Final Results
BlackRock Frontiers Investment Trust plc
(LEI: 5493003K5E043LHLO706)
Annual results announcement for the year ended 30 September 2018
PERFORMANCE RECORD
| Attributable to ordinary shareholders | 30 September 2018 | 30 September 2017 |
| US Dollar | ||
| Net assets (US$’000) | 356,495 | 350,247 |
| Net asset value per ordinary share (cents) | 177.70 | 196.91 |
| Ordinary share price (mid market)1 (cents) | 182.25 | 199.91 |
| -------- | -------- | |
| Sterling | ||
| Net assets (£’000)1 | 273,365 | 261,047 |
| Net asset value per ordinary share1 (pence) | 136.26 | 146.76 |
| Ordinary share price (mid market) (pence) | 139.75 | 149.00 |
| -------- | -------- | |
| Premium | 2.6% | 1.5% |
| ===== | ===== |
Performance – total return basis |
Year ended 30 September 2018 % |
Year ended 30 September 2017 % |
Since inception4 % |
| US Dollar | |||
| Net asset value per share (with dividends reinvested) | -6.6 | +21.5 | +48.8 |
| Reference Index (NR)2, 3 | +2.3 | n/a | +35.8 |
| MSCI Frontier Markets Index (NR)2, 3 | -7.7 | +25.5 | +22.5 |
| MSCI Emerging Markets Index (NR)3 | -0.8 | +22.5 | +14.1 |
| Ordinary share price (with dividends reinvested) | -5.7 | +23.6 | +50.1 |
| Sterling | |||
| Net asset value per share (with dividends reinvested) | -4.0 | +17.7 | +77.5 |
| Reference Index (NR)2, 3 | +5.3 | n/a | +62.3 |
| MSCI Frontier Markets Index (NR)2,3 | -5.1 | +21.5 | +46.4 |
| MSCI Emerging Markets Index (NR)3 | +2.0 | +18.6 | +36.5 |
| Ordinary share price (with dividends reinvested) | -3.1 | +19.8 | +78.7 |
1 Based on an exchange rate of $1.3041 to £1 at 30 September 2018 and $1.3417 to £1 at 30 September 2017.
2 With effect from 1 April 2018, the Reference Index changed to the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index +MSCI Saudi Arabia Index. Prior to 1 April 2018, the Reference Index was the MSCI Frontier
Markets Index. The performance of the Reference Index during the year has been blended to reflect this change.
3 Net return (NR) indices include the reinvestment of dividends net of withholding taxes using the tax rates applicable to non-resident institutional investors.
4 The Company was incorporated on 15 October 2010 and its shares were admitted to trading on the London Stock Exchange on 17 December 2010.
CHAIRMAN’S STATEMENT
Dear Shareholder,
I am pleased to present to you the Annual Report and Financial Statements for the year ended 30 September 2018.
OVERVIEW
During the year to 30 September 2018, your Company’s Net Asset Value per share (NAV) decreased by 6.6%, compared with the Reference Index, which rose by 2.3%. As shareholders will be aware, and as set out below, on 1 April 2018 we adopted a revised investment policy and new benchmark which the Board and the Manager believe provides a better and more consistent basis for the fund in the future. To some extent therefore, 2018 represents a transition year as the portfolio is realigned to reflect the new investment policy. Our NAV total return was ahead of the outcome for the year of the previous benchmark, the MSCI Frontier Markets Index, but behind the new Reference Index (as set out below). Relative performance has been measured against the performance of the previous benchmark up to 31 March 2018, chain-linked with the performance of the new Reference Index from 1 April 2018 to the financial year end. No performance fee will be payable this year.
Over the longer term, your Company has generated an impressive total return of 48.8% since launch in 2010, comparing favourably to an increase of 35.8% for the Reference Index over the same period. Returns are higher for sterling based investors given the depreciation of the pound, with a sterling equivalent NAV total return of 77.5% since launch, compared with the return on the Reference Index in sterling terms of 62.3% over the same period.
The contributors and detractors to overall investment performance during the period and the Investment Managers’ view on the outlook for Frontier Markets are given in their report which follows.
REVISED INVESTMENT POLICY
As reported in the Company’s half-yearly report, the Board, having consulted with the Manager and the Company’s advisers, proposed that shareholders consider the adoption of a revised investment policy which would permit a broadened investment universe to include any country which is neither part of the MSCI World Index of developed markets nor one of the eight largest countries by market capitalisation in the MSCI Emerging Markets Index as at 1 April 2018: being Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan. As part of this change it was also proposed that the Company also adopt a new Reference Index: the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index (net total return, USD).
Prior to 1 April 2018, the Reference Index was the MSCI Frontier Markets Index. The performance of the Reference Index during the year ended 30 September 2018 has been calculated on a blended basis to reflect this change. The Reference Index for the year ended 30 September 2017 was the MSCI Frontier Markets Index. (All performance figures are in US Dollars on a total return basis.)
At a General Meeting of the Company held on 27 March 2018 an ordinary resolution of the Company was duly passed by shareholders adopting the revised investment objective and policy (including the new benchmark index) with effect from 1 April 2018.
I am also very pleased to be able to report to Shareholders that the Company has been awarded “Best Global Emerging Market Equities Trust†in the Citywire Investment Trust Awards 2018.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return per share for the year amounted to 10.13 cents (2017: 7.70 cents). The revenue per share has been enhanced by a number of stock and special dividends this year, which are likely to be one-off payments and unlikely to be repeated. Consequently, your Board is recommending an increase in the final dividend to 4.40 cents per ordinary share and an additional special dividend of 1.00 cent per ordinary share for the year ended 30 September 2018. It is necessary to pay the latter to maintain investment trust status which requires the distribution of 85% of the Company’s revenue. The Directors are recommending the payment of a final dividend of 4.40 cents per ordinary share (2017: 4.20 cents) and a special dividend of 1.00 cent per ordinary share in respect of the year ended 30 September 2018 (2017: nil). Together with the interim dividend of 3.00 cents per share (2017: 2.70 cents), this represents a total of 8.40 cents per share (2017: 6.90 cents), an increase of 21.7% over total dividends paid in the previous year. Subject to shareholder approval, this dividend will be paid on 7 February 2019 to shareholders on the register of members at close of business on 4 January 2019. The Company does not have a policy of actively targeting income; nevertheless, this return represents an attractive yield of 4.6%. We believe this is an attractive element of the total return generated for shareholders, particularly given the low returns being offered by traditional sources of income.
C SHARE ISSUE
As set out in the Circular and C Share Prospectus sent to shareholders in October 2018, the Directors proposed that shareholders consider the issue of up to 150 million C Shares in connection with a reconstruction and winding up of another BlackRock investment trust, BlackRock Emerging Europe plc (the ‘Scheme Issue’), and in tandem with a wider placing and offer for subscription (the ‘Issue’).
The Board believed that the Scheme Issue and the Issue would have the following principal benefits for Shareholders:
-
the additional capital raised would enable the Company to take advantage of attractive investment opportunities, whilst also diversifying its investment portfolio;
-
the increase in the size of the Company was expected to improve market liquidity of the Ordinary Shares, enhancing the marketability of the Company and might result in a broader investor base over the longer term; and
- an increase in the size of the Company would mean that the fixed costs of operating the Company were spread over a larger asset base thereby reducing the Company’s ongoing charges ratio.
At a General Meeting of the Company held on 15 November 2018, the proposals were approved by shareholders and on 27 November 2018 a total of 44,927,580 C Shares were issued for cash and admitted to the Official List on the London Stock Exchange. The net proceeds from the Scheme Issue and the Issue will be accounted for as a separate pool of assets until the conversion date to ensure existing Ordinary Shareholders are not disadvantaged through exposure to a portfolio which may contain a proportion of uninvested cash, nor to the costs of investing the net proceeds. The NAV of the existing Ordinary Shares will not be diluted by the expenses associated with the Issues, which will be borne by the subscribers for C Shares. It is anticipated that the C Shares issued will convert into Ordinary Shares in January 2019. Upon Conversion the investments which were attributable to the C Shares will be merged with the Company’s existing portfolio of investments. The new Ordinary Shares arising on Conversion of the C Shares will rank pari passu, with the Ordinary Shares then in issue.
SHARE CAPITAL
The Directors recognise the importance to investors of ensuring that the Company’s share price is as close to its underlying NAV as possible. Accordingly, the Directors monitor the share price closely and will consider the issue of shares at a premium or the repurchase at a discount to balance demand and supply in the market. As at 30 September 2018, the Company had 200,616,108 ordinary shares in issue. In response to sustained demand for the Company’s shares, a total of 22,748,000 new ordinary shares were issued during the year to 30 September 2018. A further 3,625,000 new ordinary shares were issued during the period from 1 October 2018 up to the date of this report, bringing the total number of new shares issued to 26,373,000. Thus, the authority taken from shareholders at the last AGM has been fully utilised, save in respect of 876,610 shares.
Following the Scheme Issue and Issue described above, 37,375,087 C Shares were issued at a price of 100 pence per C Share on 27 November 2018 pursuant to the Scheme Issue to shareholders of BlackRock Emerging Europe plc, and a further 7,552,493 C Shares were issued pursuant to the placing and offer for subscription at an issue price of 100 pence per C Share.
For the year under review, the Company’s ordinary shares have traded at an average premium to NAV of 3.2% and were trading at a premium of 3.2% on a cum-income basis at 7 December 2018, the latest practicable date prior to the issue of this report. The Directors have the authority to buy back up to 14.99% of the Company’s issued share capital (excluding any shares held in treasury) and also to issue or sell from treasury on a non pre-emptive basis up to 10% of the Company’s issued share capital, having renewed this power at a General Meeting held on 15 November 2018. Both authorities expire on the conclusion of the forthcoming AGM at which time resolutions will be put to shareholders seeking a renewal of these powers. Further information can be found in the Directors’ Report on pages 33 to 37 of the Annual Report and Financial Statements.
CAPITAL GAINS TAXATION
On 30 March 2017 the Board made the decision to accrue for Argentine Capital Gains Tax potentially payable in respect of investments held through American Depositary Receipts (“ADRsâ€). Following the enactment of Argentine tax reform (Law No. 27,430), effective 1 January 2018, and discussions with the Company’s advisers, it was noted that ADRs over Argentine equity held by a non-resident purchaser would not give rise to an Argentine Capital Gains Tax liability. In addition, the law removed any liability for unpaid capital gains tax arising from transactions prior to 1 January 2018. The Board therefore decided to reverse the accrual with effect from that date. Further details can be found in note 7 on page 62 of the Annual Report and Financial Statements.
BOARD COMPOSITION
The Board consists of five wholly Independent Non-executive Directors. There have been no changes to the composition of the Board or its committees during the year. The Board has a succession plan in place which ensures that a suitable balance of skills, knowledge, experience, independence and diversity is achieved to enable the Board to effectively discharge its duties. The Directors have agreed to submit themselves to annual re-election and therefore all Directors will retire and will stand for re-election at the forthcoming Annual General Meeting (“AGMâ€).
Further information on the experience and background of the Directors can be found in their biographies on page 26 of the Annual Report and Financial Statements.
OUTLOOK
Global economic growth is expected to continue, although growth is likely to vary across the major developed economies. Markets are also becoming increasingly volatile, largely driven by heightened geopolitical tensions – in particular the threat of an escalation in the US/China trade war through the imposition of fresh US trade tariffs and concerns in Europe about the economic consequence of Brexit and tensions arising from Italian government spending. The strength of the US economy, the consequent strong US dollar, and the impact of rising US interest rates as a result of tightening monetary policy, have created headwinds for many of the countries in the Frontiers Universe whose debt is often denominated in US dollars.
Although the last financial year has been challenging with a significant derating for both Frontier and Emerging Markets, we believe the case for investing in the Frontiers Universe continues to present an attractive proposition for the medium to long-term investor. The Board believes that the Company’s broadened investable universe provides the investment managers with the flexibility to adjust the portfolio’s geographic exposure to take advantage of specific opportunities or in response to the natural evolution of Frontier Markets. The Board is confident that the investment managers are well positioned to take full advantage of the new opportunities this may create in what remains a dynamic and exciting asset class. We look forward to a new chapter for the Company and believe that it is now well placed to deliver continued success in the years to come.
