Half-yearly Report

Half Year Report for the six months ended 31 March 2011 Baring Emerging Europe PLC Contents Investment Objective 2 Financial Highlights 2 Performance 2 The Investment Manager 2 Chairman's Statement 3 Report of the Investment Manager 4-6 Twenty Largest Equity Holdings 7 Income Statement 8-9 Balance Sheet 10 Reconciliation of Movement in 11 Shareholders' Funds Cashflow Statement 12 Notes to Half Year Report 13-14 Interim Management Report 15 Directors and Officers 16 ISA and Savings Scheme 17 Share Price 17 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. Financial highlights 31 March 2011 31 March 2010 30 September 2010 Shareholders' funds 359,570 331,834 314,546 (£000) Net asset value 1,043.86p 952.21p 912.60p ("NAV") per share Share price 944.00p 861.00p 818.00p Discount of share 9.6% 9.6% 10.4% price to NAV Six months to 31 Six months to 31 Year ended 30 March 2011 March 2010 September 2010 Total return per 134.12p 184.93p 149.45p share Dividend per share* - - 2.90p *See note 2 in Notes to the half year report. Performance (total return basis) Six months to 31 Six months to 31 Year ended 30 March 2011 March 2010 September 2010 Net asset value per +14.7%* +24.8%* +19.6%† share Benchmark# +16.6% +24.2% +22.6% Share price† +14.9% +24.2% +16.7% #The benchmark is the MSCI EM Europe 10/40 Index. †Source: AIC using Morningstar. *Source: Barings. The Investment Manager The Investment Manager is Baring Asset Management Limited which is authorised and regulated by the Financial Services Authority. Chairman's statement Performance The net asset value per share of your Company increased from 912.60p at 30 September 2010 to 1,043.86p at 31 March 2011. This represented an increase of 14.7% on a total return basis compared to an increase of 16.6% in the benchmark index. It is pleasing to report a fairly substantial increase for the period even though the Company lagged its benchmark somewhat. The reasons for this are explored in the manager's report which follows. The longer term returns against competitors remain excellent, and it is this longer term data on which the Board focuses. The Company was ranked 8 out of 86 funds in the Morningstar Emerging Europe Universe for the five years ended 31 March 2011. Share Capital The discount averaged 8.9% during the period. The Board's policy is to constrain discount volatility and to this end 21,000 shares at a total cost of £188,000 were bought back for cancellation during the six months ended 31 March 2011. Since 31 March 2011 a further 825,000 shares have been bought back at a total cost of £7,338,000 to the date of this report. Annual Dividend At the Annual General Meeting held on 18 January 2011 shareholders approved the payment of an annual dividend of 2.90p per share on 2 February 2011 to members on the register at the close of business on 7 January 2011. VAT VAT on management fees and performance fees invoiced during the period from the launch of the Company to March 2005 amounting to £328,000 together with the interest thereon of £58,000 was recovered on 23 May 2011 and was reflected in the net asset value from 23 May 2011. This completes the recovery of the VAT on management fees and performance fees. Board As reported in the annual report for the year ended 30 September 2010, John Cousins retired from the Board at the conclusion of the Annual General Meeting on 18 January 2011. John had been a Director of the Company and its predecessor Company since its launch in 1994 and on behalf of the Board, I would like to thank him for his wisdom and contribution over the years and wish him well for the future. Outlook It has been a period of extraordinary events around the world, and shareholders may be surprised by how resilient markets have been in response. This reflects both the easy money policy of the US Federal Reserve as well as specific regional factors from which your Company has benefited. With elections in Poland, Turkey and Russia this year, governments are likely to focus on increasing spending. This should boost disposable income and give a lift to infrastructure investment. Government receipts will also benefit from an acceleration of the privatisation process. Even after the rise we have seen in the market, this benign backdrop, supported by solid macro-economic fundamentals and low share price valuations, underlines the strength of the investment case for the region. Steven Bates Chairman 24 May 2011 Report of the Investment Manager for the half year ended 31 March 2011 Performance Emerging European equity markets led the rest of the world during