Half-yearly Report

Half Year Report for the six months ended 31 March 2014 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 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 31 March 30 September 2014 2013 2013 Shareholders' funds 139,834 190,972 171,330 (£000) Net asset value 717.17p 880.95p 846.16p ("NAV") per share Share price 639.00p 786.00p 745.50p Discount of share 10.9% 10.8% 11.9% price to NAV Six months to Six months to Year ended 31 March 2014 31 March 2013 30 September 2013 Total return per (111.40)p 109.39p 74.20p share Dividend per share* - - 19.00p *See note 2 on page 13. Performance (total return basis) Six months to Six months to Year ended 31 March 2014 31 March 2013 30 September 2013 Net asset value per -13.3%* +15.1%* +11.1%† share Benchmark# -10.3% +11.5% +3.8% Share price† -12.1% +14.2% +8.3% #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 Conduct Authority. Chairman's statement Dear Shareholder, It has been a dramatic time in markets during the first half of our fiscal year with politics trumping all other influences. Matthias Siller gives his interpretation of events in both Turkey and Russia in the Investment Manager's Report which follows. With all that has been going on, it seems surprising that the business of your Company has ploughed its normal furrow, and I will stick for the most part to those more prosaic issues. Performance The Net Asset Value per share of your Company fell by 13.3% on a total return basis during the first half of the fiscal year. At the same time, the benchmark fell by 10.3%. This represents an underperformance which took place entirely in the aftermath of the Ukrainian crisis. The portfolio was positioned to benefit from the likelihood of a better economic environment in Russia during 2014 and the political events which dominated markets during February and March were not foreseen. When markets react to geopolitical crises, there is often a random element in the impact on individual securities. It is only some time after the events that calmer analysis can allow the stock picking approach pursued by your manager to reassert itself. It is customary in reports like these to say that the return is disappointing, but that seems inappropriate here. In the Board's view the returns of the last six months tell us nothing about the investment approach and everything about the dynamics of a market crisis. We remain confident in our manager and expect that his approach will be successful as markets recover from the cardiac arrest they suffered in February. Likewise, within the peer group, the data reflects the position in Russia ab initio. Longer term comparisons remain good. On a five year view, the Company is 9th out of 47 peers. Discount Management Despite the turbulence in markets, the discount has been quite stable. We have bought back 750,000 shares over the period at an aggregate cost of £5.9m. The average discount at which these were repurchased was 10.5% and the effect was a modest accretion to NAV of approximately 3 pence per share. The average discount at which the shares traded during the period was 10.5%. We remain committed to a strong discount control policy and stand ready to repurchase shares when necessary. Income Account As I have pointed out in previous reports, we expect income to play a bigger role in the future of this Company than it has in the past, but that generating income is not an investment priority. In the first half of our year, we typically earn very little in the way of dividends and at this stage our income account shows a deficit of about £313,000. Whilst we do expect this to change it is difficult to project what the level of income will be for the full year. Board I am delighted to announce that on 29th April, we appointed Frances Daley to the Board. She is a highly experienced Finance Director with a range of experience in a number of different fields and the plan is that she will take over as Chair of the Audit Committee when Jo Dixon retires at the next AGM. Regulation The new EU rules known as the Alternative Investment Fund Management Directive (`Directive') come into force this July and have forced us to draft new agreements with our Investment Manager and with our Custodian, who is required to provide some additional services. At the moment we are still in the process of finalising the various agreements in order to comply with the Directive. This has cost money and taken a lot of