ANNUAL GENERAL MEETING
The AGM of the Company will be held at BlackRock’s offices at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 5 February 2019 at 12.00 noon. Details of the business of the meeting are set out in the Notice of Meeting on pages 88 to 91 of the Annual Report and Financial Statements. The investment managers will make a presentation to shareholders on the Company’s progress and the outlook for Frontier Markets. My fellow Directors and I look forward to meeting shareholders at this year’s AGM and encourage you to attend.
AUDLEY TWISTON-DAVIES
Chairman
10 December 2018
INVESTMENT MANAGER’S REPORT
PORTFOLIO & MARKET COMMENTARY
During the 12 months to 30 September 2018, the Company returned -6.6%* (on a US Dollar basis with dividends reinvested) versus the Reference Index which rose by 2.3%**. The MSCI Frontier Markets Index declined by 7.7%, while the MSCI Emerging Markets Index returned -0.8% over the same period. Since inception the Company has returned +48.8%, compared to +35.8% return of the Reference Index, while the MSCI Emerging Markets Index has lagged, returning +14.1%.
* Source: BlackRock, as at 30 September 2018. ** Source: MSCI as at 30 September 2018. The benchmark changed from MSCI Frontier Markets Index to MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index ("Reference Index") from 1 April 2018.
The Company changed its benchmark in April 2018 from the MSCI Frontier Markets Index to MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index (the “Frontiers Universeâ€). The new Index excludes the largest eight countries (by market capitalisation), that is, Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan, and includes the other 16 countries in the MSCI Emerging Markets Index. With a combined weight of only 15% (on a market weighted basis) of the MSCI Emerging Markets Index, these 16 smaller ‘forgotten’ countries are less followed by investors in Emerging Markets and share many characteristics with our historically defined Frontier Markets; hence we expanded the investment universe to include these countries. The performance of the new benchmark has been significantly better than the previous benchmark over the period, which demonstrated the benefits of an expanded, more diverse and less concentrated investment universe.
Argentina (-46%) was both a contributor and detractor during the year. In the first half of the period, the Argentine market index was approximately flat, whilst the Company benefited from stock selection with our holdings in Argentine financials, such as Grupo Galicia and Grupo Supervielle, contributing strongly to returns. Whilst we did significantly decrease exposure to Argentina through this period, we did not cut our exposure sufficiently as the market fell 46% over the following six months, hurting performance of the Company. As US quantitative tightening started to impact markets, those countries which had twin deficits and a high reliance on external funding fared particularly badly and Argentina, with an arguably overvalued currency and reliance on huge monthly bond auctions, was at the forefront of this. Aware of their vulnerability, the Central Bank in Argentina approached the IMF (International Monetary Fund) at the first sign of problems in April, and were able to agree a US$50bn package with the IMF. Thinking that this would be sufficient to comfort the markets with respect to Argentina’s financing requirements, we added to our remaining positions into this sell off. In hindsight, these additions were too early, with the market continuing to fall throughout the summer.
Crisis point for Argentina was reached in August with a run on the currency which the Central Bank was unable to contain on its own. This precipitated an expanded agreement with the IMF, which came with additional requirements for Argentina to further reduce its fiscal deficit and shift from inflation targeting to monetary aggregate targeting. Under the agreement, the IMF will cover the gross financing requirement to the end of 2019 in the event that Argentina is not able to access debt markets. Whilst it is impossible to categorically rule out a debt default by Argentina, given current yields, the extent of the currency devaluation and the IMF backstop, we think risk reward tilts in our favour by remaining long.
The positions in Greek banks performed poorly over the period, falling over 26% as investors were concerned about an escalation of the tensions post elections in Italy spilling over into the wider Eurozone. Furthermore, our holdings in National Bank of Greece and Alpha Bank reported disappointing results as they struggled to reduce stock of non-performing exposures ("NPE"s) on balance sheets to the extent that investors expected. This led to increased fears about the potential for capital raises from the banks which given their valuations would be very dilutive for shareholders. Whilst the results missed our expectations, we think that the extent of the reaction to these results was excessive and we would expect better news on NPE reductions going forward.
Turkey (-41%) has had a troubled year with the currency devaluing by 25% in August alone. Investors became concerned with a central bank substantially behind the curve, spiralling inflation and a government which continued to stoke activity with loose fiscal policy. We are currently zero weighted in Turkey, concerned about the extent of foreign currency debt owed by the corporate sector and have no desire to add to exposure until the government reverses its current policy course. In a similar vein, we have had no exposure to Pakistan, have significantly reduced our exposure to Sri Lanka and Bangladesh and are running meaningful short exposure in the Philippines.
On a more positive note, the Kazakhstan (+23%) market rose over the period driven by Halyk Bank which rallied post the take-over of competitor, Kazkommertsbank. We remain holders of the bank given its strong market position and competitive advantage in terms of cost of funding versus peers.
Colombian oil producer, Ecopetrol (+50%), was one of the largest stock contributors to returns. Whilst the increase in the oil price was no doubt helpful for returns, the company was also able to stabilise production post a number of years of declines and to achieve better than expected cost discipline. Following the strong performance, we have fully exited the position.
Positions in Romania (+19%) also benefited returns, as both BRD, a leading bank in the country, and Romgaz, an oil and gas producer, reported strong earnings backed by robust cash flow generation supported by strong domestic macro-economic environment.
Vietnam (+35%) was the best performing country in the universe over the period. The economy continued to be supported by strong net Foreign Direct Investment as attractive labour costs attracted many companies to set up manufacturing operations in the country. The resulting strong growth in exports has provided a good support to both domestic activity and the current account surplus. The Company’s exposure to Vietnam contributed well to performance. Our position in a listed brokerage firm, Saigon Securities, rose over 70% as it benefited from increasing trading volumes and increasing market valuations.
A holding in MHP, a Ukrainian food processor specialising in poultry exports, added to performance. The stock benefited from increased margins as a result of strong pricing, especially across the Middle East where they took market share from the Brazilian poultry exporters on the back of their domestic problems. The company continued to expand its international customer base and strengthen its position as Europe’s largest poultry farm thanks to the development and capacity expansion of the Vinnytsia Complex.
Saudi Arabia (+7%) rose over the period thanks to a strong oil price and US dollar, to which the market is sensitive. The holding in Al Rajhi Bank contributed to returns as the stock rose helped by good earnings due to increased loan volumes.
BLACKROCK FRONTIERS INVESTMENT TRUST: SURPRISINGLY LOW VOLATILITY
| % | |
| BlackRock Frontiers Investment Trust NAV | 1.5 |
| S&P 500 | 1.8 |
| FTSE All-Share | 2.2 |
| MSCI EM | 2.4 |
The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Source: Bloomberg, MSCI, as at end September 2018. Volatility of weekly returns since 17th December 2010, inception date of the BlackRock Frontiers Investment Trust.
PORTFOLIO ACTIVITY
We started the year somewhat geared, something that we reduced through the year to reach a net exposure of exactly 100% at the end of September 2018. We have most significantly decreased exposure to Argentina since the start of the period by locking in the profits in the names that performed well and keeping the exposure to high conviction names. We have mainly exited or significantly reduced exposure to positions in Sri Lanka, Bangladesh, Estonia, Slovenia and Morocco, taking profits in a number of long held names as we see better opportunities elsewhere. The Company has maintained its exposure to Egypt on the back of an improved macro environment with lower than expected inflation and a lower trade deficit. We also added to exposure in Nigeria as we believed the exchange rate had reached a sustainable level and the stock market was overly pessimistic on the country.
Following the benchmark change, we built up the exposure to ASEAN countries, Thailand and Indonesia. In Thailand, consumption remains firm and its current account is in surplus. We initiated a position in Land and Houses, a real estate development company with a strong balance sheet and Polyethylene Tirephtallate (PET) plastic producer, Indorama. In Indonesia, we bought a position in conglomerate Astra International, where we thought that analysts were too pessimistic on revenue and margin turnaround potential for their auto business. We also initiated a position in a clothing retailer which is midst implementation of a balance sheet turnaround plan.
In Eastern Europe. we bought Gedeon Richter, a Hungarian generic pharmaceutical producer that also has two speciality drugs in the women’s health and central nervous system areas, which are currently in the ramp up stage. We expect the performance of both drugs to beat analyst expectations and think that the company is cheap on that basis. We added to Alior Bank, the largest challenger bank in Poland, which benefits from a strong IT platform. The bank trades at attractive valuations and is seeing rapid earnings growth as it completes a restructuring programme. We also took advantages of the Company’s ability to short on a limited basis and had some short positions in Turkey on the back of macro concerns.
In the Middle East, we added a number of positions in UAE and Qatar, including Industries Qatar, a domestic commodity producer which we have since exited following strong share price performance, and Emaar Properties, the largest UAE real estate developer, where we think the market is overly discounting the company’s long-term potential.
Over the period MSCI announced index changes affecting Argentina, Saudi Arabia and Kuwait. Our expanded investment universe encompassing all but the largest eight Emerging Markets is unaffected by these latest MSCI announcements. Argentina, Saudi Arabia and Kuwait will remain part of our investable universe and offer interesting investment opportunities for investors in our view.
OUTLOOK
We continue to be positive on the Frontiers Universe, especially where those markets are experiencing improved macroeconomic conditions, better political governance, cash flow growth, and cheap valuations.
Emerging and Frontier Markets have de-rated considerably. Whilst further rises in US rates would likely put pressure on some Emerging Market Central Banks to mirror these increases, we believe that, in general, Emerging Markets are better positioned to weather this strain than they were in the previous periods of monetary tightening of 2013 and 2015. At current levels, Emerging Markets are historically low on price to book valuations, which we believe is an attractive level. Despite the sell off and increased market concerns in 2018, we think that the expanded Frontiers Universe continues to exhibit strong GDP growth, has low government debt levels, and represents an opportunity to invest in companies with strong cash flow and high dividend yields, on some of the lowest valuations in the world.
SAM VECHT & EMILY FLETCHER
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
10 December 2018
TEN LARGEST INVESTMENTS1 AS AT 30 SEPTEMBER 2018
Astra International (Indonesia, Consumer Discretionary, 4.6% (2017: 0.0%)) is an Indonesian conglomerate. It owns Southeast Asia’s largest independent automotive group and is the leading provider of a full range of automobile and motorcycle products. Astra also has interests in financial services, heavy equipment, mining, construction and energy, agribusiness, infrastructure and logistics, information technology and property. It is also an active participant in the development of Indonesia’s strategic infrastructure, including toll roads, energy transportation and logistics and sea ports.
MHP (Ukraine, Consumer Staples, 3.5% (2017: 3.2%)) is a food processor, specialising in poultry exports. From hatching through to finished poultry products, the production process is 100% owned. MHP also owns 11 distribution centres and a refrigerated delivery vehicle fleet which enables the company to distribute products directly to customers.
Halyk Savings Bank (Kazakhstan, Financials, 3.3% (2017: 3.6%)) is one of Kazakhstan’s leading financial services groups and a leading retail bank with the largest domestic customer base and distribution network in Kazakhstan. Following the recent merger with Kazkommertsbank, Halyk’s branch network consists of 657 outlets across the country, with 4,411 ATMs.
Ooredoo2 (Qatar, Telecommunication Services, 3.3% (2017: 0.1%)) is an international communications company with a customer base of more than 100 million across the Middle East, North Africa and Southeast Asia with headquarters in Doha, Qatar. Ooredoo provides mobile, wireless, and content services with over 40% market share in the domestic and international telecommunication markets, and in business and residential markets.
Gedeon Richter (Hungary, Health Care, 3.2% (2017: 0.0%)) is a generic pharmaceutical producer in Central Eastern Europe and Russia that is currently in the process of transforming itself into a specialty pharma company. In the past, it has largely developed APIs (Active Pharmaceutical Ingredients) and generics, but it is now starting to generate an increasing share of its profits from higher margin, innovative drugs both for women’s health care and the central nervous system. We hold the stock on the premise that these higher margin and faster growing speciality drugs will drive up both the Company’s reserves and margins.