the six month period under review. Remarkably, this comes in a period where developed markets fared better than emerging markets, as investors worried about the effects of inflation in the emerging world. Against the backdrop of strongly rising markets, your Company posted an increase of 14.7% in the NAV in Sterling terms, while its benchmark rose by 16.6%. The difference in performance was due to stock selection in Russia. Commodity related stocks were the top contributors to performance as bulk materials, metals and energy prices continued to move upwards, buoyed by positive global growth. Additionally, the combination of geopolitical turmoil in the Middle East and North Africa, floods in Australia which disrupted commodity supplies and the tragic Japanese earthquake, tsunami and nuclear disaster sparked supply worries. Gazprom, the largest Russian company by market cap did particularly well, benefitting from an improving outlook in European gas markets, its main export destination. Against this, however, the move in commodity prices also raised inflation expectations, which particularly hurt sentiment in the Turkish stock market, a net commodity importer and an interest rate sensitive market. Fears of an overheating domestic economy (2010 GDP growth was revised upwards to 8.9%) and rapid loan growth led to a sell-off in the Turkish banks sector. Investors were also concerned by the Central Bank's unconventional approach: instead of raising interest rates to slow down the economy, it opted to raise reserve requirements, which drains liquidity from the banking system without causing the currency to appreciate. In contrast, the Russian index showed the strongest gains by a wide margin benefitting from a combination of earnings upgrades (particularly in commodity related sectors) and very attractive valuations. Activity In contrast to developed Europe, the Emerging European banking sector is not exposed to credit risk from the European periphery, remains very well capitalised and highly liquid. The superior growth potential and solid profit margins have not been overlooked by global banking multinationals such as BBVA from Spain, which decided to acquire a 25% stake in Garanti Bank from Turkey in November 2010. Your Company's weighting in Garanti was reduced at the start of the period. Your Company participated in the secondary offering of VTB, the second-largest Russian bank. Contrary to the situation in Turkey, Russia's credit growth still has only just started to recover from the financial crisis and should be supported by positive internal and external conditions such as budgetary receipts and high oil prices. In the commodity space, exposure to the oil and gas sector has been increased as high energy prices should support earnings going forward. Materials and Mining stocks have been reduced as price targets were reached. Generally, this area of the market saw earnings multiple expansion, and will have to cope with rising input costs such as wages and energy going forward. Outlook The European Central Bank faces a challenge. The level of short-term rates which would be appropriate for core Europe such as Germany would be manifestly too high for peripheral Europe, where economies such as Ireland, Greece and Portugal are experiencing a financial crisis. In April, we saw the ECB start to move rates higher to mitigate rising prices in the strong German economy. Further rises from here are likely to exacerbate the problem in peripheral Europe. Yet, we also believe that the risk of "contagion" from developed Europe to Emerging Europe is low. In contrast to previous crises, investors have clearly demonstrated that they are able to distinguish between the fiscal worries in the European periphery, in Portugal, Ireland and Greece, and the superior fiscal and growth outlook for Emerging Europe. The evidence can be seen in the performance differential between developed and Emerging Europe in recent months, and in the inflows seen into Emerging Europe over this period. Looking forward, 2011 will bring parliamentary elections in the 3 major Emerging European countries of Poland, Turkey and Russia and, thus, political implications are of particular importance at present. Where fiscally possible, especially in Russia, we expect governments to focus on providing disposable income gains, social spending and infrastructure investment, all of which should support domestic growth and profit margins. Further, to cover fiscal spending needs, governments have accelerated the privatisation agenda. Even after the strength we have seen in the market, we