 6,278 2.32 14 Tupras Petrol Turkey 6,187 2.29 15 Oriflame Cosmetics Sweden 5,796 2.14 16 AO Tatneft Russia 5,444 2.01 17 Enka Insaat Turkey 5,259 1.95 18 International Personal United 5,253 1.94 Finance Kingdom 19 Telefonica O2 Czech 4,692 1.73 Republic 20 Uralkaliy Russia 4,552 1.68 21 Novatek Russia 4,531 1.67 22 Turkcell Iletisim Turkey 4,395 1.62 23 Akbank Turkey 4,342 1.60 24 Komercni Banka Czech 4,203 1.55 Republic 25 Sibirskiy Cement Russia 4,031 1.49 26 Kardan Netherlands 3,932 1.45 27 Eurocash Poland 3,884 1.43 28 Tekfen Holdings Turkey 3,620 1.34 29 Novolipetsk Iron Russia 3,155 1.17 30 Pharmstandard Russia 2,626 0.98 31 BRE Poland 2,617 0.97 32 Globe Trade Centre Poland 2,475 0.91 33 PBG Poland 2,318 0.86 34 Peter Hambro Mining United 2,254 0.83 Kingdom 35 Vostok Nafta Sweden 2,241 0.83 36 BK Zachodni Poland 1,874 0.69 37 Turkiye Halk Bankasi Turkey 1,723 0.64 38 Turkiye Vakiflar Turkey 1,388 0.51 39 Steppe Cement Malaysia 1,101 0.41 40 Ferrexpo United 1,074 0.40 Kingdom 41 Akcansa Cimento Turkey 1,035 0.38 Total 270,697 100.00 investments CLASSIFICATION OF ASSETS The Sector Split of the Company's Portfolio as per MSCI Sector at 30 September 2008 was: Percentage Classification of Assets Based on Valuation Net Current Czech Other Assets/ Total Total Russia Hungary Poland Republic Turkey Countries (Liabilities) 2008 2007 Consumer - - 1.4 - - - - 1.4 1.7 Discretionary Consumer Staples - - - - - 2.1 - 2.1 1.8 Energy 28.6 - - - 2.3 - - 30.9 22.5 Financials 6.3 2.3 9.7 1.6 5.7 4.3 - 29.9 31.3 Healthcare 0.9 - - - - - - 0.9 0.7 Industrials 1.3 - 0.9 - - 0.4 - 2.6 2.7 Information - - - - - - - - 0.7 Technology Materials 7.9 - - - 0.4 1.2 - 9.5 15.7 Telecommunication 9.4 - - 1.8 1.7 - - 12.9 10.1 Services Utilities - - - 6.2 - - - 6.2 9.5 Total equity 54.4 2.3 12.0 9.6 10.1 8.0 - 96.4 96.7 investment Net current - - - - - - 3.6 3.6 3.3 assets/ (liabilities) Total 2008 54.4 2.3 12.0 9.6 10.1 8.0 3.6 100.0 - Total 2007 57.6 5.6 8.9 5.4 12.6 6.6 3.3 - 100.0 Company Weighting versus Benchmark on Country of Listing Level at 30 September 2008 Company Benchmark Czech Republic 9.6 8.1 Hungary 2.3 7.1 Kazakhstan 0.4 - Netherlands 1.4 - Poland 12.0 16.0 Russia 54.4 53.2 Sweden 2.8 - Turkey 10.1 15.6 United Kingdom 3.4 - Cash 3.6 - 100.0 100.0 Source: Barings, MSCI PERFORMANCE The year's performance of the Company against the benchmark index is shown in the following graph: Baring Asset Management Limited 27 November 2008 REPORT OF THE DIRECTORS INCORPORATING THE BUSINESS REVIEW for the year ended 30 September 2008 Â The Directors submit to the shareholders their business review, report and the audited financial statements of the Company for the year ended 30 September 2008. BUSINESS REVIEW Business and Tax Status The Company carries on business as an investment trust and as such it has received specific approval from the Inland Revenue under the provisions contained in Section 842 of the Income and Corporation Taxes Act 1988. Approval for the year ended 30 September 2007 is subject to there being no subsequent enquiry into our Corporate Self Assessment. In the opinion of the Directors the Company has subsequently directed its affairs so as to enable it to continue to seek such approval. The Company is an investment company as defined in Section 833 of the Companies Act 2006. The Company is managed by external parties in respect of investment management, custodial services and the day-to-day accounting and company secretarial requirements. Investment management services are provided by Baring Asset Management Limited ("Barings") and details of the agreement with Barings are given in note 3 to the accounts. The Custodian is State Street Bank & Trust Company Limited. Secretarial services are provided by Northern Trust International Fund Administration Services (UK) Limited. The Company has no employees. The Directors are all non-executive. Investment Objective The investment objective is to achieve long-term capital growth, principally through investment in securities listed on or traded on an Emerging European securities market or in securities of companies listed or traded elsewhere, whose revenues and/or profits are, or are expected to be, derived from activities in Emerging Europe. The primary objective of the Company as set by the Board is to outperform its competitors. Investment Policy The policy of the Directors is that, in normal market conditions, the portfolio of the Company should consist primarily of diversified securities listed or traded on Emerging European securities markets (including over the counter markets, which, in the Company's case, would include the Russian Trading System). Equity securities for this purpose include equity-related instruments such as preference shares, convertible securities, options, warrants and other rights to subscribe for or acquire, or relating to, equity securities. The Company may also invest in debt instruments such as bonds, bills, notes, certificates of deposit and other debt instruments issued by private and public sector entities in Emerging Europe. In addition, Emerging European exposure may be obtained by indirect means. Investments may, for example, be made in securities of companies listed on securities markets outside Emerging Europe that derive, or are expected by the Directors to derive, the majority of their revenues and/or profits and/or growth from activities in Emerging Europe. The Company may also invest in other funds in order to gain exposure to Emerging Europe where, for example, such funds afford one of the few practicable means of access to a particular market, or where such a fund represents an attractive investment in its own right. The Company will not invest more than 15% of its gross assets in other UK listed investment companies (including investment trusts). The Company may from time to time invest in unquoted securities, but the amount of such investment is not expected to be material. Furthermore the Board has agreed that the maximum exposure to unquoted securities should be restricted to 5% of the Company's net assets. For the purposes of this investment policy the Board has defined Emerging Europe as the successor countries of the former Soviet Union, Poland, Hungary, the Czech Republic, Slovakia, Turkey, the States of former Yugoslavia, Romania, Bulgaria and Albania. There is no restriction on the proportion that may be invested in these countries. In addition the Board has agreed that up to up to 2% of the total assets may be invested in other countries provided that any investments made are companies listed on a regulated stock exchange. In order to comply with the provisions contained in Section 842 of the Income and Corporation Taxes Act 1988 no investment in a company should represent more than 15% by value of the Company's total portfolio except for subsequent market movements in the value of that investment. Furthermore the Board has agreed that the maximum value of any one investment should not exceed 12% of the Company's total portfolio save with the prior written consent of the Board. Where excess occurs due to market movement the manager will notify the Board of this and will reduce the holding to below 12% within six months. In addition to the above restriction on investment in a single Company the Board seeks to achieve a spread of risk in the portfolio through monitoring the country and sector weightings of the portfolio. There will be a minimum of 30 stocks in the portfolio. The Company's Articles provide that the Company may borrow an amount equal to its share capital and reserves. At 30 September 2008, the only loan facility in place was a US$10 million unsecured loan and overdraft facility with State Street Bank and Trust Company Limited which is used principally to cover timing differences on portfolio transactions. The Board was negotiating a short-term gearing facility of up to US$60m, but the discussions have been put on hold until markets stabilise. The Board believes that the markets in which the Company invests are too volatile to warrant long-term gearing. Dividends The Board does not seek to target any particular level of dividend, and intends rather to distribute by way of dividend most of the net earnings available for this purpose. The Board recommends an annual dividend of 9.00p per share compared with 0.50p for the previous period. Subject to the approval of the Annual General Meeting, the recommended annual dividend will be paid on 4 February 2009 to members on the register at the close of business on 9 January 2009. The shares will be marked ex-dividend on 7 January 2009. Discount The Directors