Land & Houses Public Company (Thailand, Real Estate, 3.2% (2017: 0.0%)) is a large real-estate company based in Thailand. It operates in two segments: real estate business, and rental and service business. The real estate business segment develops and sells houses, townhouses, and residential condominium projects. The rental and service business segment is involved in the rental of shopping malls, hotels, and apartments.
YPF (Argentina, Energy, 3.1% (2017: 2.5%)) is a vertically integrated Argentine state controlled energy company, engaged in oil and gas exploration and production, and the transportation, refining, and marketing of gas and petroleum products.
Emaar Properties (United Arab Emirates, Real Estate, 3.1% (2017: 0.0%)) is a real estate development company located in the United Arab Emirates. The company operates internationally, providing property development and management services. Emaar Properties Dubai is one of the largest real estate developers in the UAE and is known for various large-scale projects such as developing Burj Khalifa, the tallest building in the world.
Indorama Ventures (Thailand, Materials, 3.1% (2017: 0.0%)) is one of the world’s leading producers in the intermediate petrochemicals industry and a global manufacturer of wool yarns. It is the world’s largest producer of polyethylene terephthalate (PET) resin, the main material in PET bottles. It also produces polyester fibres and purified terephthalic acid, ingredients of polyfibres.
Al Rajhi Bank (P-Note) (Saudi Arabia, Financials, 3.0% (2017: 0.0%)) is the largest Islamic bank in the world and it is a major investor in Saudi Arabia’s business world. The bank is Saudi Arabia’s largest bank by market value and the Kingdom’s second largest lender with over SR 330.5 billion in assets and over 600 branches.
1 Gross market exposure as a % of net assets. Percentages in brackets represent the portfolio holding at 30 September 2017.
2 Includes exposure gained via both contracts for difference and equity holdings.
PORTFOLIO ANALYSIS
COUNTRY ALLOCATION: ABSOLUTE WEIGHTS (% OF GROSS MARKET EXPOSURE)
| Thailand | 10.2 |
| Indonesia | 9.2 |
| Vietnam | 9.0 |
| Argentina | 8.8 |
| Egypt | 8.0 |
| Romania | 6.2 |
| Nigeria | 5.9 |
| Kuwait | 5.6 |
| United Arab Emirates | 5.6 |
| Ukraine | 5.5 |
| Qatar | 5.4 |
| Saudi Arabia | 5.3 |
| Philippines | 4.1 |
| Malaysia | 4.0 |
| Kazakhstan | 3.4 |
| Greece | 3.3 |
| Pan-Asia | 3.2 |
| Hungary | 3.2 |
| Pan-Africa | 2.4 |
| Poland | 2.4 |
| Kenya | 2.0 |
| Tanzania | 1.3 |
| Morocco | 0.8 |
| Sri Lanka | 0.4 |
| Bangladesh | 0.3 |
| Estonia | 0.0 |
Source: BlackRock.
COUNTRY ALLOCATION RELATIVE TO THE REFERENCE INDEX (%)
| Egypt | 7.4 |
| Vietnam | 7.3 |
| Argentina | 7.2 |
| Romania | 5.7 |
| Ukraine | 5.5 |
| Nigeria | 5.1 |
| Kazakhstan | 3.3 |
| Kuwait | 3.1 |
| United Arab Emirates | 2.3 |
| Greece | 1.9 |
| Hungary | 1.7 |
| Kenya | 1.4 |
| Tanzania | 1.3 |
| Qatar | 0.5 |
| Sri Lanka | 0.3 |
| Bangladesh | 0.0 |
| Morocco | -0.1 |
| Tunisia | -0.1 |
| Senegal | -0.1 |
| Jordan | -0.1 |
| Croatia | -0.2 |
| Oman | -0.2 |
| Slovenia | -0.2 |
| Lebanon | -0.2 |
| Mauritius | -0.3 |
| Pakistan | -0.3 |
| Bahrain | -0.5 |
| Thailand | -0.5 |
| Indonesia | -0.6 |
| Philippines | -0.7 |
| Czech Republic | -1.0 |
| Peru | -2.1 |
| Colombia | -2.5 |
| Turkey | -3.2 |
| Poland | -3.5 |
| Other | -3.9 |
| Saudi Arabia | -5.3 |
| Chile | -5.8 |
| Malaysia | -7.1 |
Source: BlackRock and Datastream.
SECTOR ALLOCATION: ABSOLUTE WEIGHTS (% OF GROSS MARKET EXPOSURE)
| Financials | 33.6 |
| Consumer Discretionary | 16.5 |
| Real Estate | 16.3 |
| Consumer Staples | 10.9 |
| Materials | 10.1 |
| Health Care | 8.9 |
| Energy | 7.5 |
| Telecommunication Services | 5.8 |
| Industrials | 4.5 |
| Information Technology | 1.4 |
Source: BlackRock and Datastream.
SECTOR ALLOCATION RELATIVE TO THE REFERENCE INDEX (%)
| Consumer Discretionary | 11.7 |
| Real Estate | 11.4 |
| Health Care | 6.9 |
| Consumer Staples | 2.8 |
| Information Technology | 1.0 |
| Materials | -1.2 |
| Energy | -1.2 |
| Industrials | -1.9 |
| Telecommunication Services | -2.8 |
| Utilities | -5.2 |
| Financials | -6.0 |
Source: BlackRock and Datastream.
INVESTMENTS AS AT 30 SEPTEMBER 2018
Company |
Principal country of operation |
Sector |
Fair value and market exposure1 US$’000 |
Gross market exposure as a % of net assets3 |
| Equity portfolio | ||||
| YPF ADR | Argentina | Energy | 11,188 | 3.1 |
| Banco Macro | Argentina | Financials | 8,690 | 2.5 |
| Irsa Inversiones GDR | Argentina | Real Estate | 6,479 | 1.8 |
| Loma Negra Compania Industrial Argentina ADS | Argentina | Materials | 4,585 | 1.3 |
| -------- | -------- | |||
| 30,942 | 8.7 | |||
| -------- | -------- | |||
| Orascom Construction | Egypt | Industrials | 9,514 | 2.7 |
| Integrated Diagnostics | Egypt | Health Care | 6,763 | 1.9 |
| Medinet Nasr | Egypt | Real Estate | 5,113 | 1.4 |
| Eastern Tobacco | Egypt | Consumer Staples | 4,942 | 1.4 |
| Centamin | Egypt | Materials | 1,233 | 0.3 |
| Cleopatra Hospital | Egypt | Health Care | 1 | – |
| -------- | -------- | |||
| 27,566 | 7.7 | |||
| -------- | -------- | |||
| BRD Groupe Société Générale | Romania | Financials | 8,211 | 2.3 |
| S.N.G.N. Romgaz | Romania | Energy | 7,074 | 2.0 |
| Banca Transilvania | Romania | Financials | 6,660 | 1.9 |
| -------- | -------- | |||
| 21,945 | 6.2 | |||
| -------- | -------- | |||
| Zenith Bank | Nigeria | Financials | 9,329 | 2.6 |
| United Bank for Africa | Nigeria | Financials | 7,775 | 2.2 |
| Nigerian Breweries | Nigeria | Consumer Staples | 3,882 | 1.1 |
| -------- | -------- | |||
| 20,986 | 5.9 | |||
| -------- | -------- | |||
| Emaar Properties | United Arab Emirates | Real Estate | 11,096 | 3.1 |
| Emaar Development | United Arab Emirates | Real Estate | 9,016 | 2.5 |
| -------- | -------- | |||
| 20,112 | 5.6 | |||
| -------- | -------- | |||
| Mobile Telecommunications | Kuwait | Telecommunication Services | 8,570 | 2.4 |
| Burgan Bank | Kuwait | Financials | 5,721 | 1.6 |
| Mezzan | Kuwait | Consumer Staples | 3,233 | 0.9 |
| Kuwait Investment Projects | Kuwait | Financials | 2,393 | 0.7 |
| -------- | -------- | |||
| 19,917 | 5.6 | |||
| -------- | -------- | |||
| MHP | Ukraine | Consumer Staples | 12,528 | 3.5 |
| Ferrexpo | Ukraine | Materials | 7,019 | 2.0 |
| -------- | -------- | |||
| 19,547 | 5.5 | |||
| -------- | -------- | |||
| Thai Beverage | Thailand | Consumer Staples | 7,453 | 2.1 |
| Siam Commercial Bank | Thailand | Financials | 6,553 | 1.8 |
| -------- | -------- | |||
| 14,006 | 3.9 | |||
| -------- | -------- | |||
| Halyk Savings Bank | Kazakhstan | Financials | 11,718 | 3.3 |
| Kcell Joint Stock Company | Kazakhstan | Telecommunication Services | 444 | 0.1 |
| -------- | -------- | |||
| 12,162 | 3.4 | |||
| -------- | -------- | |||
| Vivo Energy | Pan-Africa | Consumer Discretionary | 8,603 | 2.4 |
| -------- | -------- | |||
| 8,603 | 2.4 | |||
| -------- | -------- | |||
| Alior Bank | Poland | Financials | 8,460 | 2.4 |
| -------- | -------- | |||
| 8,460 | 2.4 | |||
| -------- | -------- | |||
| Indo Tambangraya | Indonesia | Energy | 5,123 | 1.4 |
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 1,633 | 0.5 |
| Ciputra Development | Indonesia | Real Estate | 404 | 0.1 |
| -------- | -------- | |||
| 7,160 | 2.0 | |||
| -------- | -------- | |||
| Equity Group | Kenya | Financials | 6,908 | 1.9 |
| -------- | -------- | |||
| 6,908 | 1.9 | |||
| -------- | -------- | |||
| LT Group | Philippines | Industrials | 6,481 | 1.8 |
| -------- | -------- | |||
| 6,481 | 1.8 | |||
| -------- | -------- | |||
| Crystal International Group | Pan-Asia | Consumer Discretionary | 4,105 | 1.2 |
| -------- | -------- | |||
| 4,105 | 1.2 | |||
| -------- | -------- | |||
| Douja Promotion Groupe Addoha | Morocco | Real Estate | 2,875 | 0.8 |
| -------- | -------- | |||
| 2,875 | 0.8 | |||
| -------- | -------- | |||
| Ooredoo | Qatar | Telecommunication Services | 2,360 | 0.7 |
| -------- | -------- | |||
| 2,360 | 0.7 | |||
| -------- | -------- | |||
| Chevron Lubricants | Sri Lanka | Materials | 1,591 | 0.4 |
| -------- | -------- | |||
| 1,591 | 0.4 | |||
| -------- | -------- | |||
| Sapura Energy | Malaysia | Energy | 772 | 0.2 |
| -------- | -------- | |||
| 772 | 0.2 | |||
| -------- | -------- | |||
| Square Pharmaceuticals | Bangladesh | Health Care | 308 | 0.1 |
| -------- | -------- | |||
| 308 | 0.1 | |||
| -------- | -------- | |||
| Equity investments | 236,806 | 66.4 | ||
| -------- | -------- | |||
| BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund (Cash Fund) | 100,917 | 28.3 | ||
| -------- | -------- | |||
| Total equity investments (including Cash Fund) | 337,723 | 94.7 | ||
| -------- | -------- | |||
| P-Notes | ||||
| Al Rajhi Bank P-Note 19/01/2021 | Saudi Arabia | Financials | 10,778 | 3.0 |
| -------- | -------- | |||
| Total investments excluding CFDs | 348,501 | 97.7 | ||
| ======== | ======== |
Company |
Principal country of operation |
Sector |
Fair value1 US$’000 |
Gross market exposure2 US$’000 |
Gross market exposure as a % of net assets3 |
| CFD portfolio | |||||
| Long positions | |||||
| Mobile World | Vietnam | Consumer Discretionary | 9,000 | 2.6 | |
| Petrovietnam Fertilizer & Chemicals | Vietnam | Materials | 6,413 | 1.8 | |
| Quang Ngai Sugar | Vietnam | Consumer Staples | 6,411 | 1.7 | |
| Vincom Retail | Vietnam | Real Estate | 5,250 | 1.5 | |
| FPT | Vietnam | Information Technology | 4,975 | 1.4 | |
| -------- | -------- | ||||
| 32,049 | 9.0 | ||||
| -------- | -------- | ||||
| Astra International | Indonesia | Consumer Discretionary | 16,415 | 4.6 | |
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 4,745 | 1.4 | |
| Ciputra Development | Indonesia | Real Estate | 4,414 | 1.2 | |
| -------- | -------- | ||||
| 25,574 | 7.2 | ||||
| -------- | -------- | ||||
| Land & Houses Public Company | Thailand | Real Estate | 11,447 | 3.2 | |
| Indorama Ventures | Thailand | Materials | 10,917 | 3.1 | |
| -------- | -------- | ||||
| 22,364 | 6.3 | ||||
| -------- | -------- | ||||
| Alpha Bank | Greece | Financials | 7,150 | 2.0 | |
| National Bank of Greece | Greece | Financials | 4,461 | 1.3 | |
| -------- | -------- | ||||
| 11,611 | 3.3 | ||||
| -------- | -------- | ||||
| Gedeon Richter | Hungary | Health Care | 11,461 | 3.2 | |
| -------- | -------- | ||||
| 11,461 | 3.2 | ||||
| -------- | -------- | ||||
| Ooredoo | Qatar | Telecommunication Services | 9,228 | 2.6 | |
| -------- | -------- | ||||
| 9,228 | 2.6 | ||||
| -------- | -------- | ||||
| UMW Holdings | Malaysia | Consumer Discretionary | 5,990 | 1.7 | |
| Sapura Energy | Malaysia | Energy | 2,823 | 0.8 | |
| -------- | -------- | ||||
| 8,813 | 2.5 | ||||
| -------- | -------- | ||||
| National Medical Care | Saudi Arabia | Health Care | 6,730 | 1.9 | |
| Samba Financial Group | Saudi Arabia | Financials | 612 | 0.2 | |
| Herfy Food Services | Saudi Arabia | Consumer Discretionary | 569 | 0.1 | |
| Abdullah Al Othaim | Saudi Arabia | Consumer Staples | 270 | 0.1 | |
| -------- | -------- | ||||
| 8,181 | 2.3 | ||||
| -------- | -------- | ||||
| Acacia Mining | Tanzania | Materials | 4,787 | 1.3 | |
| -------- | -------- | ||||
| 4,787 | 1.3 | ||||
| -------- | -------- | ||||
| Cleopatra Hospital | Egypt | Health Care | 1,134 | 0.3 | |
| -------- | -------- | ||||
| 1,134 | 0.3 | ||||
| -------- | -------- | ||||
| Square Pharmaceuticals | Bangladesh | Health Care | 670 | 0.2 | |
| -------- | -------- | ||||
| 670 | 0.2 | ||||
| -------- | -------- | ||||
| Biotoscana Investments | Argentina | Health Care | 352 | 0.1 | |
| -------- | -------- | ||||
| 352 | 0.1 | ||||
| -------- | -------- | ||||
| Equity Group | Kenya | Financials | 331 | 0.1 | |