time and yet is regrettably of no real value to you as shareholders. We will also have to register with the US tax authorities to comply with another piece of legislation known as FATCA. I am afraid this is another distraction designed to catch tax evading Americans, given that we can't control who buys shares in your Company and often don't know who the underlying shareholders are anyway. The regulatory pendulum is still swinging in favour of greater regulation. Outlook Matthias comments on this at length, so I will confine myself to saying that the major markets in which we invest are at exceptionally low valuations, admittedly for obvious reasons. Anyone who thinks, as does your Board, that something approaching normality will reassert itself over the medium term is being offered the opportunity to invest at prices which offer the prospect of significant return. Steven Bates Chairman 15 May 2014 Report of the Investment Manager for the half year ended 31 March 2014 Performance Against the backdrop of very volatile markets, your Company posted a return of -13.3% in the NAV in Sterling terms against a benchmark performance of -10.3%. The period was characterised by volatility stemming from policy action by the US Federal Reserve, which started to scale back the extent of its bond buying programme (`tapering') as the US economy recovered. This caused currencies and markets in countries such as Turkey, which are reliant on external funding and suffer large current account deficits, to adjust sharply. Furthermore, the situation was not helped by increased political uncertainty in Turkey and, more recently, Russia. Global economic activity followed the US lead and started to recover, but remained relatively weak compared to previous economic cycles. Emerging European countries found themselves at very different stages of the economic cycle. The small, open economies of Central Europe saw a confirmation of the improving economic environment of early 2013 and, crucially, a tangible recovery in consumer demand. Leading indicators remain firmly positive, lending has begun to accelerate and domestic activity is picking up. Exports continue to outgrow imports, leading to a substantial improvement in trade accounts, and fixed capital formation is being supported by foreign direct investment and infrastructure subsidies from the European Union. The Greek stock market was added to the Emerging European universe in November 2013. While at the epicentre of the euro-crisis of the year 2011, this Southeast European economy has since undergone a harsh adjustment process. While political risks remain and structural issues are far from being overcome, the economy shows encouraging signs of improvement. Most crucially, the banking sector has been recapitalised, consolidated and adequately provisioned for the legacy loan book. We added a small position in the country to the portfolio. By contrast, the Turkish economy has suffered from a prolonged period of political uncertainty and a sharp rise in interest rates in response to US tapering. The Central Bank of Turkey kept interest rate policy stimulative in an effort to address weakening economic activity while trying to fine-tune household credit. Against the backdrop of globally rising interest rates, this unorthodox way of conducting monetary policy came under increasing pressure from financial markets and led to a speculative attack against the Turkish Lira. On 27th January the Central Bank eventually gave in, reverted to traditional monetary policy, raised short-term interest rates substantially and stemmed the tide. On the domestic front, corruption allegations in the form of recorded mobile phone conversations rocked the political establishment and threatened the credibility of Prime Minister Erdogan. Following his political instincts, he used the municipal elections of 31st March as a referendum on his political legacy. This move proved to be successful, as a large part of the Turkish population rallied behind Mr Erdogan and secured a successful outcome for the ruling Justice and Development (AK) Party. After slowing down substantially over the course of 2013 the Russian economy stood to stabilise as a result of the economic recovery that took place globally. The mainstay of the Russian economy, oil and gas exports, benefited from a relatively stable price environment. Demand for other export goods such as metals, chemicals and agricultural goods