have adopted a firm policy with regard to the market rating of the Company's shares. At all times the Board will seek to limit the discount to NAV at which the Company's shares trade to a level significantly lower than the 12% trigger level referred to in the next paragraph, using as necessary the Company's share repurchase authority. During the year ended 30 September 2008, 2,061,202 shares were repurchased at a cost of Â£18,491,000 (1,782,199 shares were repurchased during the year ended 30 September 2007 at a cost of Â£ 13,713,000). Any shares repurchased will either be held in treasury and may be issued at a later date at or above net asset value, or cancelled. If the average closing mid-market price at which the Company's shares trade in the market in the period of ninety days prior to the publication of the Company's preliminary results each year represents a discount to NAV which exceeds 12%, the Company will offer to repurchase, by way of tender available to all shareholders, up to 15% of the outstanding issued share capital at 95% of NAV (after taking account of any expenses including the costs of selling investments in order to fund the repurchase). Performance At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives of which the most important are as follows: - Performance against the peer group The Board monitors performance relative to a broad range of competitor funds, as defined by the S&P Micropal Equity Europe Emerging markets universe. In the year ended 30 September 2008 the Company was ranked 32nd out of 130 funds in this universe. Over three years to 30 September 2008 it was ranked 13th out of 126 funds and over five years it was ranked 9th out of 114 funds. - Performance against the benchmark index A chart of NAV performance versus benchmark since inception (total return) is set out in the Directors' Remuneration Report on page 29. - Discount to NAV In the year ended 30 September 2008 the shares traded at an average discount of 8.1%. - TER The TER is an expression of the Company's management fees and other operating expenses as a percentage of average net assets over the year. The TER for the year ended 30 September 2008 was 1.17% excluding performance fee (2007: 1.29%). A performance fee of Â£128,000 is payable in respect of the year ended 30 September 2008 (2007: no performance fee was payable). The Board reviews each year an analysis of the Company's TER and a comparison with its peers. Principal Risks The key risks to the Company fall broadly under the following categories: - Investment and Strategy The Board regularly reviews the investment mandate and long-term investment strategy in relation to the market and economic conditions. The Board also regularly monitors the Company's investment performance against the benchmark and the peer group and its compliance with the investment guidelines. - Accounting, Legal and Regulatory In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ("Section 842"). A breach of Section 842 in an accounting period could lead to the Company being subject to corporation tax on gains realised in that accounting period. Section 842 qualification criteria are continually monitored by Baring Asset Management Limited and the results reported to the Board at its regular meetings. The Company must also comply with the Companies Acts and the UKLA Listing Rules. The Board relies on the services of the administrator, Northern Trust International Fund Administration Services (UK) Limited and its professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules. - Loss of Investment Team or Investment Manager A sudden departure of the Investment Manager or several members of the investment management team could result in a short-term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team-based approach, as well as special efforts to retain key personnel. - Discount A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Company's broker to follow with regard to the buy-back of shares. - Corporate Governance and Shareholder Relations Details of the Company's compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Report on pages 21 to 24. - Operational Like most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of the Investment Manager and the Company's service providers. The security, for example, of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These are regularly tested and monitored. The custodian and the Investment Manager also produce annual reports on internal controls which are reviewed by their respective auditors and give assurance regarding the effective operation of controls. - Financial The financial risks faced by the Company are disclosed in note 19 on pages 45 to 48. 2. DIRECTOR The present Directors are listed below and on page 2. They are all non-executive and have all served throughout the year, except for Jonathan Woollett who was appointed on 23 July 2008. Iain Saunders (61) spent 30 years with the Fleming group until his retirement in 2001, latterly as deputy chairman of Robert Fleming Asset Management. He is at present chairman of the Czech & Slovak Investment Corporation, MB Asia Select and a number of JPMorgan UCITS funds. He was appointed Chairman of Baring Emerging Europe PLC on 11 October 2002 and had been a director of the predecessor company, The Baring Emerging Europe Trust PLC, since 2001. Steven Bates (51) spent 18 years with the Fleming group until 2002, latterly as co-head of emerging markets of JPMorgan Fleming Asset Management. He has extensive experience in both emerging and developed markets. He is a director of Zephyr Management UK Limited which is a specialist asset management business and is also on the board of a number of financial companies involved in emerging markets. He was appointed a Director of Baring Emerging Europe PLC on 27 January 2003. John Cousins (68) was formerly chief executive of BZW Puget MahÃ© in Paris and managing director of BZW Equities in London. Prior to that, he held various posts with Kleinwort Benson and has over 30 years of experience in international equity investment. He is a former chairman of the International Equity Rules and Compliance Committee of the London Stock Exchange. He was appointed a director of Baring Emerging Europe PLC on 11 October 2002 and had been a director of The Baring Emerging Europe Trust PLC since 1994. Josephine Dixon (49) is a director of Finsbury Worldwide Pharmaceutical Trust PLC, and is a Chartered Accountant who has previously held a number of senior executive positions, including that of finance director in a publicly quoted company. She is also a member of the Greenwich Hospital Trust. She was appointed a Director of Baring Emerging Europe PLC on 5 July 2004. Saul Estrin (56) is a Professor and Head of the Department of Management at the London School of Economics where he is a specialist on emerging markets. He was formerly a Professor at the London Business School and Research Director of the Centre for New and Emerging Markets, which analysed the prospects for private sector development and business opportunities in emerging markets. He has written numerous books and articles on emerging economies. He was appointed a Director of Baring Emerging Europe PLC on 5 July 2004. Jonathan Woollett (51) spent 10 years with the European Bank for Reconstruction and Development ("EBRD") in London until January 2008 where he was responsible for the EBRD's debt as well as equity activities with non-bank financial institutions in Central and Eastern Europe. Prior to that he was a director at Credit Suisse Asset Management where he was responsible for the establishment of asset management and mutual fund businesses in Central and Eastern Europe. Prior to Credit Suisse, he worked for UBS and started his banking career with Deutsche Bank in 1979. He is on the supervisory boards of two privately owned insurance companies in Russia and Ukraine as well as the supervisory board of Allianz Slovenska poistovna AS in Slovakia. He is also a partner of a private equity manager, Acoro Capital Partners LLP, which focusses on investments in unlisted financial services companies in Central and Eastern Europe. In accordance with the Articles of Association John Cousins and Steven Bates retire by rotation and being eligible, offer themselves for re-election. Jonathan Woollett having joined the Board on 23 July 2008, will also seek election at the Annual General Meeting. The Directors' interests in the Company's shares, as shown in the register kept pursuant to Section 325 of the Companies Act 1985, are stated below: 1 December 30 September 30 September 2008 2008 2007 Beneficial: Iain Saunders 30,000 30,000 60,000 Steven Bates 3,000 3,000 3,000 John Cousins - - - Josephine Dixon 2,325 2,325 2,325 Saul Estrin 1,000 1,000 1,000 Jonathan Woollett (appointed as a - - - Director on 23 July 2008) There were no contracts or arrangements subsisting during or at the end of the financial year in which any Director is or was materially interested. No Director held a shareholding in any of the investments in the Company's portfolio during the year ended 30 September 2008. 