| -------- | -------- | ||||
| 331 | 0.1 | ||||
| -------- | -------- | ||||
| Tallink | Estonia | Industrials | 147 | – | |
| -------- | -------- | ||||
| 147 | – | ||||
| -------- | -------- | ||||
| Chevron Lubricants | Sri Lanka | Materials | 70 | – | |
| -------- | -------- | ||||
| 70 | – | ||||
| -------- | -------- | ||||
| Kuwait Food (Americana)4 | Kuwait | Consumer Discretionary | 3 | – | |
| -------- | -------- | ||||
| 3 | – | ||||
| -------- | -------- | -------- | |||
| Total long CFD positions | 1,112 | 136,775 | 38.4 | ||
| -------- | -------- | -------- | |||
| Total short CFD positions | (612) | (27,461) | (7.7) | ||
| -------- | -------- | -------- | |||
| Total CFD portfolio | 500 | 109,314 | 30.7 | ||
| ===== | ====== | ===== |
FAIR VALUE AND GROSS MARKET EXPOSURE OF INVESTMENTS AS AT 30 SEPTEMBER 2018
Portfolio |
Fair value1 US$’000 |
Gross market exposure2 US$’000 |
Gross market exposure as a % of net assets3 |
| Equity investments and P-Notes | 247,584 | 247,584 | 69.4 |
| -------- | -------- | -------- | |
| Total long CFD positions | 1,112 | 136,775 | 38.4 |
| -------- | -------- | -------- | |
| Total short CFD positions | (612) | (27,461) | (7.7) |
| -------- | -------- | -------- | |
| Total gross exposure | 248,084 | 356,898 | 100.1 |
| -------- | -------- | -------- | |
| Cash Fund3 | 100,917 | 100,917 | 28.3 |
| -------- | -------- | -------- | |
| Total investments and derivatives | 349,001 | 457,815 | 128.4 |
| -------- | -------- | -------- | |
| Cash and cash equivalents1, 3 | 4,425 | (104,389) | (29.3) |
| -------- | -------- | -------- | |
| Other net current assets | 3,088 | 3,088 | 0.9 |
| -------- | -------- | -------- | |
| Non-current liabilities | (19) | (19) | – |
| -------- | -------- | -------- | |
| Net assets | 356,495 | 356,495 | 100.0 |
| -------- | -------- | -------- |
1 Fair value is determined as follows:
– Listed investments are valued at bid prices where available, otherwise at latest market traded quoted prices.
– The sum of the fair value column for the CFD contracts totalling US$500,000 represents the fair valuation of all the CFD contracts, which is determined based on the difference between the purchase price and value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed positions). The cost of purchasing the securities held through long CFD positions directly in the market would have amounted to US$135,663,000 at the time of purchase, and subsequent market rises in prices have resulted in unrealised gains on the CFD contracts of US$1,112,000, resulting in the value of the total market exposure to the underlying securities rising to US$136,775,000 as at 30 September 2018. The proceeds from selling the securities to which exposure was gained via the short CFD positions would have been US$26,849,000 at the time of entering into the contract, and subsequent price rises have resulted in unrealised losses on the short CFD positions of US$612,000 and the value of the market exposure of these investments increasing to US$27,461,000 at 30 September 2018. If the short positions had been closed on 30 September 2018 this would have resulted in a loss of US$612,000 for the Company.
– P-Notes are valued based on the quoted bid price of the underlying security to which they relate.
2 Market exposure in the case of equity investments is the same as fair value. In the case of CFDs it is the market value of the underlying shares to which the portfolio is exposed via the contract.
3 The gross market exposure column for cash and cash equivalents has been adjusted to assume the Company purchased direct holdings rather than exposure being gained through CFDs.
4 Unquoted investment.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 30 September 2018.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment.
INVESTMENT OBJECTIVE
The Company’s investment objective was to achieve long-term capital growth from investment in companies operating in Frontier Markets or whose stocks are listed on the stock markets of such countries.
With effect from 1 April 2018, and following shareholder approval, the Company adopted a new investment objective and investment policy which is set out below.
The Company’s investment objective is to achieve long-term capital growth by investing in companies domiciled or listed in, or exercising the predominant part of their economic activity in, less developed countries. These countries (the “Frontiers Universeâ€) are any country which is neither part of the MSCI World Index of developed markets, nor one of the eight largest countries by market capitalisation in the MSCI Emerging Markets Index as at 1 April 2018: being Brazil, China, India, Korea, Mexico, Russia, South Africa and Taiwan (the “Selected Countriesâ€).
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
Strategy
To achieve its objective, the Company invests globally in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, the Frontiers Universe.
Business model
The Company’s business model follows that of an externally managed investment trust, therefore the Company does not have any employees and outsources its activities to third-party service providers, including BlackRock Fund Managers Ltd (“BFMâ€) (“The Managerâ€) which is the principal service provider.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (“BIM (UK)â€) (“the Investment Managerâ€). The contractual arrangements with, and assessment of, the Manager are summarised on pages 32 and 33 of the Annual Report and Financial Statements. The Investment Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company. Other service providers include the Depositary and the Fund Accountant, The Bank of New York Mellon (International) Limited, and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with third-party service providers are set out in the Directors’ Report in the Annual Report and Financial Statements.
Investment policy (from 1 April 2018)
The Company will seek to maximise total return and will invest globally in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, the Frontiers Universe. Performance is measured against the Company’s Reference Index (“Reference Indexâ€), which is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index (net total return, USD). The Investment Manager is not constrained by the geographical weightings of the Reference Index and the Company’s portfolio may frequently be overweight or underweight relative to the Reference Index. The Company will exit any investment as soon as reasonably practicable following the relevant company ceasing to be domiciled or listed in, or exercising the predominant part of its economic activity in, the Frontiers Universe.
In order to achieve the Company’s investment objective, the Investment Manager selects investments through a process of fundamental and geopolitical analysis, seeking long-term appreciation from mispriced value or growth. The Investment Manager employs both a top-down and bottom-up approach to investing. It is expected that the Company will have exposure to between 35 to 65 holdings.
Where possible, investment will generally be made directly in the stock markets of the Frontiers Universe. Where the Investment Manager determines it appropriate, investment may be made through collective investment schemes, although such investments are not likely to be significant. Investment in other closed-ended investment funds admitted to the Official List will not exceed more than 10 per cent., in aggregate, of the value of the Gross Assets (calculated at the time of any relevant investment). It is intended that the Company will generally be invested in equity investments; however, the Investment Manager may invest in equity-related investments, such as derivatives or convertibles, and, to a lesser extent, in bonds or other fixed-income securities, including high risk debt securities. These securities may be below investment grade.
Due to national and/or international regulation, excessive operational risk, prohibitive costs and/or the time period involved in establishing trading and custody accounts in certain countries in the Frontiers Universe, the Company may be unable to invest (whether directly or through nominees) in companies in certain countries in the Frontiers Universe or, in the opinion of the Company and/or the Investment Manager, it may not be advisable to do so. In such circumstances, or in countries where acceptable custodial and other arrangements are not in place to safeguard the Company’s investments, the Company intends to gain economic exposure to companies in such countries by investing indirectly through derivatives. Derivatives are financial instruments linked to the performance of another asset or security, such as promissory notes, contracts for difference, futures or traded options. Save as provided below, there is no restriction on the Company investing in derivatives in such circumstances or for efficient portfolio management purposes.
The Company may be geared through borrowings and/or by entering into derivative transactions (taking both long and short positions) that have the effect of gearing the Company’s portfolio to enhance performance. The Company may also use borrowings for the settlement of transactions, to facilitate share repurchases (where applicable) and to meet on-going expenses.
The respective limits on gearing (whether through the use of derivatives, borrowings or a combination of both) are set out below:
-
Maximum gearing through the use of derivatives or borrowings to gain exposure to long positions in securities: 140 per cent. of net assets
-
Maximum exposure to short positions (for shorting purposes the Company may use indices or individual stocks): 10 per cent. of net assets
-
Maximum gross exposure (total long exposure plus total short exposure): 150 per cent. of net assets
- Maximum net exposure (total long exposure minus total short exposure): 130 per cent. of net assets
In normal circumstances, the Company will typically have net exposure of between 95 per cent. and 120 per cent. of net assets.
When investing via derivatives, the Company will seek to mitigate and/or spread its counterparty risk exposure by collateralisation and/or contracting with a potential range of counterparty banks, as appropriate, each of which shall, at the time of entering into such derivatives, have a Standard & Poor’s credit rating of at least A- on its long-term senior unsecured debt.
The Company may invest up to 5 per cent. of its Gross Assets (at the time of such investment) in unquoted securities. The Company will invest so as not to hold more than 15 per cent. of its Gross Assets in any one stock or derivative position at the time of investment (excluding cash management activities).
No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.
A detailed analysis of the Company’s portfolio has been provided on pages 10 to 17 of the Annual Report and Financial Statements.
Portfolio construction is a continuous process, with the Investment Manager analysing constantly the impact of new ideas and information on the portfolio as a whole. The approach is flexible, varying through market and economic cycles to create a portfolio appropriate to the focused and unconstrained strategy of the Company. The macroeconomic environment is factored into all portfolio decisions. In general, macroeconomic analysis is a more dominant factor in investment decision making when the outlook is negative. The macro process is comprised of three parts: political assessment, macroeconomic analysis and appraisal of the valuation of a country’s market, which can only take place with thorough analysis of stock specific opportunities.