also shaped up well. A limited decline in the value of the Russian Rouble would have supported exporters' margins while keeping inflationary pressures well contained, allowing for rates cuts later in 2014. Political events, however, took over. Following the ousting of the Ukrainian President and Moscow ally Victor Yanukovich, events led to a referendum in the Crimea and brought the peninsula under Russian control. These actions introduced huge uncertainty to Russian financial markets and brought widespread international condemnation and sanctions. Domestically, Mr Putin's decisive actions in Crimea, which many Russians consider home soil, were hugely popular. Still, Russian investors, both individual and corporate, well acquainted with political risk scenarios, opted for the US Dollar and sold Roubles. This forced the Central Bank to raise short-term interest rates and prompted an intervention on the money market to stabilise the currency. More importantly, a sharp rise in capital flight tightened liquidity further and stifled banks' lending appetite, essentially killing the chances of an economic recovery. While we believe the base case remains a de-escalation of the crisis and diplomatic rapprochement over the next couple of months, the damage to Russian economic growth prospects for 2014 are irreversible. Beyond 2014, Russian growth potential should be able to return to more normal levels, although the political implications are likely to remain far reaching. The diversification of Europe's gas supplies will be pursued vigorously, and points to a development of liquefied natural gas (`LNG') infrastructure and Middle Eastern sources being accessed through Turkish territory. The portfolio's Ukraine exposure remains limited and includes the iron ore mining company Ferrexpo (listed in the UK) and agricultural producer Kernel (listed in Poland) in addition to poultry producer, MHP. Activity In a contrarian move, we raised the weighting in Turkish stocks from underweight to overweight in the quarter ended 31 March 2014. Using the sharp sell-off, we built positions in high quality, long-term growth companies such as the discount store operator BIM and mobile telecoms company Turkcell. Economically sensitive exposure was increased by adding to Turk Traktor, a joint venture with NewHolland, and Volkswagen car distributor Dogus Oto. Conglomerate Sabanci Holding, active in finance, retailing and basic materials, was added to the portfolio. In Poland, we increased exposure to the Polish financial sector via the country's largest lender PKO BP and Banco Santander subsidiary Bank Zachodni WBK. Holdings in the basic materials sector were increased by buying the Polish copper miner KGHM. By participating in the initial public offering of the Polish electricity utility Energa, the sector underweight was reduced. Exposure to the financial sector was reduced as slowing domestic growth prospects and a less stimulative liquidity environment hurt banks profit estimates in Turkey and Russia. In Information Technology, the best performing sector of 2013, we exited Russian internet search engine Yandex in the expectation that a weaker domestic growth outlook might affect the company's earnings potential. The weak performance of the Russian Rouble prompted us to reduce exposure in Rouble sensitive financials VTB and Sberbank, and Eurasia Drilling, the largest Russian oil field service company. Given the positive impact a weaker currency has on earnings and cash flows of commodity exporters the weighting in the Energy and Mining sector was increased. Outlook While recent performance has been disappointing due to being underweight relative to the index in Poland and Greece, both of which outperformed the benchmark in the period in question, it is worthwhile mentioning that the adverse geopolitical developments in Russia overshadow the otherwise positive developments in terms of stock picking and asset allocation. We remain confident that our management approach of identifying aptly priced growth opportunities can work in an environment where a large part of the Emerging European market trades at multi-year lows relative to Developed Markets. Recent evidence of increased fund flows into the region, in spite of the politically induced volatility, makes us positive that the attractive combination of cheap valuation and solid growth prospects will continue to attract attention and prove rewarding for investors over