3. SUBSTANTIAL SHAREHOLDINGS At 1 December 2008, the Company had received notification of the following disclosable interests in the ordinary share capital of the Company: Sarasin & Partners LLP 4,035,371 shares 10.50% City of London Investment Management Ltd 2,962,625 shares 7.71% Legal & General Group plc 1,406,000 shares 3.66% 4. CORPORATE GOVERNANCE Introduction The Board is accountable to the Company's shareholders for the governance of the Company's affairs and this statement describes how the principles of the Combined Code on Corporate Governance ("the Code") issued by the Financial Reporting Council in 2006 have been applied to the affairs of the Company. In applying the principles of the Code, the directors have also taken account of the Code of Corporate Governance published by the Association of Investment Companies ("the AIC Code"), which has established a framework of best practice specifically for the Boards of investment trust companies. There is some overlap in the principles laid down by the two Codes and there are some areas where the AIC Code is more appropriate for investment trust companies. Applications of the Code's Principles The Board is committed to high standards of corporate governance and seeks to observe the principles and supporting principles identified in the Code and, where appropriate, the principles identified in the AIC Code. It should be noted that, as an investment trust, most of the Company's day-to-day responsibilities are delegated to third parties and the Directors are all non-executive. Thus not all the provisions of the Code are directly applicable to the Company. The Board The Board currently consists of six non-executive Directors and is chaired by Iain Saunders. All the Directors are considered by the Board to be independent of the Investment Manager. Their biographies are set out on pages 19 and 20. Collectively the Board has the requisite range of business and financial experience which enables it to provide clear and effective leadership and proper stewardship of the Company. The number of meetings of the Board, the Audit Committee and the Nomination Committee held during the financial year and the attendance of individual Directors are shown below: Board Audit Nomination Number of meetings in the year 4 2 2 Iain Saunders 4 2 2 Steven Bates 4 2 2 John Cousins 4 2 2 Josephine Dixon 3 2 1 Saul Estrin 4 2 2 Jonathan Woollett (appointed as a Director on 23 July 1 - 1 2008) All of the Directors attended the Annual General Meeting held in January 2008, (except Jonathan Woollett who was appointed as a Director on 23 July 2008). The Board deals with the Company's affairs, including the consideration of overall strategy, the setting and monitoring of investment policy and the review of investment performance. The Investment Manager takes decisions as to asset allocation and the purchase and sale of individual investments. The Board papers circulated before each meeting contain full information on the financial condition of the Company. Key representatives of the Investment Manager attend most of the Board meetings, enabling Directors to probe further or seek clarification on matters of concern. Matters specifically reserved for discussion by the full Board have been defined and a procedure adopted for the Directors to take independent professional advice if necessary at the Company's expense. The Chairman of the Company is a non-executive Director. A senior non-executive Director has not been identified as the Board is comprised entirely of non-executive Directors. In accordance with the Articles of Association new Directors stand for election at the first Annual General Meeting following their appointment. The Articles require that one third of the Directors retire by rotation each year and seek re-election at the Annual General Meeting. In addition, all Directors are required to submit themselves for re-election at least every three years and will seek annual re-election if they have already served for more than nine years or are aged over 70. Performance Evaluation/Re-election of Directors An appraisal process has been established in order to review the effectiveness of the Board, the Committees and individual directors. This process involves the consideration by the Chairman and the Board of responses from individual directors to a questionnaire which is completed on an annual basis. In addition the other directors meet collectively once a year to evaluate the performance of the Chairman. As a result of this evaluation, the Nomination Committee recommends the election of Jonathan Woollett and the re-election of John Cousins and Steven Bates who retire by rotation and offer themselves for re-election at the Annual General Meeting. John Cousins is required to seek annual re-election to the Board as he has served for more than nine years when his service on the board of The Baring Emerging Europe Trust PLC (the predecessor company) is included. Mr Cousins continues to make a significant contribution to the Board's deliberations and the Nomination Committee is satisfied that his independence is not affected by his length of service. The performance of the Company is considered in detail at each Board meeting. Board Committees The Board believes that the interests of shareholders in an investment trust company are best served by limiting its size so that all Directors are able to participate fully in all the activities of the Board. It is for this reason that the membership of the Audit and Nomination Committees is the same as that for the Board as a whole. Audit Committee Miss Dixon is the Chairman of the committee which meets at least twice a year and is responsible for reviewing the annual and interim reports, the nature and scope of the external audit and the findings therefrom, and the terms of appointment of the Auditors, including their remuneration and the provision of any non-audit services. Non audit services provided by the Auditors mainly comprised work on the Company's taxation affairs. The committee has considered the independence of the Auditors and the objectivity of the audit process and is satisfied that KPMG Audit Plc has fulfilled its obligations to shareholders. It also regularly reviews the terms of the different service providers to the Company including contracts with the Investment Manager, the Company Secretary and the Custodian. The Audit Committee meets representatives of the Investment Manager and its Compliance Officer who report as to the proper conduct of business in accordance with the regulatory environment in which both the Company and the Investment Manager operate. The Company's external Auditors also attend this committee at its request and report on their findings in relation to the Company's statutory audit. As the Company has no employees, section C.3.4 of the Code, which deals with arrangements for staff to raise concerns in confidence about possible improprieties in respect of financial reporting or other matters, is not directly relevant to it. The Audit Committee has however, confirmed with the Investment Manager and the administrator that they do have "whistle blowing" policies in place for their staff. The Chairman of the Audit Committee will be present at the AGM to deal with questions relating to the financial statements. Nomination Committee The Committee, which meets at least annually, reviews the Board's size and structure and is responsible for Board succession planning. During the year the Nomination Committee identified Jonathan Woollett as a suitable Director. Mr Woollett has significant experience in the Emerging Europe region and the Nomination Committee concluded that he would be a valuable addition to the Board. Remuneration The Board as a whole considers Directors' remuneration and therefore has not appointed a separate remuneration committee. As the Company is an investment trust and all Directors are non-executive, the Company is not required to comply with the Code in respect of executive Directors' remuneration. Directors' fees are detailed in the Directors' Remuneration Report on page 28. Internal Controls The Board