The Investment Manager’s research team generates ideas from a diverse range of sources. These include frequent travel to the markets in which the Company invests and regular conversations with contacts that allow the Frontiers team to assess the entire eco-system around a company; namely competitors, suppliers, financiers, customers and regulators. The team leverages the internal research network sharing information between BlackRock’s investment teams using a proprietary research application and database, and develops insights from macroeconomic analysis. The Board believes that BlackRock’s research platform is a significant competitive advantage, both in terms of information specific to Emerging and Frontier Market equities and through its global insights across asset classes. Access to companies is extremely good given BlackRock’s market presence, which makes it possible to develop a detailed knowledge of a company and its management.
The research process focuses on cash flow, as the investment team believes that this is ultimately the driver of share prices over time. The process is designed with the aim of identifying companies that can translate top line revenue growth to free cash flow and investing in these companies when the analysis suggests that the cash flow stream is undervalued. Financial models are developed focusing on company financials, particularly cash flow statements, rather than relying on third party research.
The Investment Manager’s research team monitors differing levels of risk throughout the process and believes that avoiding major downside events can generate significant outperformance over the long-term. Inputs from BlackRock’s Risk & Quantitative Analysis Team (RQA) are an integral part of the investment process. The overall premise of BlackRock’s risk analysis is to try and understand risk as opposed to avoiding risk. RQA analyse market and portfolio risk factors including stress tests, correlations, factor returns, cross-sectional volatility and attributions. BlackRock’s evaluation procedures and financial analysis of the companies within the portfolio also take into account environmental, social and governance matters and other business issues. The Company invests primarily on financial grounds to meet its stated objectives.
PERFORMANCE
Details of the Company’s performance for the year are given in the Chairman’s Statement. The Investment Managers’ Report includes a review of the main developments during the period, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive Income. The total loss for the year, after taxation, was US$29,342,000 (2017: profit of US$60,204,000) of which the revenue return amounted to US$19,328,000 (2017: US$13,107,000) and the capital loss amounted to US$48,670,000 (2017: profit of US$47,097,000).
The Directors are recommending the payment of a final dividend of 4.40 cents per ordinary share and a one-off special dividend of 1.00 cent per ordinary share in respect of the year ended 30 September 2018 (2017: 4.20 cents) as set out in the Chairman’s Statement.
KEY PERFORMANCE INDICATORS
The Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below.
Performance measured against the benchmark
At each meeting the Board reviews the performance of the portfolio as well as the net asset value and share price for the Company and compares this to the return of the Company’s benchmark. The Board considers this to be an important key performance indicator and has determined that it should also be used to calculate whether a performance fee is payable to BlackRock. The Company’s absolute and relative performance is set out in the performance record table on page 3 of the Annual Report and Financial Statements.
Share rating
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount to NAV. Accordingly, the Directors monitor the share rating closely and will consider share repurchases in the market if the discount widens significantly, or the issue of shares to the market to meet demand to the extent that the Company’s shares are trading at a premium. In addition, in accordance with the Directors’ commitment at launch the Company will formulate and submit to shareholders proposals to provide them with an opportunity at each five year anniversary since launch, to realise the value of their ordinary shares at the applicable NAV per share less costs. The next opportunity will take place on or around the date of the Company’s AGM in 2021.
For the year under review the Company’s shares have traded at an average premium to the cum-income NAV of 3.2% during the year, and were trading at a premium of 3.2% on a cum-income basis at 7 December 2018. The Directors have the authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares). The Directors sought and received shareholder authority at the last AGM to issue up to 10% of the Company’s issued share capital (via the issue of new shares or sale of shares from treasury) on a non pre-emptive basis. Further information can be found in the Directors’ Report on page 36 of the Annual Report and Financial Statements.
Ongoing charges
The ongoing charges reflect those expenses which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective investment fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments and performance fees. The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company.
The table below sets out the key KPIs for the Company.
Alternative Performance Measures (see glossary on pages 92 and 93 of the Annual Report and Financial Statements).
| Year ended 30 September 20181 |
Year ended 30 September 20171 |
|||
| £% | US$% | £% | US$% | |
| Net asset value total return2 | -4.0 | -6.6 | +17.7 | +21.5 |
| Share price total return3 | -3.1 | -5.7 | +19.8 | +23.6 |
| Reference Index return4 | +5.3 | +2.3 | +21.5 | +25.5 |
| Premium to cum-income NAV | 2.6 | 1.5 | ||
| Ongoing charges5 | 1.42 | 1.44 | ||
| Ongoing charges including performance fees | 1.42 | 1.64 | ||
1 Based on an exchange rate of US$1.3041 to £1 at 30 September 2018 and US$1.3417 to £1 at 30 September 2017.
2 Calculated with dividends reinvested in accordance with AIC guidelines.
3 Calculated on a mid to mid basis with dividends reinvested.
4 With effect from 1 April 2018, the Reference Index changed to a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Prior to 1 April 2018, the Reference Index was the MSCI Frontier Markets Index. The performance of the reference indices during the year ended 30 September 2018 has been blended to reflect this change. The Reference Index shown for the year ended 30 September 2017 is the MSCI Frontier Markets Index.
5 Calculated as a percentage of average net assets and using expenses, excluding performance fees, VAT refunded, transaction charges, finance costs and taxation.
The Board also regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance of the Company against a peer group of Frontier Market open and closed-ended funds.
PRINCIPAL RISKS
The Board has in place a robust process to identify, assess and monitor the principal risks of the Company, including those that they consider would threaten its business model, future performance, solvency or liquidity. A core element of this is the Company’s risk register, which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk, and the quality of the controls operating to mitigate the risk. A residual risk rating is then calculated for each risk based on the outcome of this assessment. This approach allows the effect of any mitigating procedures to be reflected in the final assessment.
The register, its method of preparation and the operation of the key controls in BlackRock’s and other third party service providers’ systems of internal control are reviewed on a regular basis by the Company’s Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit and Management Engagement Committee periodically receives presentations from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams, and reviews Service Organisation Control (SOC 1) reports from BlackRock and the Company’s Custodian and Fund Accountant, The Bank of New York Mellon (International) Limited.
The current risk register includes a range of risks spread between performance risk, income/dividend risk, legal & regulatory risk, counterparty risk, operational risk, market risk, political risk and financial risk.
The principal risks and uncertainties faced by the Company during the year, together with the potential effects, controls and mitigating factors, are set out as follows.
| Principal Risk | Mitigation/Control |
| Investment Performance Risk The Board is responsible for: - setting the investment policy to fulfil the Company’s objectives; - monitoring the performance of the Company’s Investment Manager and the strategy adopted. An inappropriate policy or strategy may lead to: - poor performance compared to the Company’s benchmark, peer group or shareholder expectations; - a widening discount to NAV; - a reduction or permanent loss of capital; and - dissatisfied shareholders and reputational damage. |
To manage these risks the Board: - regularly reviews the Company’s investment mandate and long-term strategy; - has set, and regularly reviews, the investment guidelines and has put in place appropriate limits on levels of gearing and the use of derivatives; - receives from the Investment Manager a regular explanation of stock selection decisions, portfolio gearing and any changes in gearing and the rationale for the composition of the investment portfolio; - receives from the Investment Manager regular reporting on the portfolio’s exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions; and - monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the Company’s investment policy. |
| Income/Dividend Risk The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. Any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls imposed by jurisdictions in which the Company invests) may reduce the level of dividends received by shareholders. |
The Company does not have a policy of actively seeking income. The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting. The Company also has a revenue reserve and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required. |
| Legal & Regulatory Risk The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing its investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the Market Abuse Act, the UK Listing Rules and the Disclosure Guidance & Transparency Rules. |
The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of this Directive are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company. Compliance with the accounting standards applicable to quoted companies and those applicable to investment trusts are also regularly monitored to ensure compliance. The Company Secretary and the Company’s professional advisers monitor developments in relevant laws and regulations and provide regular reports to the Board in respect of the Company’s compliance. |
| Counterparty Risk The Company’s investment policy also permits the use of both exchange-traded and over-the-counter derivatives (including contracts for difference). The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. |
Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Board reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intra-day monitoring of exposures to ensure that these are within set limits. |
| Operational Risk In common with 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 BlackRock (the Investment Manager and AIFM), and of The Bank of New York Mellon (International) Limited (the Depositary and Fund Accountant), which ensures safe custody of the Company’s assets and maintains the Company’s accounting records. The Company’s share register is maintained by the Registrar, Computershare. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records, as a result of a cyber-attack or otherwise, could impact the monitoring and reporting of the Company’s financial position. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. |
The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the investment management agreement on a regular basis. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control. The Board considers succession arrangements for key employees of the Manager and the Investment Manager and receives reports on the business continuity arrangements for the Company’s key service providers. The Board also receives regular reports from BlackRock’s internal audit function. |
| Market Risk Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. The securities markets of the Frontiers Universe are not as large as the more established securities markets and have substantially less trading volume, which may result in a lack of liquidity and higher price volatility. There are a limited number of attractive investment opportunities in Frontier Markets and this may lead to a delay in investment and may affect the price at which such investments may be made and reduce potential investment returns for the Company. There is also exposure to currency, market and political risk due to the location of the operation of the businesses in which the Company may invest. As a consequence of this and other market factors the Company may invest in a concentrated portfolio of shares and this focus may result in higher risk when compared to a portfolio that has spread or diversified investments more broadly. Corruption also remains a significant issue across the Frontiers Universe and the effects of corruption could have a material adverse effect on the Company’s performance. Accounting, auditing and financial reporting standards and practices and disclosure requirements applicable to many companies in developing countries may be less rigorous than in developed markets. As a result there may be less information available publicly to investors in these securities, and such information as is available is often less reliable. The Company also gains exposure to the Frontiers Universe by investing indirectly through Promissory Notes (P-Notes) which presents additional risk to the Company as P-Notes are uncollateralised resulting in the Company being subject to full counterparty risk via the P-Note issuer. P-Notes also present liquidity issues as the Company, being a captive client of a P-Note issuer, may only be able to realise its investment through the P-Note issuer and this may have a negative impact on the liquidity of the P-Notes which does not correlate to the liquidity of the underlying security. |
Market risk represents the risks of investment in a particular market, country or geographic region. Therefore, this is largely outside of the scope of the Board’s control. However, the Board carefully considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. Market risk is also mitigated through portfolio diversification across countries and regions. The Board monitors the implementation and results of the investment process with the Investment Manager regularly. The Investment Manager also regularly reports to the Board on relative market risks associated with investment in such regions. Further information is provided under ‘Political Risk’. |
| Political Risk Investments in the Frontiers Universe may include a higher element of risk compared to more developed markets due to greater political instability. Political and diplomatic events in the Frontiers Universe where the Company invests (for example, governmental instability, corruption, adverse changes in legislation or other diplomatic developments such as the outbreak of war or imposition of sanctions) could substantially and adversely affect the economies of such countries or the value of the Company’s investments in those countries. |
The Investment Manager mitigates this risk by applying stringent controls over where investments are made and through close monitoring of political risks. The Investment Manager’s approach to filtering the investment universe takes account of the political background to regions and is backed up by rigorous stock specific research and risk analysis, individually and collectively, in constructing the portfolio. The management team has a wide network of business and political contacts which provides economic insights with public and private bodies. This enables the Investment Manager to assess potential investments in an informed and disciplined way, as well as being able to conduct regular monitoring of investments once made. However, given the nature of political risk, all investments will be exposed to a degree of risk and the Investment Manager will ensure that the portfolio remains diversified across countries to mitigate the risk. |
| Financial Risk The Company’s investment activities expose it to a variety of financial risks which include foreign currency risk, liquidity risk, currency risk and interest rate risk. |
Details of these risks are disclosed in note 17 of the Annual Report and Financial Statements, together with a summary of the policies for managing these risks. |
VIABILITY STATEMENT
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines. The Board conducted this review for the period up to the AGM in 2023. In determining this period, the Board took into account the Company’s investment objective to achieve long-term capital growth and the fact that on or around the AGM in 2021 it will be necessary for the Board to formulate and submit to shareholders proposals (which may constitute a tender offer and/or other method of distribution, as was the case in 2016) to provide an opportunity to realise the value of their investment in the Company at NAV less applicable costs.