the longer term. Baring Asset Management Limited 29 April 2014 Twenty largest equity holdings Equity portfolio The Company's twenty largest equity holdings at 31 March 2014, is set out in the following table: Holding Primary country Market value £ % of equity of listing or 000 portfolio investment 1 Lukoil Holdings Russia 15,359 11.0 2 Sberbank Russia 10,511 7.6 3 Gazprom Russia 9,487 6.8 4 PKO BP Poland 7,936 5.7 5 Halk Bank Turkey 6,362 4.6 6 Norilsk Nickel Russia 5,402 3.9 7 Haci Omer Turkey 5,382 3.9 Sabanci Holdings 8 Sistema Russia 4,831 3.5 9 OTP Bank Hungary 4,394 3.2 10 Mobile Russia 4,231 3.0 Telesystems 11 Magnit Russia 3,843 2.8 12 Vakif Bank Turkey 3,555 2.6 13 Mail.ru Russia 3,501 2.5 14 Novatek Russia 3,458 2.5 15 Rosneft Russia 3,399 2.4 16 Surgutneftegas Russia 3,279 2.3 17 PZU Poland 3,004 2.2 18 Energa Poland 2,734 1.9 19 Turk Traktor Turkey 2,583 1.8 20 Turkcell Turkey 2,546 1.8 Iletisim 105,797 76.0 Other holdings 33,418 24.0 Total 139,215 100.0 investments Income statement (incorporating the Revenue Account*) for the six months to 31 March 2014 (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 2014 2014 2014 2013 2013 2013 September September September 2013 2013 2013 Revenue Capital Total Revenue Capital Total Revenue Capital Total Notes £000 £000 £000 £000 £000 £000 £000 £000 £000 Gains on -­ (21,274) (21,274) - 25,388 25,388 - 11,946 11,946 investments held at fair value through profit or loss Income 620 - 620 772 - 772 7,490 - 7,490 Investment (316) (314) (630) (764) - (764) (1,439) - (1,439) management fee Other (539) - (539) (483) - (483) (974) - (974) expenses Net return (235) (21,588) (21,823) (475) 25,388 24,913 5,077 11,946 17,023 before finance costs and taxation Finance (3) - (3) (17) - (17) (21) - (21) costs Return on (238) (21,588) (21,826) (492) 25,388 24,896 5,056 11,946 17,002 ordinary activities before taxation Taxation (75) - (75) (35) - (35) (817) - (817) Return (313) (21,588) (21,901) (527) 25,388 24,861 4,239 11,946 16,185 attributable to ordinary shareholders Return per 7 (1.59)p (109.81)p (111.40)p (2.32)p 111.71p 109.39p 19.44p 54.76p 74.20p 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 2014 (Unaudited) (Unaudited) (Audited) At At At 31 March 31 March 30 September 2014 2013 2013 £000 £000 £000 Non current assets Investments at fair 139,215 186,195 167,899 value through profit or loss Current assets Debtors 4,540 1,004 762 Cash at bank and in 200 4,257 3,312 hand 4,740 5,261 4,074 Current liabilities Creditors: amounts (4,121) (484) (643) falling due within one year Net current assets 619 4,777 3,431 Total net assets 139,834 190,972 171,330 Capital and reserves Called-up share 2,282 2,500 2,357 capital Share premium 1,411 1,411 1,411 account Capital reserve 130,008 181,895 157,486 Redemption reserve 2,506 2,288 2,431 Revenue reserve 3,627 2,878 7,645 Total equity 139,834 190,972 171,330 shareholders' funds Net asset value per 717.17p 880.95p 846.16p share Reconciliation of movement in shareholders' funds Called-up Share share premium Capital Redemption Revenue (Unaudited) capital account reserve reserve reserve Total For the six months ended £000 £000 £000 £000 £000 £000 31 March 2014 At 30 September 2013 2,357 1,411 157,486 2,431 7,645 171,330 Return for the six - - (21,588) - (313) (21,901) months to 31 March 2014 Buyback of own shares - - (5,890) - - (5,890) for cancellation Transfer to capital (75) - - 75 - - redemption reserve Dividends paid - - - - (3,705) (3,705) Balance at 31 March 2014 2,282 1,411 130,008 2,506 3,627 139,834 Called-up Share share premium Capital Redemption Revenue (Unaudited) capital account reserve reserve reserve Total For the six months ended £000 £000 £000 £000 £000 £000 31 March 2013 At 30 September 2012 2,769 1,411 175,988 2,019 7016 189,203 Return for the six - - 25,388 - (527) 24,861 months to 31 March 2013 Buyback of own shares - - (19,481) - - (19,481) for cancellation Transfer to capital (269) - - 269 - - redemption reserve Dividends paid - - - - (3,611) (3,611) Balance at 31 March 2013 2,500 1,411 181,895 2,288 2,878 190,972 Called-up Share share premium Capital Redemption Revenue (Audited) capital account reserve reserve reserve Total For the year ended 30 £000 £000 £000 £000 £000 £000 September 2013 At 30 September 2012 2,769 1,411 175,988 2,019 7,016 189,203 Return for the year to - - 11,946 - 4,239 16,185 30 September 2013 Buyback of own shares ­- - (30,448) - - (30,448) for cancellation