has established a process for identifying, evaluating and managing significant risks faced by the Company. The process is subject to regular review by the Board and accords with "Internal Control: Guidance for Directors on the Combined Code" ("The Turnbull guidance") which was issued in September 1999 and revised in September 2005. The Directors are responsible for the Company's system of internal control which is designed to safeguard shareholders' investment and the Company's assets. These systems of internal control are designed to provide reasonable but not absolute assurance against material misstatement or loss. The Turnbull guidance recommends a risk-based approach to the assessment of internal controls. The Board has completed a risk map for the Company and established procedures for the monitoring and review of the risks identified. The Board as a whole is primarily responsible for the monitoring and review of risks associated with investment matters and the Audit Committee is primarily responsible for other risks. As the Board has contractually delegated to external parties the investment management, the custodial services and the day-to-day accounting and company secretarial requirements, the Company relies significantly upon the internal controls operated by those companies. Therefore the Directors have concluded that the Company should not establish its own internal audit function. The Board continues to monitor its system of internal control in order to ensure it operates as intended and the directors review annually whether an internal audit function is required. Investment management services are provided by Baring Asset Management Limited ("Barings") and details of the agreement with Barings are given in note 3 to the accounts. The Custodian is State Street Bank & Trust Company Limited. Secretarial services are provided by Northern Trust International Fund Administration Services (UK) Limited. The risk map has been considered at all regular meetings of the Board and Audit Committee. As part of the risk review process, regular reports are received from the Investment Manager on all investment matters including compliance with the investment mandate, the performance of the portfolio compared with the benchmark and compliance with investment trust status requirements. The Board also receives and reviews annual reports from the Investment Manager and the Custodian on their internal controls and their operation. These reports are designed to provide details of the internal control procedures operated by the relevant entity and include a report by an independent reporting accountant. The Board confirms that appropriate procedures to review the effectiveness of the Company's system of internal control have been in place which cover all controls including financial, operational and compliance controls and risk management. An assessment of internal control, which includes a review of the Company's risk map, an assessment of the quality of reports on internal control from the service providers and the effectiveness of the Company's reporting process, is carried out on an annual basis. Accountability and Audit Set out on page 30 is a statement by the Directors of their responsibilities in respect of the accounts. The Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the accounts, as the assets of the Company consist mainly of securities which are readily realisable. As noted earlier, an Audit Committee has been established consisting of independent Directors. The Board as a whole regularly reviews the terms of the management and secretarial contracts. The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditors are unaware; and each Director has taken all the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Company's Auditors are aware of that information. The Directors were covered by directors' and officers' insurance that was in place during the financial year and at the date of this report. Relations with Shareholders The Board regularly reviews the Investment Manager's contacts with the Company's shareholders and monitors its shareholder profile. The Board supplements this with some direct contact with shareholders and is available to speak with any shareholder who wishes to do so. The Board supports the principle that the Annual General Meeting be used to communicate with private investors. The full Board attends the Annual General Meeting and the Chairman of the Board chairs the meeting. Details of the proxy votes received in respect of each resolution are made available to shareholders at the meeting. The Investment Manager attends to give a presentation to the meeting. A quarterly newsletter is produced by the Investment Manager and is available to shareholders. If a shareholder would like to contact the Board directly, he or she should write to the Chairman at 155 Bishopsgate, London EC2M 3XY and mark their letter private and confidential. Evaluation of Performance of Investment Manager The investment performance is reviewed at each regular Board meeting at which representatives of the Investment Manager are required to provide answers to any questions raised by the Board. The Board has instigated an annual formal review of the Investment Manager which includes consideration of: - performance compared with benchmark and peer group; - investment resources dedicated to the Company; - investment management fee arrangements and notice period compared with the peer group; and - marketing effort and resources provided to the Company. The Board believes that Baring Asset Management Limited has served the Company well both in terms of investment performance and general support and will continue its appointment. Statement of Compliance The Board considers that it has complied with all the material provisions set out in Section 1 of the Code throughout the year. It did not, however, comply with the following provisions as explained above: - due to the small size of the Board and nature of the business a separate remuneration committee has not been established; - a senior non-executive Director has not been identified; and - the Chairman is a member of the Audit Committee. 5. VAT ON MANAGEMENT FEES Details of the potential recovery of VAT on past management fees are set out in note 20 to the financial statements on page 48. 6. CREDITOR PAYMENT POLICY It is the Company's payment policy to obtain the best possible terms for all business and therefore there is no consistent policy as to the terms used. In general, the Company agrees with its suppliers the terms on which business will take place and it is its policy to abide by the terms. As an investment trust, the Company does not transact business of a trading nature. There were no trade creditors at 30 September 2008. 7. SOCIALLY RESPONSIBLE INVESTMENT The Board has delegated the investment management function to Baring Asset Management Limited. The Investment Manager's primary objective is to produce superior financial returns to investors. It believes that over the long term sound social, environmental and ethical policies make good business sense and takes these issues into account when, in its view, they have a material impact on either the investment risk or the expected return from an investment. 8. EXERCISE OF VOTING POWERS The Board has delegated authority to the Investment Manager to vote the shares held by the Company in accordance with current best practice. Wherever practical the Investment Manager does vote the shares, but in the markets where the Company invests this is not always feasible. The Investment Manager may refer to the Board on any matters of a contentious nature. 9. AUTHORITY TO ALLOT SHARES Under Resolution 8 of the Annual General Meeting, the Directors seek a general power from shareholders to allot new securities up to an aggregate par value of Â£192,218 representing approximately 5% of the issued share capital of the Company as at the date of this document excluding shares held in treasury. Such authority, if granted, will expire at the conclusion of the next Annual General Meeting. Resolution 9 of the AGM will, if passed, empower the Directors to make allotments of shares (including sales of shares held in treasury) for cash on a non pre-emptive basis up to an aggregate of (i) 5% of the issued ordinary share capital of the Company less the aggregate nominal value of the shares held in treasury as at the date of this document, and (ii) the aggregate nominal value of shares held in treasury as at that date. These Resolutions will provide the Directors with flexibility to act in the best interests of shareholders. Under the requirements of the UK Listing Authority, unless authorised by shareholders, shares may not be issued for cash at a price below the net asset value per share unless they are first offered pro rata to existing holders of shares of that class. 