In making this assessment the Board has considered the following factors:
-
The Company’s principal risks as set out as above;
-
The ongoing relevance of the Company’s investment objective in the current environment; and
- The level of ongoing demand for the Company’s ordinary shares.
The Board has also considered a number of financial metrics, including:
-
The level of current and historic ongoing charges incurred by the Company;
-
The Company’s borrowings and its ability to meet its liabilities as they fall due;
-
The premium or discount to NAV;
-
The level of income generated by the Company;
-
Future income forecasts; and
- The liquidity of the Company’s portfolio.
The Company is an investment company with a relatively liquid equity portfolio (as at 30 September 2018, 89.5% of the equity portfolio was capable of being liquidated in less than 20 days) and largely fixed overheads (excluding performance fees) which comprise a very small percentage of net assets (1.42%). In addition, any performance fees are capped at 1% of NAV in years where the NAV per share has fallen or 2.5% in years where the NAV per share has increased. Therefore, the Board has concluded that even in exceptionally stressed operating conditions, the Company would comfortably be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges, such as regulatory changes and the tax treatment of Investment Trusts, or a significant decrease in size due to substantial share buy-back activity, which may result in the Company no longer being of sufficient market capitalisation to represent viable investment propositions or no longer being able to continue in operation.
THE UK’S EXIT FROM THE EUROPEAN UNION
The Board has also considered the adverse impact of potential changes in law, regulation and taxation and the matter of foreign exchange risk. They have determined that although there are a number of potential risks associated with the Brexit process, any transition following any agreement, and the legal, fiscal and regulatory landscape thereafter, they do not believe that this represents a material threat to the Company’s strategy and business model, nor do they believe that the Investment Manager would be materially impeded in achieving the Company’s investment objective.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
FUTURE PROSPECTS
The Board’s main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in both the Chairman’s Statement and in the Investment Manager’s Report.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider environmental, social and governance factors and human rights issues when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on page 30 of the Annual Report and Financial Statements.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 30 September 2018, all of whom held office throughout the year, are set out in the Directors’ biographies on page 26 of the Annual Report and Financial Statements. As at the date of this report, the Board consists of five men. The Company does not have any employees.
BY ORDER OF THE BOARD
KEVIN MAYGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
10 December 2018
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report on pages 32 and 33 of the Annual Report and Financial Statements.
The investment management fee due for the year ended 30 September 2018 amounted to US$4,280,000 (2017: US$3,361,000). No performance fee is payable for the year ended 30 September 2018 (2017: US$596,000). At the year end, US$1,024,000 was outstanding in respect of management fees (2017: US$2,606,000) and US$nil (2017: US$596,000) was outstanding in respect of performance fees.
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 30 September 2018 amounted to US$93,000 excluding VAT (2017: US$73,000) of which marketing fees of US$68,000 excluding VAT (2017: US$55,000) were outstanding as at year end.
The Company has an investment in the Cash Fund of US$100,917,000 (2017: US$66,194,000) at the year end, which is a fund managed by a company within the BlackRock Group.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report on pages 38 to 40 of the Annual Report and Financial Statements. At 30 September 2018, US$16,000 (£12,000) (2017: US$16,000 (£12,000)) was outstanding in respect of Directors’ fees.
At the date of this report, the Board consists of five non-executive Directors, all of whom are considered to be independent of the Manager by the Board. None of the Directors has a service contract with the Company. For the year ended 30 September 2018, the Chairman received an annual fee of £36,000, the Chairman of the Audit & Management Engagement Committee receives an annual fee of £30,000 and each of the other Directors received an annual fee of £26,000. The Board’s remuneration was last reviewed on 5 December 2018. Following this review it was agreed that all Directors’ fees would increase by £1,000 per annum with effect from 1 October 2018.
All members of the Board hold ordinary shares in the Company with the exception of Mr Zok who does not currently hold any shares. Audley Twiston-Davies holds 128,935 ordinary shares, John Murray holds 121,967 ordinary shares, Nick Pitts-Tucker holds 110,148 ordinary shares and Stephen White holds 30,000 ordinary shares.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable United Kingdom law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under IFRS as adopted by the European Union. Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
-
present fairly the financial position, financial performance and cash flows of the Company;
-
select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
-
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
-
make judgements and estimates that are reasonable and prudent;
-
state whether the financial statements have been prepared in accordance with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;
-
provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report, Corporate Governance Statement and the Report of the Audit and Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Investment Manager and the AIFM for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 26 of the Annual Report and Financial Statements, confirms to the best of their knowledge that:
-
the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and net return of the Company; and
- the Strategic Report contained in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2016 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit and Management Engagement Committee’s report on pages 41 to 45 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 30 September 2018, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
AUDLEY TWISTON-DAVIES
Chairman
10 December 2018
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2018
Notes |
Revenue 2018 US$’000 |
Revenue 2017 US$’000 |
Capital 2018 US$’000 |
Capital 2017 US$’000 |
Total 2018 US$’000 |
Total 2017 US$’000 |
|
| Income | |||||||
| Income from investments held at fair value through profit or loss | 3 | 19,295 | 13,195 | – | – | 19,295 | 13,195 |
| Net income from contracts for difference | 3 | 3,245 | 2,731 | – | – | 3,245 | 2,731 |
| Other income | 3 | 103 | 42 | – | – | 103 | 42 |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Total revenue | 22,643 | 15,968 | – | – | 22,643 | 15,968 | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net (loss)/profit on investments held at fair value through profit or loss | – | – | (27,899) | 54,896 | (27,899) | 54,896 | |
| Net loss on foreign exchange | – | – | (336) | (835) | (336) | (835) | |
| Net (loss)/profit from contracts for difference | – | – | (22,830) | 3,367 | (22,830) | 3,367 | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Total | 22,643 | 15,968 | (51,065) | 57,428 | (28,422) | 73,396 | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Expenses | |||||||
| Investment management and performance fees | 4 | (856) | (672) | (3,424) | (3,285) | (4,280) | (3,957) |
| Other operating expenses | 5 | (1,252) | (1,062) | (118) | (130) | (1,370) | (1,192) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Total operating expenses | (2,108) | (1,734) | (3,542) | (3,415) | (5,650) | (5,149) | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 20,535 | 14,234 | (54,607) | 54,013 | (34,072) | 68,247 | |
| Finance costs | (5) | (2) | (18) | (7) | (23) | (9) | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net profit/(loss) on ordinary activities before taxation | 20,530 | 14,232 | (54,625) | 54,006 | (34,095) | 68,238 | |
| Taxation | (1,202) | (1,125) | 5,955 | (6,909) | 4,753 | (8,034) | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Profit/(loss) for the year | 19,328 | 13,107 | (48,670) | 47,097 | (29,342) | 60,204 | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Earnings/(loss) per ordinary share (cents) | 7 | 10.13 | 7.70 | (25.50) | 27.67 | (15.37) | 35.37 |
| ===== | ===== | ===== | ===== | ===== | ===== |
The total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or disposed of during the year. All income is attributable to the equity holders of the Company.
The Company does not have any other comprehensive income. The net profit/(loss) for the year disclosed above represents the Company’s total comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2018
Notes |
Called up share capital US$’000 |
Share premium account US$’000 |
Capital redemption reserve US$’000 |
Special reserve US$’000 |
Capital reserves US$’000 |
Revenue reserve US$’000 |
Total US$’000 |
|
| For the year ended 30 September 2018 |
||||||||
| At 30 September 2017 | 1,778 | 46,275 | 5,798 | 230,776 | 55,901 | 9,719 | 350,247 | |
| Total comprehensive income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (48,670) | 19,328 | (29,342) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Share issues | 8,9 | 228 | 49,119 | – | – | – | – | 49,347 |
| Share issue costs | 9 | – | (299) | – | – | – | – | (299) |
| C Share issue costs – write back | 9 | – | – | – | 23 | – | – | 23 |
| Dividends paid* | 6 | – | – | – | – | – | (13,481) | (13,481) |
| -------- | -------- | -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2018 | 2,006 | 95,095 | 5,798 | 230,799 | 7,231 | 15,566 | 356,495 | |
| -------- | -------- | -------- | -------- | -------- | -------- | -------- | ||
| For the year ended 30 September 2017 |
||||||||
| At 30 September 2016 | 1,643 | 21,456 | 5,798 | 230,794 | 8,804 | 7,902 | 276,397 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 47,097 | 13,107 | 60,204 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Share issues | 135 | 24,967 | – | – | – | – | 25,102 | |
| Share issue costs | – | (148) | – | – | – | – | (148) | |
| C Share issue costs | – | – | – | (18) | – | – | (18) | |
| Dividends paid** | 6 | – | – | – | – | – | (11,290) | (11,290) |
| -------- | -------- | -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2017 | 1,778 | 46,275 | 5,798 | 230,776 | 55,901 | 9,719 | 350,247 | |
| -------- | -------- | -------- | -------- | -------- | -------- | -------- |
* Final dividend of 4.20 cents per share for the year ended 30 September 2017, declared on 1 December 2017 and paid on 9 February 2018 and interim dividend paid in respect of the year ended 30 September 2018 of 3.00 cents per share, declared on 17 May 2018 and paid on 29 June 2018.
** Final dividend of 4.00 cents per share for the year ended 30 September 2016, declared on 22 November 2016 and paid on 17 February 2017 and interim dividend paid in respect of the year ended 30 September 2017 of 2.70 cents per share, declared on 25 May 2017 and paid on 30 June 2017.
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2018
Notes |
2018 US$’000 |
2017 US$’000 |
|
| Non current assets | |||
| Investments held at fair value through profit or loss | 348,501 | 354,384 | |
| -------- | -------- | ||
| Current assets | |||
| Other receivables | 755 | 5,416 | |
| Derivative financial assets held at fair value through profit or loss | 4,011 | 882 | |
| Cash and cash equivalents | 4,425 | 5,947 | |
| Cash collateral held with brokers in respect of contracts for difference | 10,180 | 1,431 | |
| -------- | -------- | ||
| 19,371 | 13,676 | ||
| -------- | -------- | ||
| Total assets | 367,872 | 368,060 | |
| -------- | -------- | ||
| Current liabilities | |||
| Other payables | (7,847) | (7,644) | |
| Derivative financial liabilities held at fair value through profit or loss | (3,511) | (2,281) | |
| Cash collateral received in respect of contracts for difference | – | (1,930) | |
| -------- | -------- | ||
| (11,358) | (11,855) | ||
| -------- | -------- | ||
| Total assets less current liabilities | 356,514 | 356,205 | |
| -------- | -------- | ||
| Non current liabilities | |||
| Non current tax liability | – | (3,286) | |
| Deferred taxation liability | – | (2,653) | |
| Management shares of £1.00 each (one quarter paid) | (19) | (19) | |
| -------- | -------- | ||
| Net assets | 356,495 | 350,247 | |
| -------- | -------- | ||
| Equity attributable to equity holders | |||
| Called up share capital | 8 | 2,006 | 1,778 |
| Share premium account | 9 | 95,095 | 46,275 |
| Capital redemption reserve | 9 | 5,798 | 5,798 |
| Special reserve | 9 | 230,799 | 230,776 |
| Capital reserves | 9 | 7,231 | 55,901 |
| Revenue reserve | 9 | 15,566 | 9,719 |
| -------- | -------- | ||
| Total equity | 356,495 | 350,247 | |
| -------- | -------- | ||
| Net asset value per ordinary share (cents) | 7 | 177.70 | 196.91 |
| ======== | ======== |
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2018
| 2018 US$’000 |
2017 US$’000 |
|
| Operating activities | ||
| Net (loss)/profit on ordinary activities before taxation | (34,095) | 68,238 |
| Add back finance costs | 23 | 9 |
| Net loss/(profit) on investments and contracts for difference held at fair value through profit or loss (including transaction costs) | 47,874 | (59,209) |
| Net loss on foreign exchange | 336 | 835 |
| Sales of investments held at fair value through profit or loss | 245,347 | 164,419 |
| Purchases of investments held at fair value through profit or loss | (232,640) | (172,655) |
| Sales of Cash Fund* | 195,025 | 65,645 |
| Purchases of Cash Fund* | (229,748) | (89,213) |
| Realised losses on closure of contracts for difference | (77,413) | (24,567) |
| Realised gains on closure of contracts for difference | 55,539 | 30,586 |
| (Increase)/decrease in other receivables | (203) | 705 |
| Decrease in other payables | (2,139) | (568) |
| Decrease in amounts due from brokers | 3,567 | 294 |
| Increase in amounts due to brokers | 2,342 | 2,507 |
| Net cash collateral (pledged)/received | (10,679) | 782 |
| Taxation paid | (1,186) | (2,095) |
| -------- | -------- | |
| Net cash outflow from operating activities | (38,050) | (14,287) |
| -------- | -------- | |
| Financing activities | ||
| Interest paid | (23) | (9) |
| Proceeds from share issues | 50,644 | 23,805 |
| Share issue costs paid | (276) | (166) |
| Dividends paid | (13,481) | (11,290) |
| -------- | -------- | |
| Net cash inflow from financing activities | 36,864 | 12,340 |
| -------- | -------- | |
| Decrease in cash and cash equivalents | (1,186) | (1,947) |
| Effect of foreign exchange rate changes | (336) | (835) |
| -------- | -------- | |
| Change in cash and cash equivalents | (1,522) | (2,782) |
| Cash and cash equivalents at the start of the year | 5,947 | 8,729 |
| -------- | -------- | |
| Cash and cash equivalents at the end of the year | 4,425 | 5,947 |
| -------- | -------- | |
| Comprised of: | ||
| Cash at bank | 4,425 | 5,947 |
| -------- | -------- | |
| 4,425 | 5,947 | |
| -------- | -------- |
* Cash Fund represents funds held on deposit with BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund.