believe the investment case for the region remains strong. While consumers in the West are over-burdened with debt, the situation across most of your Company's investment universe is completely different. Consumers in Central and Eastern Europe carry a fraction of the level of debt of their Western counterparts. In Russia, the temporary halt in the growth of the middle class is now behind us and we expect this segment to expand rapidly over the medium-term as wage growth returns. Finally, we continue to concentrate on investment opportunities in the region that show a combination of Growth at a Reasonable Price (GARP). Baring Asset Management Limited 13 April 2011 Twenty largest equity holdings Equity portfolio The Company's twenty largest equity holdings at 31 March 2011, is set out in the following table: Holding Primary country Market value £ % of equity of listing or 000 portfolio investment 1 Sberbank Russia 42,183 12.0 2 Gazprom Russia 40,728 11.6 3 Lukoil Holdings Russia 31,254 8.9 4 Mobile Russia 22,931 6.5 Telesystems 5 Rosneft Russia 22,260 6.3 6 PKO BP Poland 17,285 4.9 7 OTP Bank Hungary 16,026 4.5 8 Garanti Bank Turkey 12,589 3.6 9 VTB Bank Russia 12,067 3.4 10 Halk Bankasi Turkey 11,283 3.2 11 Eurocash Poland 9,880 2.8 12 Koç Holdings Turkey 8,116 2.3 13 Mechel Russia 7,950 2.3 14 Novolipetsk Russia 7,564 2.2 Steel 15 Turkiye Petrol Turkey 6,816 1.9 16 Yapi Ve Kredi Turkey 5,259 1.5 Bank 17 Ferrexpo United Kingdom 5,186 1.4 18 Globe Trade Poland 4,683 1.3 Centre 19 Kazakhmys United Kingdom 4,610 1.3 20 LSR Russia 4,539 1.3 293,209 83.20 Other holdings 59,417 16.80 Total 352,626 100.00 investments Income statement (incorporating the Revenue Account*) for the six months to 31 March 2011 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited) (Audited) (Audited) Six months Six months Six months Six months Six months Six months Year Year Year to 31 March to 31 March to 31 March to 31 March to 31 March to 31 March ended 30 ended 30 ended 30 2011 2011 2011 2010 2010 2010 September September September 2010 2010 2010 Revenue Capital Total Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 £000 £000 £000 Gains on - 47,130 47,130 - 68,631 68,631 - 51,798 51,798 investments held at fair value through profit or loss Income 1,162 - 1,162 408 - 408 5,430 - 5,430 Investment (1,346) - (1,346) (1,214) (225) (1,439) (2,422) - (2,422) management fee and performance fee Other (591) - (591) (671) - (671) (1,307) - (1,307) expenses Net return (775) 47,130 46,355 (1,477) 68,406 66,929 1,701 51,798 53,499 before finance costs and taxation Finance (6) - (6) (10) - (10) (17) - (17) costs Net return (781) 47,130 46,349 (1,487) 68,406 66,919 1,684 51,798 53,482 on ordinary activities before taxation Taxation (138) - (138) (49) - (49) (655) - (655) Return (919) 47,130 46,211 (1,536) 68,406 66,870 1,029 51,798 52,827 attributable to ordinary shareholders Return per 134.12p 184.93p 149.54p ordinary share *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. No operations were acquired or discontinued during the period. The supplementary revenue and capital columns are both prepared under 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 31 March 2011 (Unaudited) (Unaudited) (Audited) At At At 31 March 31 March 30 September 2011 2010 2010 £000 £000 £000 Non current assets Investments at fair 352,626 328,583 307,030 value through profit or loss Current assets Debtors 236 589 6,139 Cash at bank and in 7,542 9,137 1,846 hand 7,778 9,726 7,985 Creditors: amounts (834) (6,475) (469) falling due within one year Net current assets 6,944 3,251 7,516 Net assets 359,570 331,834 314,546 Capital and reserves Called-up share 3,777 3,817 3,779 capital Share premium 1,411 1,411 1,411 account Special reserve 14,118 17,551 14,306 Redemption reserve 1,011 971 1,009 Capital reserve 338,245 307,723 291,115 Revenue reserve 1,008 361 2,926 Total equity 359,570 331,834 314,546 shareholders' funds Net asset value per 1,043.86p 952.21p 912.60p share Reconciliation of movement in shareholders' funds Called-up Share share premium Special Redemption Retained (Unaudited) capital account reserve reserve earnings* Total For the six £000 £000 £000 £000 £000 £000 months ended 31 March 2011 At 30 3,779 1,411 14,306 1,009 294,041 314,546 September 2010 Buyback of own - - (188) - - (188) shares for cancellation Transfer to (2) - - 2 - - capital redemption reserve Net return for - - - - 45,212 45,212 the six months to 31 March 2011 Balance at 31 3,777 1,411 14,118 1,011 339,253 359,570 March 2011 Called-up Share share premium Special Redemption Retained (Unaudited) capital account reserve reserve earnings* Total For the six £000 £000 £000 £000 £000 £000 months ended 31 March 2010 At 30 3,995 1,411 31,792 793 244,299 282,290 September 2009 Buyback of own - - (14,241) - - (14,241) shares for cancellation Transfer to (178) - - 178 - - capital redemption reserve Net return for - - - - 63,785 63,785 the six months to 31 March 2010 Balance at 31 3,817 1,411 17,551 971 308,084 331,834 March 2010 Called-up Share share premium Special Redemption Retained (Audited) capital account reserve reserve earnings* Total For the year £000 £000 £000 £000 £000 £000 ended 30 September 2010 At 30 3,995 1,411 31,792 793 244,299 282,290 September 2009 Buyback of own - - (17,486) - - (17,486) shares for cancellation Transfer to (216) - - 216 - - capital redemption reserve Net return for - - - - 49,742 49,742 the year to 30 September 2010 Balance at 30 3,779 1,411 14,306 1,009 294,041 314,546 September 2010 *Retained earnings comprise capital reserve and revenue reserve. Cashflow statement for the six months to 31 March 2011 (Unaudited) (Unaudited) (Audited) Six months Six months Year ended to 31 March to 31 March 30 September 2011 2010 2010 £000 £000 £000 Operating activities Income received from 2,929 2,221 5,534 investments Interest received - - 1 Investment management (1,307) (2,171) (3,404) fees and performance fees paid Other cash payments (596) (600) (1,268) Net cash inflow/ 1,026 (550) 863 (outflow) from operating activities Servicing of finance Interest paid (6) (10) (17) Taxation Overseas tax paid (138) (60) (488) Financial investment Purchases of (112,608) (36,302) (84,457) investments Sales of investments 118,609 46,536 95,391 Net cash inflow from 6,001 10,234 10,934 financial investment Equity dividends paid (999) (3,085) (3,085) Net cash inflow before 5,884 6,529 8,207 financing Financing Buyback of ordinary (188) (8,517) (17,486) shares Net cash outflow from (188) (8,517) (17,486) financing Increase/(decrease) in 5,696 (1,988) (9,279) cash Notes to the half year report 1. Accounting policies These financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (issued in January 2009). The accounting policies applied to this half year report are consistent with those applied in the accounts for the year ended 30 September 2010. 2. Dividend No dividend is payable in respect of the six months to 31 March 2011. Consideration will be given to an annual dividend in respect of the year ended 30 September 2011 at a Board meeting to be held in November 2011. An announcement will be made shortly after that meeting. 3. Comparative information The figures and financial information for the year ended 30 September 2010 are an extract from the latest published accounts and do not constitute statutory accounts. Full accounts for that period have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The half year report for the six months ended 31 March 2011 and for the six months ended 31 March 2010 have been neither audited nor reviewed by the auditors. 4. Shares in issue As at 31 March 2011 there were 37,764,317 ordinary shares of 10p each in issue (30 September 2010: 37,785,317 and 31 March 2010: 38,166,942) which includes 3,318,207 ordinary shares held in treasury (30 September 2010: 3,318,207 and 31 March 2010: 3,318,207) and treated as not being in issue when calculating the net asset value per share. Shares held in treasury are non-voting and not eligible for receipt of dividends. During the period 21,000 ordinary shares were bought back to be cancelled at a cost of £188,000. A further 825,000 ordinary shares were bought back to be cancelled at a cost of £7,338,000 since 31 March 2011 to the date of this report. 5. Taxation The taxation charge of £138,000 (30 September 2010: £655,000 and 31 March 2010: £49,000) relates to irrecoverable overseas taxation. 6. Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow/(outflow) from operating activities (Unaudited) (Unaudited) (Audited) Six months Six months Year ended ended ended 31 March 31 March 30 September 2011 2010 2010 £000 £000 £000 Net total return 46,355 66,929 53,499 before finance costs and taxation Net capital return (47,130) (68,406) (51,798) before finance costs and taxation Increase in accrued 1,767 1,813 105 income Increase/(decrease) 51 (661) (943) in sundry creditors Increase in sundry (17) - - debtors Management fee - (225) - capitalised Net cash inflow/ 1,026 (550) 863 (outflow) from operating activities 7. Return per ordinary share The total return per ordinary share is based on the return on ordinary activities after taxation of £46,211,000 (six months ended 31 March 2010: £ 66,870,000; and year ended 30 September 2010: £52,827,000) and on a weighted average of 34,454,077 ordinary shares in issue during the six months ended 31 March 2011 (six months ended 31 March 2010: weighted average of 36,159,129 ordinary shares in issue; and year ended 30 September 2010: weighted average of 35,346,596 ordinary shares in issue). Interim management report The Company is required to make the following disclosures in its half year report: Principal risks and uncertainties The Board believes that the principal risks and uncertainties faced by the Company continue to fall under the following broad categories: Investment strategy. Accounting, legal and regulatory. Loss of investment team or investment manager. Discount. Corporate governance and shareholder relations. Operational. Financial. Future developments. Information of each of these is given in the Report of the Directors in the Annual Report for the year ended 30 September 2010. Related party transactions The Investment Manager is regarded as a related party and details of the management fee payable during the six months ended 31 March 2011 is shown in the Income Statement on pages 8 and 9. There have been no other related party transactions during the six months ended 31 March 2011. Directors' responsibility statement The Directors are responsible for preparing the half-yearly financial report, in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge: The condensed set of financial statements within the half-yearly financial report has been prepared in accordance with the Accounting Standards Board's statement "Half-Yearly Financial Reports"; and The Interim Management Report includes a fair review of the information required by 4.2.7R (indication of important events during the first six months of the year) and 4.2.8R (disclosure of related party transactions and changes therein) of the FSA's Disclosure and Transparency Rules. For and on behalf of the Board Steven Bates Chairman 24 May 2011 Directors and officers Directors Steven Bates, Chairman Josephine Dixon Saul Estrin Jonathan Woollett Ivo Coulson John Cousins (retired 18 January 2011) Secretary M. J. Nokes, F.C.A. Registered office 155 Bishopsgate London EC2M 3XY Company number 4560726 Investment Manager Baring Asset Management Limited 155 Bishopsgate London EC2M 3XY Telephone: 020 7628 6000 Facsimile: 020 7638 7928 Auditor KPMG Audit Plc 15 Canada Square London E14 5GL Custodian State Street Bank & Trust Company Limited 20 Churchill Place Canary Wharf London E14 5HJ Administrator Northern Trust Global Services Limited 50 Bank Street Canary Wharf London E14 5NT Telephone: 0207 982 2000 Registrars and transfer office Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone: 0871 664 0300(calls cost 10p per minute plus network extras) Overseas: +44 208 639 3399 Email: shareholder.services@capitaregistrars.com Website www.bee-plc.com ISA & Savings Scheme The Company's shares can be purchased through the Baring Emerging Europe ISA & Savings Scheme which provides a simple and cost-effective method for investing either lump sums or on a regular basis. The Baring Emerging Europe ISA investment limits are: Minimum Maximum Investment Limits Investment Limits Regular investment £250 £890 per month per month Lump sum investment £3,000 £10,680 (Additional lump sum per annum top-ups of £1,000) The Baring Emerging Europe Savings Scheme has a minimum regular investment of £ 50 per month or a minimum lump sum investment of £250. Further information For further information on the ISA & Savings Scheme, please write to: Baring Asset Management Limited c/o Northern Trust Global Services Limited 50 Bank Street London E14 5NT Telephone: 0845 082 2479 Alternatively information can be obtained from the Company's website: www.bee-plc.com Please remember that the value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Past performance is not a guarantee of future performance. Baring Asset Management Limited, the Manager of the Baring Emerging Europe ISA & Savings Scheme, is authorised and regulated by the Financial Services Authority. Share Price The ordinary share price of the Company is quoted in the Financial Times under the heading "Investment Companies" in the "London Share Service" section. Baring Asset Management Limited 155 Bishopsgate London EC2M 3XY Telephone: 020 7628 6000 (Authorised and regulated by the Financial Services Authority) www.barings.com Registered in England and Wales no: 02915887 Registered office as above.

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