10. PURCHASE BY THE COMPANY OF ITS OWN SHARES AND TREASURY SHARES At the Annual General Meeting held on 15 January 2008 a special resolution was passed giving the Directors authority until the conclusion of the earlier of the 2009 Annual General Meeting, and 12 July 2009, to make market purchases of the Company's own issued ordinary shares up to a maximum of 6,096,757 ordinary shares. During the year ended 30 September 2008, 1,436,008 ordinary shares were repurchased to be held in treasury (2007: 1,782,199 ordinary shares were repurchased to be held in treasury). During the year 1,000,000 ordinary shares held in treasury were cancelled (2007: no ordinary shares held in treasury were cancelled). A further 625,194 ordinary shares were repurchased for cancellation in the year ended 30 September 2008 (2007: no ordinary shares were repurchased for cancellation). The Board proposes that the Company should be given renewed authority to purchase ordinary shares in the market either for cancellation or to be held, sold, transferred or otherwise dealt with as treasury shares in accordance with the Companies Act. Resolution 10 of the Annual General Meeting, which is a special resolution, is being proposed for this purpose. The Board remains committed to exploring methods by which shareholder value can be enhanced. The purchase and cancellation or holding in treasury by the Company of its shares at a cost below the net asset value of those shares enhances the net asset value of the remaining shares. This additional demand for shares may reduce the discount at which the shares trade. It is proposed that the Company be authorised to purchase on the London Stock Exchange up to 5,762,685 ordinary shares (being 14.99% of the Company's issued share capital as at the date of this document excluding shares held in treasury). Any such purchases will be completed by the delivery to the Company of shares which will then be cancelled immediately or held, sold, transferred or otherwise dealt with as treasury shares in accordance with the Companies Act. Purchases of shares will be made within guidelines set from time to time by the Board, and will only be made in the market at prices below the prevailing net asset value attributable to a share and, in any event, the minimum price paid may not be below Â£0.10 per share. Any exercise by the Company of the authority to purchase shares will occur only when market conditions are appropriate. The authority to purchase shares will last until the Annual General Meeting of the Company in 2010, or 12 July 2010, whichever is the earlier. The authority may be renewed by shareholders at a General Meeting. Purchases will be funded either by using available cash resources, debt or by selling investments. Effect on Shareholders The effect of the implementation of this proposal will be to enhance the net asset value of the remaining shares, as shares will only be acquired in the market for less than their underlying net asset value. 11. CONFLICT OF INTEREST Section 175 of the Companies Act 2006, which came in to effect on 1 October 2008, introduced a duty for directors to avoid unauthorised conflicts of interest. The new Articles of Association approved by Resolution 2 at the General Meeting held on 15 January 2008 allows the Directors to authorise such conflicts and potential conflicts, where appropriate. The Board has expanded the terms of reference of the Audit Committee to review conflicts and potential conflicts and make recommendations to the Board as to whether any such conflicts should be authorised. 12. AUDITORS The Company's Auditors, KPMG Audit Plc, have indicated their willingness to continue in office. A resolution for their re-appointment and remuneration will be proposed at the Annual General Meeting. By order of the Board M. J. Nokes Secretary 3 December 2008 DIRECTORS' REMUNERATION REPORT for the year ended 30 September 2008 This report is presented in accordance with Schedule 7a of the Companies Act 1985. As the Board of Directors is comprised solely of non-executive Directors, it is exempt under the Listing Rules from appointing a Remuneration Committee.The determination of the level of fees paid to Directors, which are reviewed on a periodic basis, is dealt with by the whole Board. The Company's Articles of Association limits the aggregate fees payable to the Board of Directors to a total of Â£175,000. Subject to this overall limit, it is the Company's policy to determine the level of Directors' fees having regard to fees payable to non-executive Directors in the industry generally, the role that individual Directors fulfil, and the time committed to the Company's affairs. No Director has a service contract with the Company. During the year ended 30 September 2008 the Chairman received a fee of Â£30,000 per annum, the Chairman of the Audit Committee received a fee of Â£25,000 per annum and other Directors Â£22,500 per annum. The Company does not provide pension benefits, share options or long-term incentive schemes for Directors. Directors Emoluments for the Year (Audited) The Directors who served during the year received the following emoluments in the form of fees: 2008 2007 Â£000 Â£000 Iain Saunders 30 25 Steven Bates 23 20 John Cousins 23 20 Josephine Dixon 25 23 Saul Estrin 23 20 Jonathan Woollett (appointed as a Director on 23 July 2008) 3 - Total 127 108 Share Price Performance The following graph compares the share price and net asset value performance against the benchmark*â€ : Approval A resolution for the approval of the Directors' Remuneration Report for the year ended 30 September 2008 will be proposed at the Annual General Meeting. By order of the Board M. J. Nokes Secretary 3 December 2008 STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The Directors are responsible for preparing the annual report and the 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, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: - select suitable accounting policies and then apply them consistently; - 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 confirm that they comply with these requirements. The Directors are responsible for keeping proper accounting records which 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 1985. 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. Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The financial statements are published on the www.bee-plc.com website, which is maintained by the Company's Manager, Baring Asset Management Limited. The maintenance and integrity of the website maintained by Baring Asset Management Limited is, so far as it relates to the Company, the responsibility of Baring Asset Management Limited. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. The financial statements are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions. STATEMENT UNDER THE DISCLOSURE & TRANSPARENCY RULES 4.1.12 The Directors each confirm to the best of their knowledge that: a) 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 b) this 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. For and on behalf of the Board. Iain Saunders Chairman 3 December 2008 INCOME STATEMENT (incorporating the Revenue Account*) for the year ended 30 September 2008 Year ended 30 September 2008 Revenue Capital Total Notes Â£000 Â£000 Â£000 (Losses)/gains on investments held at fair 9 - (87,107) (87,107) value through profit or loss Income 2 10,147 - 10,147 Investment management fee 3 (3,142) (128) (3,270) Other expenses 4 (1,393) - (1,393) Net return before finance charges and taxation 5,612 (87,235) (81,623) Finance Charges 5 (8) - (8) Return on ordinary activities before taxation 5,604 (87,235) (81,631) Taxation 6 (1,449) - (1,449) Return attributable to ordinary shareholders 4,155 (87,235) (83,080) Return per ordinary share 8 10.28p (215.84) (205.56) p p Year ended 30 September 2007 Revenue Capital Total Notes Â£000 Â£000 Â£000 (Losses)/gains on investments held at fair value 9 - 104,815 104,815 through profit or loss Income 2 5,220 - 5,220 Investment management fee 3 (3,222) - (3,222) Other expenses 4 (1,246) - (1,246) Net return before finance charges and taxation 752 104,815 105,567 Finance Charges 5 (10) - (10) Return on ordinary activities before taxation 742 104,815 105,557 Taxation 6 (524) - (524) Return attributable to ordinary shareholders 218 104,815 105,033 Return per ordinary share 8 0.51p 245.29p 245.80p *The total column of this statement is the profit and loss account of the Company. All revenue and capital items in the above statement derive from continuing operations. The annexed notes on pages 37 to 48 form part of these accounts. The supplementary revenue and capital columns are both prepared under the guidance published by the Association of Investment Companies. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. BALANCE SHEET as at 30 September 2008 2008 2007 Notes Â£000 Â£000 Fixed assets Investments at fair value through profit or loss 9 270,697 370,406 Current assets Debtors 10 8,978 7,741 Cash at bank and in hand 5,878 13,549 14,856 21,290 Creditors: amounts falling due within one year 11 (5,139) (9,508) Net current assets 9,717 11,782 Net assets 280,414 382,188 Capital and reserves Called-up share capital 4,273 4,436 Share premium account 1,411 1,411 Special reserve 67,745 79,917 Redemption reserve 515 352 Capital reserve - realised 225,004 157,723 Capital reserve - unrealised - 154,516 Revenue reserve 5,036 1,084 Own shares held (23,570) (17,251) Total equity shareholders' funds 280,414 382,188 Net asset value per share 13 711.41p 921.43p The financial statements on pages 33 to 48 were approved by the Board on 3 December 2008 and signed on its behalf by: Josephine Dixon Director The annexed notes on pages 37 to 48 form part of these accounts. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS for the year ended 30 September 2008 Called-up Share Capital Capital Own share premium Special Redemption reserve reserve Revenue shares capital account reserve reserve realised unrealised reserve held Total Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 For the year ended 30 September 2008 Beginning of 4,436 1,411 79,917 352 157,723 154,516 1,084 (17,251) 382,188 year Transfer to - - - - 154,516 (154,516) - - - capital reserves* Return for - - - - (87,235) - 4,155 - (83,080) the year Buyback of - - - - - - - (13,422) (13,422) own sharesheld in treasury Buyback of - - (5,069) - - - - - (5,069) own sharesfor cancellation Cancellation - - (7,103) - - - - 7,103 - of sharesheld in treasury Transfer to (163) - - 163 - - - - - capital redemption reserve Dividends - - - - - - (203) - (203) paid Balance at 4,273 1,411 67,745 515 225,004 - 5,036 (23,570) 280,414 30 September 2008 * â€“With effect from 1 October 2007, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the balance sheet date are included in realised, rather than unrealised, capital reserves. The balance on both capital reserves at 1 October 2007 has been amended by a revenue transfer to reflect this change. For the year ended 30 September 2007 Beginning of 4,436 1,411 79,917 352 84,187 123,237 2,034 (3,538) 292,036 year Net gain on - - - - 73,536 - - - 73,536 realisationof investments Unrealised - - - - - 31,279 - - 31,279 appreciationon investments Net revenue - - - - - - 218 - 218 retained for the year Buy back of - - - - - - - (13,713) (13,713) ownshares held in treasury Dividends paid - - - - - - (1,168) - (1,168) Balance at 30 4,436 1,411 79,917 352 157,723 154,516 1,084 (17,251) 382,188 September 2007 CASHFLOW STATEMENT for the year ended 30 September 2008 Year Year ended ended 30 30 September September 2008 2007 Notes Â£000 Â£000 Operating activities Income received from investments 7,901 5,541 Interest received 343 108 Investment management fees paid (3,241) (3,169) Other cash payments (1,349) (1,237) Net cash inflow from operating activities 14 3,654 1,243 Servicing of finance Interest paid (8) (10) Taxation Overseas tax paid (1,449) (524) Capital expenditure and financial investment Purchases of investments (204,638) (178,857) Sales of investments 212,460 201,252 Net cash inflow from capital expenditure and 7,822 22,395 financial investment Equity dividends paid (203) (1,168) Net cash inflow before financing 9,816 21,936 Financing Buyback of ordinary shares (17,487) (13,713) Net cash outflow from financing (17,487) (13,713) (Decrease)/increase in cash 15 (7,671) 8,223 The annexed notes on pages 37 to 48 form part of these accounts. NOTES TO THE ACCOUNTS 1. ACCOUNTING POLICIES A summary of the principal policies, all of which have been applied consistently throughout the year, is set out below: (a) Basis of Accounting These financial statements are prepared under the historical cost convention as modified by the revaluation of fixed asset investments and in accordance with applicable United Kingdom accounting standards and with the Statement of Recommended Practice 2003 (revised 2005) regarding the Financial Statements of Investment Trust Companies ("SORP"). (b) Valuation of Investments Upon initial recognition the investments are designated by the Company as "at fair value through profit or loss". They are included initially at fair value which is taken to be their cost, including expenses incidental to purchase. Subsequently the investments are valued at fair value which is bid market price for listed investments. Unquoted investments are included at a valuation determined by the Directors after discussion with the Investment Manager on the basis of the latest accounting and other relevant information. Changes in the fair value of investments held at fair value through profit or loss and gains or losses on disposal are included in the capital column of the income statement within "Gains/(losses) from investments held at fair value through profit or loss". All purchases and sales are accounted for on a trade date basis. Year-end exchange rates are used to translate the value of investments which are denominated in foreign currencies. (c) Foreign Currency Transactions denominated in foreign currencies are translated into sterling at actual exchange rates as at the date of the transaction or, where appropriate, at the rate of exchange in a related forward exchange contract. Monetary assets and liabilities denominated in foreign currencies at the year-end are reported at the rates of exchange prevailing at the year-end or, where appropriate, at the rate of exchange in a related forward exchange contract. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve. Foreign exchange movements on fixed asset investments are included in the Income Statement within gains/(losses) on investments. (d) Income Investment income, which includes related taxation, has been accounted for on an ex-dividend basis or when the Company's right to the income is established. Interest receivable on deposits is accounted for on an accruals basis. (e) Expenses All expenses are accounted for on an accruals basis and are charged as follows: - the basic investment management fee is charged wholly to revenue; - any investment performance bonus payable to Baring Asset Management Limited is charged wholly to capital; - dealing costs are charged wholly to capital; and - other expenses are charged wholly to revenue. (f) Interest Payable Interest payable is accounted for on an accruals basis, and is charged wholly to revenue. (g) Capital Reserve With effect from 1 October 2007, changes in fair value of investments which are readily convertible to cash, without adverse terms held at the balance sheet date are included in realised, rather than unrealised, capital reserves. Prior to this date they were held as unrealised capital reserves. The prior year comparative figures have not been changed to take into effect this change in treatment. (h) Special reserve Pursuant to a special resolution passed on 8 November 2002, the Company's application to reduce its share premium account was approved by the High Court and registered with the Registrar of Companies on 18 December 2002. The amount of the reduction was Â£86,624,982, representing the share premium arising on the issue of shares by the Company on 17 December 2002. This amount was transferred to a special reserve which is available for the repurchase by the Company of its own shares. (i) Taxation The charge for taxation is based upon the net revenue for the year. The tax charge is allocated to the revenue and capital accounts according to the marginal basis whereby revenue expenses are first matched against taxable income arising in the revenue account; the effect of this for the year ended 30 September 2008 was that all the deductions for tax purposes went to the revenue account. Deferred taxation will be recognised as an asset or a liability if transactions have occurred at the balance sheet date that give rise to an obligation to pay more taxation in the future, or a right to pay less taxation in the future. An asset will not be recognised to the extent that the transfer of economic benefit is uncertain. 