NOTES TO THE FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010. The Company was incorporated on 15 October 2010, and this is the eighth Annual Report.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set out below.
(a) Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. All of the Company’s operations are of a continuing nature.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (AIC) in November 2014 and updated in January 2017, is compatible with IFRS, the financial statements have been prepared in accordance with the guidance set out in the SORP.
Substantially all of the assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future. Consequently, the Directors have determined that it is appropriate for the financial statements to be prepared on a going concern basis.
The Company’s financial statements are presented in US Dollars, which is the functional currency of the Company and the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand dollars (US$’000) except where otherwise indicated.
A number of new standards, amendments to standards and interpretations are effective for the annual periods beginning on or after 1 October 2018 and have not been applied in preparing these financial statements (major changes and new standards issued are detailed below) as these are not expected to have any effect on the measurement of the amounts recognised in the financial statements of the Company.
IFRS standards that have been adopted during the year:
Amendments to IAS 7 – Disclosure initiative – Statement of Cash Flows (effective 1 January 2017). The amendments did not have a significant effect on the presentation of the Cash Flow Statement within the financial statements of the Company as the Company does not have any debt.
Amendments to IAS 12 – Recognition of deferred tax assets for unrealised losses (effective 1 January 2017). The amendment has had no effect on the measurement of amounts recognised in the financial statements of the Company.
IFRS standards that have yet to be adopted:
IFRS 9 (2014) – Financial Instruments replaces IAS 39 and deals with a package of improvements including principally a revised model for classification and measurement of financial instruments, a forward looking expected loss impairment model and a revised framework for hedge accounting. In terms of classification and measurement, the revised standard is principles based depending on the business model and nature of cash flows. Under this approach, instruments are measured at either amortised cost or fair value. Under IFRS 9 equity and derivative investments will be held at fair value because they fail the ‘solely payments of principal and interest’ test and debt investments will be held at fair value because the business model is to manage them on a fair value basis. The standard is effective for periods beginning on or after 1 January 2018 with earlier application permitted. The Company does not plan to early adopt this standard.
IFRS 15 – Revenue from Contracts with Customers (effective for periods beginning on or after 1 January 2018) specifies how and when an entity should recognise revenue and enhances the nature of revenue disclosures. Given the nature of the Company’s revenue streams from financial instruments, the provisions of this standard are not expected to have an impact.
(b) Presentation of the Statement of Comprehensive Income
In order to reflect better the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and a capital nature has been presented alongside the Statement of Comprehensive Income.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not expected to be received. Special dividends, if any, are treated as a capital or a revenue receipt depending on the facts or circumstances of each dividend. The return on a debt security is recognised on a time apportionment basis so as to reflect the effective yield on the debt security.
Deposit interest receivable is accounted for on an accruals basis.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend is recognised as revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.
(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue column of the Statement of Comprehensive Income, except as follows:
-
expenses which are incidental to the acquisition or sale of an investment are charged to the capital column of the Statement of Comprehensive Income. Details of transaction costs on the purchases and sales of investments are disclosed within note 10 to the Financial Statements on page 63 of the Annual Report and Financial Statements;
-
expenses are treated as capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated;
-
the investment management fee and finance costs have been allocated 80% to the capital column and 20% to the revenue column of the Statement of Comprehensive Income in line with the Board’s expected long term split of returns, in the form of capital gains and income, respectively, from the investment portfolio; and
-
performance fees are allocated 100% to the capital column of the Statement of Comprehensive Income as fees are generated in connection with enhancing the value of the investment portfolio.
(f) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.
Where expenses are allocated between capital and revenue, any tax relief in respect of the expenses is allocated between capital and revenue returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to pay less tax in the future have occurred at the financial reporting date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise.
(g) Investments held at fair value through profit or loss
The Company’s investments are designated upon initial recognition as held at fair value through profit or loss in accordance with IAS 39 – “Financial Instruments: Recognition and Measurement†and are managed and evaluated on a fair value basis in accordance with its investment strategy.
All investments are measured initially and subsequently at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales of investments are recognised at the trade date of the disposal.
The fair value of the financial investments is based on their quoted bid price at the financial reporting date, without deduction for the estimated selling costs. This policy applies to all current and non current asset investments held by the Company. The fair value of the P-Notes are, when held, based on the quoted bid price of the underlying equity to which they relate.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as “Profits or losses on investments held at fair value through profit or lossâ€. Also included within the heading are transaction costs in relation to the purchase or sale of investments.
For all financial instruments not traded in an active market, the fair value is determined by using various valuation techniques. Valuation techniques include market approach (i.e., using recent arm’s length market transactions adjusted as necessary and reference to the current market value of another instrument that is substantially the same) and the income approach (e.g., discounted cash flow analysis and option pricing models making use of available and supportable market data as possible). Where no reliable fair value can be estimated for such instruments, they are carried at cost subject to any provision for impairment.
(h) Derivatives
The Company can hold long and short positions in contracts for difference (CFD) which are held at fair value based on the bid prices of the underlying securities in respect of long positions, and the offer prices of the underlying securities in respect of short positions.
Profits and losses on derivative transactions are recognised in the Statement of Comprehensive Income. They are shown in the capital column of the Statement of Comprehensive Income if they are of a capital nature and are shown in the revenue column of the Statement of Comprehensive Income if they are of a revenue nature. To the extent that any profits or losses are of a mixed revenue and capital nature, they are apportioned between revenue and capital accordingly.
(i) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short term in nature and are accordingly stated at their nominal value.
(j) Dividends payable
Under IFRS, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the financial reporting date. Interim dividends should not be accrued in the financial statements unless they have been paid.
Dividends payable to equity shareholders are recognised in the Statements of Changes in Equity.
(k) Foreign currency translation
Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities and non monetary assets held at fair value are translated into US Dollars at the rate ruling on the financial reporting date. Foreign exchange differences arising on translation are recognised in the Statement of Comprehensive Income as a revenue or capital item depending on the income or expense to which they relate. For investment transactions and investments held at the year end, denominated in a foreign currency, the resulting gains or losses are included in the profit/(loss) on investments held at fair value through profit or loss in the Statement of Comprehensive Income.
(l) Cash and cash equivalents
Cash comprises cash in hand and on demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
The Company’s investment in BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund (Cash Fund) of US$100,917,000 (2017: US$66,194,000) is managed as part of the Company’s investment policy and, accordingly, this investment, along with purchases and sales of this investment, has been classified in the Statement of Financial Position as an investment and not as a cash equivalent as defined under IAS 7.
(m) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Directors do not believe that any accounting judgements or estimates have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
3. INCOME
| 2018 US$’000 |
2017 US$’000 |
|
| Investment income: | ||
| UK dividends | 24 | – |
| Overseas listed dividends | 12,415 | 10,627 |
| Overseas listed special dividends | 707 | 488 |
| Overseas listed stock dividends | 3,798 | 1,507 |
| Income from P-Notes | 547 | 97 |
| Interest from Cash Fund | 1,804 | 476 |
| -------- | -------- | |
| 19,295 | 13,195 | |
| -------- | -------- | |
| Net income from contracts for difference | 3,245 | 2,731 |
| -------- | -------- | |
| 22,540 | 15,926 | |
| -------- | -------- | |
| Other Income: | ||
| Deposit interest | 103 | 42 |
| -------- | -------- | |
| Total income | 22,643 | 15,968 |
| ====== | ====== |
Dividends and interest received in cash during the year amounted to US$17,706,000 and US$1,771,000 (2017: US$15,701,000 and US$468,000).
No special dividends have been recognised in capital (2017: nil).
4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES
| 2018 | 2017 | |||||
| Revenue US$’000 |
Capital US$’000 |
Total US$’000 |
Revenue US$’000 |
Capital US$’000 |
Total US$’000 |
|
| Investment management fee | 856 | 3,424 | 4,280 | 672 | 2,689 | 3,361 |
| Performance fee | – | – | – | – | 596 | 596 |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Total | 856 | 3,424 | 4,280 | 672 | 3,285 | 3,957 |
| ===== | ===== | ===== | ===== | ===== | ===== | |
An investment management fee equivalent to 1.10% per annum of the Company’s gross assets (defined as the aggregate net assets of the long equity and CFD portfolios of the Company) is payable to the Manager. In addition, the Manager is also entitled to receive a performance fee at a rate of 10% of any increase in the NAV at the end of a performance period over and above what would have been achieved had the NAV since launch increased in line with the Reference Index, which, since 1 April 2018, is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Prior to 1 April 2018, the Reference Index was the MSCI Frontier Markets Index. For the purposes of calculation of performance fee for the year to 30 September 2018, the performance of the Net Asset Value total return has been measured against the performance of the benchmark indices on a blended basis during the year.
For the year to 30 September 2018, the Company’s NAV performance of -6.6% generated a deficit of US$39.88 million (2017: NAV performance of 21.5% and excess returns of US$5.96 million) resulting in no performance fees for the year (2017: US$596,000). The performance fee payable in any year is capped at an amount equal to 2.5% or 1% of the gross assets if there is any increase or decrease in the NAV per share at the end of the relevant performance period, respectively. Any capped excess outperformance for a period may be carried forward to the next two performance periods, subject to the then applicable annual cap. The performance fee is also subject to a high watermark such that any performance fee is only payable to the extent that the cumulative relative outperformance of the NAV is greater than what would have been achieved had the NAV increased in line with the Reference Index since the last date in relation to which a performance fee had been paid.
5. OTHER OPERATING EXPENSES
| 2018 US$’000 |
2017 US$’000 |
|
| Allocated to revenue: | ||
| Custody fee | 503 | 429 |
| Auditor’s remuneration: | ||
| – audit services | 38 | 36 |
| – other assurance services1 | 9 | 9 |
| Registrar’s fee | 52 | 37 |
| Directors’ emoluments | 205 | 179 |
| Broker fees | 62 | 38 |
| Depositary fees2 | 44 | 35 |
| Marketing fees | 93 | 73 |
| Other administrative costs | 246 | 226 |
| -------- | -------- | |
| 1,252 | 1,062 | |
| -------- | -------- | |
| Allocated to capital: | ||
| Custody transaction charges | 118 | 130 |
| -------- | -------- | |
| 1,370 | 1,192 | |
| -------- | -------- | |
| The Company’s ongoing charges, calculated as a percentage of average net assets and using expenses, excluding performance fees, VAT refunded, transaction costs and taxation were: | 1.42% |
1.44% |
| -------- | -------- | |
| The Company’s ongoing charges, calculated as a percentage of average net assets and using expenses and performance fees but excluding VAT refunded, transaction costs and taxation were: | 1.42% |
1.64% |
| -------- | -------- |
1 Fees of US$9,000 (2017: US$9,000) relating to the review of the interim financial statements.
2 All expenses other than depositary fees are paid in Sterling and are therefore subject to exchange rate fluctuations.
For the year ended 30 September 2018, expenses of US$118,000 (2017: US$130,000) were charged to the capital column of the Statement of Comprehensive Income, which relate to transaction costs charged by the custodian on sale and purchase trades.