Transfer to capital (412) - - 412 - - redemption reserve Dividends paid - - - - (3,610) (3,610) Balance at 30 September 2,357 1,411 157,486 2,431 7,645 171,330 2013 Cashflow statement for the six months to 31 March 2014 (Unaudited) (Unaudited) (Audited) Six months Six months Year ended to 31 March to 31 March 30 September 2014 2013 2013 Notes £000 £000 £000 Operating activities Income received from 1,136 1,475 7,545 investments Investment (630) (764) (1,439) management fees paid Other cash payments (554) (327) (899) Net cash (outflow)/ 6 (48) 384 5,207 inflow from operating activities Servicing of finance Interest paid (3) (17) (21) Taxation Overseas tax paid (76) (35) (817) Financial investment Purchases of (54,156) (41,300) (66,570) investments Sales of investments 60,766 67,808 99,062 Net cash inflow from 6,610 26,508 32,492 financial investment Equity dividends (3,705) (3,611) (3,610) paid Net cash inflow 2,778 23,229 33,251 before financing Financing Buyback of ordinary (5,890) (19,481) (30,448) shares Net cash outflow (5,890) (19,481) (30,448) from financing (Decrease)/increase (3,112) 3,748 2,803 in cash Notes to the half year report 1. Accounting policies These financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (`UK GAAP') 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 2013, except for the allocation of the basic management fee which from 1 October 2013 has been charged 50% to revenue and 50% to capital (previously charged wholly to revenue). 2. Dividend No dividend is payable in respect of the six months to 31 March 2014. Consideration will be given to an annual dividend in respect of the year ended 30 September 2014 at a Board meeting to be held in November 2014. An announcement will be made shortly after that meeting. 3. Comparative information The figures and financial information for the year ended 30 September 2013 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 2014 and for the six months ended 31 March 2013 have been neither audited nor reviewed by the auditors. 4. Shares in issue As at 31 March 2014 there were 19,498,043 ordinary shares of 10p each in issue (30 September 2013: 20,248,043 and 31 March 2013: 21,678,043) which excludes 3,318,207 ordinary shares held in treasury (30 September 2013: 3,318,207 and 31 March 2013: 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 750,000 ordinary shares were bought back to be cancelled at a cost of £5,890,000. 5. Taxation The taxation charge of £75,000 (30 September 2013: £817,000; and 31 March 2013: £35,000) 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 2014 2013 2013 £000 £000 £000 Total net revenue (21,823) 24,913 17,023 return before finance costs and taxation Net capital return 21,588 (25,388) (11,946) before finance costs and taxation Decrease in accrued 516 703 55 income (Decrease)/increase (15) 156 75 in sundry creditors Investment management (314) - - fee capitalised Net cash (outflow)/ (48) 384 5,207 inflow 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 £(21,901,000) (six months ended 31 March 2013: £ 24,861,000; and year ended 30 September 2013: £16,185,000) and on a weighted average of 19,659,472 ordinary shares in issue during the six months ended 31 March 2014 (six months ended 31 March 2013: weighted average of 22,726,252 ordinary shares in issue; and year ended 30 September 2013: weighted average of 21,815,561 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 and 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 2013. 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 2014 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 2014. 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 FCA's Disclosure and Transparency Rules. For and on behalf of the Board Steven Bates Chairman 15 May 2014 Directors and officers Directors Steven Bates, Chairman Josephine Dixon Saul Estrin Jonathan Woollett Ivo Coulson Frances Daley (appointed 29 April 2014) 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 LLP 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 Asset Services 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: ssd@capitaregistrars.com Website www.bee-plc.com Baring Asset Management Limited 155 Bishopsgate London EC2M 3XY Telephone: 020 7628 6000 (Authorised and regulated by the Financial Conduct Authority) www.barings.com Registered in England and Wales no: 02915887 Registered office as above.

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