2. INCOME 2008 2007 Â£000 Â£000 Income from investments Unfranked - Quoted 9,911 5,005 Other income Deposit interest 236 215 10,147 5,220 3. INVESTMENT MANAGEMENT FEE Baring Asset Management Limited ("Barings") acts as Investment Manager of the Company under an agreement terminable by either party giving not less than six months' written notice. Under this agreement Barings receives a basic fee (charged to revenue) which is calculated monthly and payable at an annual rate of 0.8% of the net asset value of the Company. The Directors have decided upon a policy of non-allocation of the investment management fees and as such they have been charged wholly to the revenue account. In addition under the agreement Barings is entitled to a performance fee (charged to capital) which is payable at the rate of 10% of the amount by which the change in the Company's net asset value (on a total return basis) exceeds the benchmark. The performance fee is capped at 0.6% of the net asset value of the Company on the first day of the performance period. The performance fee is calculated annually on 30 September. The whole of the performance fee is charged to the capital account as it is deemed to have arisen entirely as a result of the capital performance of the Company. The investment management fee comprises: 2008 2007 Â£000 Â£000 Basic fee (charged to revenue) 3,142 2,784 Performance fee (charged to capital): - provision for year 128 - 3,270 2,784 Irrecoverable VAT thereon - 438 3,270 3,222 At 30 September 2008, Â£320,000 (30 September 2007: Â£290,000) of this fee remained outstanding. 4. OTHER EXPENSES 2008 2007 Â£000 Â£000 Custody and administration expenses 1,234 1,107 Auditor's remuneration for: - audit 25 25 - other services 7 6 Directors' fees 127 108 1,393 1,246 5. INTEREST PAYABLE 2008 2007 (All charged to revenue) Â£000 Â£000 On short-term loan and overdraft facility with State Street Bank & Trust Company repayable within 5 years, not by installments Bank overdraft 8 10 8 10 6. TAXATION 2008 2007 (All charged to revenue) Â£000 Â£000 Current tax charge for the period: Overseas taxation 1,449 524 The current taxation charge for the year is different from the standard rate of corporation tax in the UK. With effect from 1 April 2008 the standard rate of corporation tax in the UK became 28%. Prior to 1 April 2008 the rate was 30% (2007: 30%). The differences are explained below: 2008 2007 Â£000 Â£000 Return on ordinary activities before taxation 5,604 742 Return on ordinary activities multiplied by the standard 1,625 223 theoretical rate of corporation tax Effect of: Overseas taxation not utilised in the year - 301 Utilisation of overseas taxation (176) - 1,449 524 The Company is not liable to tax on capital gains due to its status as an investment trust company. 7. DIVIDEND 2008 2008 2007 2007 Per share Â£000 Per share Â£000 Annual dividend per ordinary share - proposed 9.00p 3,547 0.50p 203 8. RETURN PER ORDINARY SHARE Total Total Revenue Capital 2008 Revenue Capital 2007 Return per ordinary share 10.28p (215.84)p (205.56)p 0.51p 245.29p 245.80p Revenue return (earnings) per ordinary share is based on the net revenue on ordinary activities after taxation of Â£4,155,000 (2007: Â£218,000). Capital return per ordinary share is based on net capital losses for the financial year of Â£87,235,000 (2007: net capital profits of Â£104,815,000). These calculations are based on the weighted average of 40,416,633 (2007: 42,732,444 shares) ordinary shares in issue during the year. At 30 September 2008 there were 39,416,505 ordinary shares of 10p each in issue (2007: 41,477,707) which excludes 3,318,207 ordinary shares held in treasury (2007: 2,882,199 shares held in treasury). The shares held in treasury are treated as not being in issue when calculating the weighted average of ordinary shares in issue during the year. During the year 1,000,000 ordinary shares were cancelled from treasury and a further 625,194 ordinary shares have been cancelled following repurchase (2007: no shares were cancelled during the year). 9. (i) FIXED ASSET INVESTMENTS Quoted Total Quoted Total overseas Unquoted 2008 overseas Unquoted 2007 Country of listing Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Austria - - - 6,049 - 6,049 Czech Republic 25,841 - 25,841 20,250 123 20,373 Hungary 6,278 - 6,278 21,399 - 21,399 Poland 32,512 - 32,512 33,827 - 33,827 Russia 152,897 - 152,897 222,831 - 222,831 Turkey 36,014 - 36,014 48,159 - 48,159 Kazakhstan 1,101 - 1,101 4,307 - 4,307 Other 16,054 - 16,054 13,461 - 13,461 Total 270,697 - 270,697 370,283 123 370,406 9. (ii) MOVEMENTS IN THE YEAR Quoted Total Quoted Total overseas Unquoted 2008 overseas Unquoted 2007 Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Book cost at 215,733 157 215,890 162,021 157 162,178 beginning of year Appreciation/ 154,550 (34) 154,516 123,260 (23) 123,237 (depreciation)on investments held Valuation at 370,283 123 370,406 285,281 134 285,415 beginning of year Purchases at cost 199,244 - 199,244 187,771 - 187,771 Sales: - proceeds (211,846) - (211,846) (207,595) - (207,595) - realised gains 43,623 - 43,623 73,536 - 73,536 (Depreciation)/ (130,607) (123) (130,730) 31,290 (11) 31,279 appreciationon investments held Valuation at end of 270,697 - 270,697 370,283 123 370,406 year Expenses incidental to the purchase or sale of investments are included within the purchase cost or deducted from sales proceeds. These expenses amounted to Â£ 645,000 for the year ended 30 September 2008 (2007: Â£702,000). 9. (iii) (LOSSES)/GAINS ON INVESTMENTS 2008 2007 Â£000 Â£000 Realised gains on sales 43,623 73,536 (Depreciation)/appreciation on investments held (130,730) 31,279 (87,107) 104,815 A list of the Company's investments by market value is shown on pages 12 and 13 and a geographical and industrial classification of the investment portfolio is shown on page 15. 10. DEBTORS 2008 2007 Â£000 Â£000 Amounts due within one year Amounts due from brokers 6,073 6,688 Prepayments and accrued income 2,905 1,002 Other debtors - 51 8,978 7,741 11. CREDITORS 2008 2007 Â£000 Â£000 Amounts falling due within one year Purchases for future settlement 3,520 8,914 Other creditors 1,619 594 5,139 9,508 Since November 2003, the Company has had a US$10 million unsecured loan and overdraft facility with State Street Bank and Trust Company. Under this facility, the Company may draw up to a maximum principal amount of US$10 million in varying proportions and for varying periods at prevailing interest rates. 12. CALLED-UP SHARE CAPITAL 2008 2007 Â£000 Â£000 Authorised 199,500,000 ordinary shares of Â£0.10 19,950 19,950 50,000 redeemable preference shares of Â£1.00 50 50 20,000 20,000 2008 2007 Â£000 Â£000 Authorised, issued and fully paid up 42,734,712 (2007: 44,359,906) ordinary shares of Â£0.10 (fully 4,273 4,436 paid) 1,436,008 ordinary shares were repurchased for Â£13,422,000, these were held in treasury (2007: 1,782,199 ordinary shares were purchased during the year for Â£ 13,713,000, these were held in treasury). During the year 1,000,000 ordinary shares which were held in treasury were cancelled. A further 625,194 ordinary shares were repurchased for cancellation in the year for Â£5,069,000 (2007: no ordinary shares were repurchased for cancellation). The Company holds 3,318,207 ordinary shares in treasury which are treated as not being in issue when calculating the number of ordinary shares in issue during the year (2007: 2,882,199 ordinary shares were held in treasury). Shares held in treasury are non-voting and not eligible for receipt of dividends. 13. NET ASSET VALUE PER SHARE Total shareholders' funds and the net asset value per share attributable to the ordinary shareholders at the year-end calculated in accordance with the Articles of Association were as follows: 2008 2007 Total shareholders' funds (Â£000) 280,414 382,188 Net asset value (pence per share) 711.41p 921.43p The net asset value per share is based on total shareholders' funds above, and on 39,416,505 ordinary shares in issue at the year-end (2007: 41,477,707 ordinary shares in issue) which excludes 3,318,207 ordinary shares held in treasury (2007: 2,882,199 ordinary shares held in treasury). The ordinary shares held in treasury are treated as not being in issue when calculating the net asset value per share. 