No fees were payable in 2018 or 2017 in relation to investing in new markets.
Details of the Directors’ emoluments are given in the Directors’ Remuneration Report on page 39 of the Annual Report and Financial Statements.
6. DIVIDENDS
Dividends paid on equity shares: |
Record date |
Payment date |
2018 US$’000 |
2017 US$’000 |
| 2017 final of 4.20 cents (2016: 4.00 cents) per ordinary share | 5 January 2018 | 9 February 2018 | 7,631 | 6,573 |
| 2018 interim of 3.00 cents (2017: 2.70 cents) per ordinary share | 1 June 2018 | 29 June 2018 | 5,850 | 4,717 |
| --------- | --------- | |||
| 13,481 | 11,290 | |||
| ===== | ===== |
The total dividends payable in respect of the year ended 30 September 2018 which form the basis of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amounts proposed, meet the relevant requirements as set out in this legislation.
| 2018 US$’000 |
2017 US$’000 |
|
| Interim dividend of 3.00 cents per ordinary share (2017: 2.70 cents) | 5,850 | 4,717 |
| Final proposed dividend of 4.40 cents per ordinary share (2017: 4.20 cents)* | 8,987 | 7,592 |
| Special dividend of 1.00 cent per ordinary share (2017: nil)* | 2,042 | - |
| -------- | -------- | |
| 16,879 | 12,309 | |
| -------- | -------- |
* Based on 204,241,108 ordinary shares in issue on 10 December 2018.
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Total revenue, capital return and net asset value per ordinary share are shown below and have been calculated using the following:
| Year ended 30 September 2018 |
Year ended 30 September 2017 |
|
| Net revenue profit attributable to ordinary shareholders (US$’000) | 19,328 | 13,107 |
| Net capital (loss)/profit attributable to ordinary shareholders (US$’000) | (48,670) | 47,097 |
| -------- | -------- | |
| Total (loss)/profit attributable to ordinary shareholders (US$’000) | (29,342) | 60,204 |
| -------- | -------- | |
| Equity shareholders’ funds (US$’000) | 356,495 | 350,247 |
| ----------------- | ----------------- | |
| The weighted average number of ordinary shares in issue during the year, on which the return per ordinary share was calculated was: | 190,842,459 | 170,192,369 |
| ----------------- | ----------------- | |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated was: | 200,616,108 | 177,868,108 |
| ---------------- | ----------------- | |
| Return per ordinary share | ||
| Revenue earnings per share (cents) | 10.13 | 7.70 |
| Capital (loss)/earnings per share (cents) | (25.50) | 27.67 |
| -------- | -------- | |
| Total (loss)/profit per share (cents) | (15.37) | 35.37 |
| -------- | -------- | |
| As at 30 September 2018 |
As at 30 September 2017 |
|
| Net asset value per ordinary share (cents) | 177.70 | 196.91 |
| -------- | -------- | |
| Ordinary share price (cents)* | 182.25 | 199.91 |
| -------- | -------- | |
| Net asset value per ordinary share (pence) | 136.26 | 146.76 |
| -------- | -------- | |
| Ordinary share price (pence) | 139.75 | 149.00 |
| -------- | -------- |
* The Company’s share price is quoted in Sterling and the above represents the US Dollar equivalent based on an exchange rate of US$1.3041 to £1 as at 30 September 2018 (30 September 2017: US$1.3417 to £1).
8. CALLED UP SHARE CAPITAL
| Number of ordinary shares in issue |
Nominal value US$’000 |
|
| Allotted, called up and fully paid share capital comprised: | ||
| ---------------- | -------- | |
| At 30 September 2017 | 177,868,108 | 1,778 |
| ----------------- | -------- | |
| Share issues | 22,748,000 | 228 |
| ----------------- | -------- | |
| At 30 September 2018 | 200,616,108 | 2,006 |
| ========== | ===== |
The Company also has in issue 50,000 management shares which carry the right to a fixed cumulative preferred dividend. Additional information is given in note 14 to the Financial Statements in the Annual Report and Financial Statements.
During the year ended 30 September 2018 the Company issued 22,748,000 (2017: 13,535,000) shares for a total gross consideration of US$49,347,000 (2017: US$25,102,000).
A further 3,625,000 shares have been issued since the year end and up to and including the date of this report.
Following the C Share Scheme Issue and Issue, as described on page 4 of the Annual Report and Financial Statements, 37,375,087 C Shares were issued on 27 November 2018 pursuant to the Scheme Issue to shareholders of BlackRock Emerging Europe plc, and a further 7,552,493 C Shares were issued pursuant to the placing and offer for subscription at an issue price of 100 pence per C Share.
9. RESERVES
Share premium account US$’000 |
Capital redemption reserve US$’000 |
Special reserve US$’000 |
Capital reserve arising on investments sold US$’000 |
Capital reserve arising on revaluation of investments US$’000 |
Revenue reserve US$’000 |
|
| At 30 September 2017 | 46,275 | 5,798 | 230,776 | 36,945 | 18,956 | 9,719 |
| Movement during the year: | ||||||
| Total Comprehensive Income: | ||||||
| Net profit/(loss) for the year | – | – | – | 12,830 | (61,500) | – |
| Transactions with owners: | ||||||
| Share issues | 49,119 | – | – | – | – | – |
| Share issue costs | (299) | – | – | – | – | – |
| C Share issues costs - write back | – | – | 23 | – | – | – |
| Revenue return for the year | – | – | – | – | – | 19,328 |
| Dividends paid | – | – | – | – | – | (13,481) |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| At 30 September 2018 | 95,095 | 5,798 | 230,799 | 49,775 | (42,544) | 15,566 |
| ===== | ===== | ====== | ===== | ===== | ===== |
The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. The special reserve may be used as distributable profits for all purposes and, in particular, for the repurchase by the Company of its ordinary shares and for payment as dividends. In accordance with the Company’s status as an investment company under the provisions of section 1158 of the Corporation Tax Act 2010, net capital returns may be distributed by way of dividend.
10. VALUATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value (investments and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2(g) to the Financial Statements on pages 57 and 58 of the Annual Report and Financial Statements.
Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset as follows.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
As at the year ended 30 September 2018, the P-Notes were valued using the underlying equity bid price and the inputs to the valuation were the exchange rates used to convert the P-Note valuation from the relevant local currency to US Dollars at the year end date. There were no P-Notes held as at the year ended 30 September 2017.
As at the year end the CFDs were valued using the underlying equity bid price and the inputs to the valuation were the exchange rates used to convert the CFD valuation from the relevant local currency in which the underlying equity was priced to US Dollars at the year end date. There have been no changes to the valuation technique since the previous year or as at the date of this report.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager.
Contracts for difference and P-Notes have all been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the market prices of the underlying quoted securities to which these contracts expose the Company.
Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using IFRS 13 fair value hierarchy.
| Financial assets/(liabilities) at fair value through profit or loss at 30 September 2018 | Level 1 US$’000 |
Level 2 US$’000 |
Level 3 US$’000 |
Total US$’000 |
| Assets: | ||||
| Equity investments | 236,806 | – | – | 236,806 |
| P-Notes | – | 10,778 | – | 10,778 |
| Cash Fund | 100,917 | – | – | 100,917 |
| Contracts for difference (gross exposure on long positions) | – | 136,772 | 3 | 136,775 |
| Liabilities: | ||||
| Contracts for difference (gross exposure on short positions) | – | (27,461) | – | (27,461) |
| ----- | ----- | ----- | ------ | |
| 337,723 | 120,089 | 3 | 457,815 | |
| ====== | ====== | ===== | ====== |
| Financial assets at fair value through profit or loss at 30 September 2017 | Level 1 US$’000 |
Level 2 US$’000 |
Level 3 US$’000 |
Total US$’000 |
| Assets: | ||||
| Equity investments | 287,979 | – | 211 | 288,190 |
| Cash Fund | 66,194 | – | – | 66,194 |
| Contracts for difference (gross exposure on long positions) | – | 88,513 | 2 | 88,515 |
| ---------- | -------- | -------- | ---------- | |
| 354,173 | 88,513 | 213 | 442,899 | |
| ====== | ===== | ===== | ====== |
There were no transfers between levels of financial assets and financial liabilities during the year recorded at fair value as at 30 September 2018. For the year ended 30 September 2017, transfers of financial assets from fair value hierarchy Level 2 to Level 1 amounted to US$14,146,000. These arose primarily in relation to the Nigerian equity securities held in the investment portfolio where observable spot exchange rates as quoted on the FMDQ OTC Securities Exchange have been applied for valuing the Nigerian equity securities following the introduction of a special window for investors by the Central Bank of Nigeria effective 28 April 2017. The Company held one Level 3 long CFD security during the year ended 30 September 2018, which is also held at the year end. The Company held one Level 3 equity and long CFD security throughout the year ended 30 September 2017.
A reconciliation of fair value measurement in Level 3 is set out below.
| Level 3 Financial assets at fair value through profit or loss at 30 September | 2018 US$’000 |
2017 US$’000 |
| Opening fair value | 213 | 213 |
| Disposal | (211) | – |
| Change in fair value during the year | 1 | – |
| ------- | -------- | |
| Closing fair value | 3 | 213 |
| ==== | ==== |
11. RELATED PARTY DISCLOSURE: DIRECTORS’ EMOLUMENTS
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report on pages 38 to 40 of the Annual Report and Financial Statements. At 30 September 2018, US$16,000 (£12,000) (2017: US$16,000 (£12,000)) was outstanding in respect of Directors’ fees.
12. TRANSACTIONS WITH INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited ("BIM (UK)"). Further details of the investment management contract are disclosed in the Directors’ Report on pages 32 and 33 of the Annual Report and Financial Statements.
The investment management fee due for the year ended 30 September 2018 amounted to US$4,280,000 (2017: US$3,361,000). No performance fee is payable for the year ended 30 September 2018 (2017: US$596,000). At the year end, US$1,024,000 was outstanding in respect of management fees (2017: US$2,606,000) and US$nil (2017: US$596,000) was outstanding in respect of performance fees.
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 30 September 2018 amounted to US$93,000 excluding VAT (2017: US$73,000) of which marketing fees of US$68,000 excluding VAT (2017: US$55,000) were outstanding as at year end.
The Company has an investment in the Cash Fund of US$100,917,000 (2017: US$66,194,000) at the year end, which is a fund managed by a company within the BlackRock Group.
13. CONTINGENT LIABILITIES
There were no contingent liabilities at 30 September 2018 (2017: nil).
14. POST BALANCE SHEET EVENT
Following the Scheme Issue and Issue described in the Chairman's Statement, 37,375,087 C Shares were issued on 27 November 2018 pursuant to the Scheme Issue to shareholders of BlackRock Emerging Europe plc, and a further 7,552,493 C Shares were issued pursuant to the placing and offer for subscription at an issue price of 100 pence per C Share.
Following the year end and up to the date of this report the Company issued a further 3,625,000 ordinary shares.
15. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The 2018 Annual Report and Financial Statements will be filed with the Registrar of Companies shortly.
The report of the Auditor for the year ended 30 September 2018 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock Frontiers Investment Trust plc for the year ended 30 September 2017, which have been filed with the Registrar of Companies. The report of the Auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act.
This announcement was approved by the Board of Directors on 10 December 2018.
16. ANNUAL REPORT
Copies of the annual report will be sent to members shortly and will be available from the registered office, c/o The Company Secretary, BlackRock Frontiers Investment Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
17. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 5 February 2019 at 12:00 p.m.
The Annual Report will also be available on the BlackRock website at blackrock.co.uk/brfi. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 3000
Press enquiries:
Lucy Horne, Lansons Communications – Tel: 020 7294 3689
E-mail: lucyh@lansons.com
11 December 2018
12 Throgmorton Avenue
London EC2N 2DL
END
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