14. RECONCILIATION OF NET REVENUE BEFORE INTEREST PAYABLE AND TAX TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES 2008 2007 Â£000 Â£000 Net revenue before interest payable and taxation 5,612 752 (Increase)/decrease in accrued income (1,903) 429 Increase/(decrease) in sundry creditors 22 (12) Decrease in debtors 51 74 Management fee capitalised (128) - Net cash inflow from operating activities 3,654 1,243 15. ANALYSIS OF CHANGES IN CASH DURING THE YEAR 2008 2007 Â£000 Â£000 Beginning of year 13,549 5,326 Net cash (outflow)/inflow (7,671) 8,223 End of year 5,878 13,549 Analysis of balance: Bank balance 5,878 13,549 16. FINANCIAL COMMITMENTS At 30 September 2008, there were no outstanding capital commitments (2007: nil). 17. CUSTODIAN'S LIEN Under the terms of the custody agreement with State Street Bank & Trust Company ("State Street"), the Company has granted a lien over its securities and other assets that are deposited with State Street to cover all sums due in connection with the custody agreement. 18. RELATED PARTY DISCLOSURES Under FRS 8, the Company is required to provide additional information concerning its relationship with the Investment Manager, Barings, and details of the investment management fee charged by Barings are set out in note 3. The ultimate holding company of Barings is Massachusetts Mutual Life Insurance Company. 19. RISK MANAGEMENT POLICIES AND PROCEDURES As an investment trust the Company invests in equities and other investments for the long-term so as to secure its investment objective stated on page 3. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for dividends. These risks, include market risk (comprising currency risk, interest rate risk, and other price risk), liquidity risk, and credit risk, and the Directors' approach to the management of them are set out below. The objectives, policies and processes for managing the risks, and the methods used to measure the risks, that are set out below, have not changed from the previous accounting period. (a) Market Risk Special considerations and risk factors associated with the Company's investments are discussed on page 4. The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk (see (b) below), interest rate risk (see (c) below) and other price risk (see (d) below). The Board of Directors reviews and agrees policies for managing these risks, which have remained substantially unchanged from those applying in the year ended 30 September 2007. The Company's Investment Manager assesses the exposure to market risk when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. (b) Currency Risk Certain of the Company's assets, liabilities, and income, are denominated in currencies other than sterling (the Company's functional currency, and in which it reports its results). As a result, movements in the rate of exchange between sterling and the currencies of the countries in which the Company invests, which are identified in the table shown in note 9, may affect the sterling value of those items. In addition the Company's univested cash balances are usually held in US dollars. Management of the risk The Investment Manager monitors the Company's exposure and reports to the Board on a regular basis. Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt. Foreign currency exposures At 30 September 2008 monetary assets included cash balances totalling Â£ 5,879,000 (2007: Â£13,549,000) that were held in US dollars. Foreign currency sensitivity The following table illustrates the sensitivity of the profit after taxation for the year and the equity in regard to the Company's monetary financial assets to changes in the exchange rates for the various currencies too which the Company is exposed. If sterling had weakened by an average of 10%, this would have had the following effect: 2008 2007 Â£000 Â£000 Income statement - profit after taxation: Revenue return 505 101 Capital return 8,710 10,482 Total profit after taxation for the year 9,215 10,583 Equity 9,215 10,583 If sterling had strengthened by an average of 10%, this would have had the following effect: 2008 2007 Â£000 Â£000 Income statement - profit after taxation: Revenue return (505) (101) Capital return (8,710) (10,482) Total profit after taxation for the year (9,215) (10,583) Equity (9,215) (10,583) (c) Interest Rate Risk Interest rate movements may affect the level of income receivable on cash deposits. Cash at bank at 30 September 2008 (and 30 September 2007) was held at floating interesting rates, linked to current short-term market rates. (d) Other Price Risk Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the quoted and unquoted equity investments. Management of the risk The Board of Directors believe that as the Company's investment objective is to provide exposure to Emerging European Securities its neutral position in respect of this risk is full exposure to the market as represented by its benchmark. The Investment Manager has been given discretion around the benchmark to enable it to add value. The amount by which the portfolio diverges from the benchmark is closely monitored by the Board with the goal of ensuring that the risk taken is proportionate to the value added. Concentration of exposure to other price risks A sector breakdown and geographical allocation of the portfolio is contained in the Investment Manager's Report on pages 14 and 15. Other price risk sensitivity The following table illustrates the sensitivity of the profit after taxation for the year and the equity to an increase or decrease of 10% in the fair values of the Company's equities. This level of change is considered to be reasonably possible based on observation of current market conditions. The sensitivity analysis is based on the Company's equities at each balance sheet date, with all other variables held constant. Increase Decrease Increase Decrease in in in in fair fair fair fair value value value value 2008 2008 2007 2007 Â£000 Â£000 Â£000 Â£000 Income statement - profit after taxation: Capital return - increase/(decrease) 27,070 (27,070) 37,041 (37,041) Total profit after taxation - increase/ 27,070 (27,070) 37,041 (37,041) (decrease) Equity 27,070 (27,070) 37,041 (37,041) (e) Liquidity Risk This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Management of the risk Liquidity risk is not significant as the majority of the Company's assets are investments in quoted equities that are readily realisable. The Board gives guidance to the Investment Manager as to the maximum amount of the Company's resources that should be invested in any one holding. The policy is that the Company should remain fully invested in normal market conditions and that short-term borrowing be used to manage short-term cash requirements. (f) Credit Risk The failure of the counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. Management of the risk This risk is not significant, and is managed as follows: - the majority of transactions take place through clearing houses on a delivery versus payment basis; - investment transactions are carried out with an approved list of brokers, whose credit-standing is reviewed periodically by the Investment Manager, and limits are set on the amount that may be due from any one broker; and - cash at bank is held only with reputable banks with high quality external credit ratings. None of the Company's financial assets are secured by collateral or other credit enhancements. (g) Fair Values of Financial Assets and Financial Liabilities Financial assets and liabilities are either carried in the balance sheet at their fair value (investments and derivatives), or the balance sheet amount if it is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals and cash balances). 20. CONTINGENT ASSET On 28 June 2007 the European Court of Justice announced that it had found in favour of the Association of Investment Companies and JPMorgan Claverhouse Trust plc in declaring that management expenses of investment trusts should be exempt from VAT. Her Majesty's Customs and Revenue ("HMRC") subsequently announced that it had accepted that fund management services are exempt from VAT and it withdrew from the appeal in the JPMorgan Claverhouse Investment Trust case. The Company is therefore no longer charged VAT on management fees and it is expected that it will be able to recover some or all of the VAT previously charged on management fees. Clarification as to how claims for past VAT will be processed is awaited from HMRC. Since its launch in December 2002 to 30 September 2007 the Company paid approximately Â£1.6 million of VAT on its management fees and recovered approximately Â£0.4 million of this through its quarterly VAT returns. We are hoping to recover a significant proportion of the Â£1.2 million net loss of VAT. This potential recovery of VAT has not been recognised in the financial statements for the year ended 30 September 2008.

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