Annual Financial Report

RNS Number : 1576S

Genesis Emerging Markets Fund Ld

28 September 2017

 

GENESIS EMERGING MARKETS FUND LIMITED

(The 'Company'; the 'Fund')

(Registration Number : 20790)

STOCK EXCHANGE ANNOUNCEMENT

ANNUAL FINANCIAL REPORT

The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the year ended 30^th June 2017.  The Annual Financial Report will shortly be available from the Fund's website www.genesisemf.com and also for inspection on the National Storage Mechanism, which is located at http://www.morningstar.co.uk/uk/NSM where users can access the regulated information provided by listed entities.

INVESTMENT APPROACH

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

BENCHMARK

MSCI Emerging Markets (Total Return) Index.

RESULTS

Highlights and Performance

	30th June 2017	30th June 2016	% change
Published net asset value	£1,011.6m	£838.7m	20.6
Published net asset value	$1,314.2m	$1,121.3m	17.2
Published net asset value per Participating Preference Share	£7.50	£6.21	20.6
Published net asset value per Participating Preference Share	$9.74	$8.31	17.2
Share price	£6.53	£5.40	20.8
Discount	12.9%	13.1%
Ongoing charges ratio*	1.43%	1.44%
Countries represented in portfolio	36	40
Number of holdings	125	142

* Expected to drop to 1.13% next year due to the reduction in management fees

	Year to 30th June 2017		Year to 30th June 2016
	Low	High	Low	High
Share price	£5.45	£6.72	£4.01	£5.40
Net asset value	£6.31	£7.69	£4.67	£6.21
Discount	9.6%	14.3%	7.3%	15.1%

Chairman's Statement

I have pleasure in presenting to shareholders the twenty-eighth Annual Report of the Genesis Emerging Markets Fund Limited, for the twelve-month period ending 30^th June 2017.

Performance

The last twelve months have been a rewarding period for emerging markets investors. Improving investor sentiment on the outlook for the Chinese economy and a global wave of enthusiasm for internet and technology stocks combined to drive the MSCI EM (TR) Index up by 25.3% in US dollar terms. For UK investors, the index return was higher still, at 27.8%, as sterling weakened slightly against the US dollar over the period.

Against this performance backdrop, the Fund's net asset value per share ('NAV') increased from 621.4p to 749.6p, representing a return of 20.6% for shareholders. The Fund's share price rose by 20.8%.

Shareholders will be aware that the Fund's portfolio contains stocks which the Manager considers to be high-quality, and feels are priced attractively. Consequently, during times when emerging stockmarkets appreciate very rapidly, and are driven by a narrow sector of the market, the Fund's performance is likely to lag that of the index in the short term. The relative underperformance we have seen over the past year has partly been a consequence of the Fund's underweight to Chinese internet stocks in particular; a position that reflects the stretched nature of the current valuations of companies such as Tencent and Alibaba rather than the Manager's assessment of their corporate quality.

That said, we are very conscious that, over the medium term, the Fund's relative performance has not been at the level that shareholders have come to expect. As a Board we are encouraged by the Manager's response to this challenging period, in terms of enhancing its investment process - through the use of more precise definitions of corporate quality when assessing companies, and increased formalisation and consistency of the investment theses across the portfolio - in order to address the reasons behind the disappointing results. Nonetheless, shareholders should be assured that my colleagues and I continue to review the Fund's performance very carefully at our meetings and frequent discussions with the Manager.

The Fund's Portfolio and the Manager

The Manager follows an investment approach which relies on fundamental analysis to identify companies it feels are able to generate attractive returns to investors over a five-year horizon, or longer, but which the market appears to be pricing too cheaply. This approach relies strongly on assessing the 'quality' of individual companies, which - importantly - incorporates not just management capability and business strength, but also how they take into account the environmental, social and governance factors to which they are exposed.

The resulting portfolio currently consists of a diversified group of 125 companies from 36 countries (including several businesses at the smaller end of the opportunity set). The typically low turnover (24% over the last twelve months and 21% per annum on average over the last five years) and the correspondingly high average holding period of more than six years both reflect the Manager's fundamental, long-term approach.

My colleagues and I have confidence that the investment approach and the portfolio characterised above is appropriate for the Fund. I have noted our ongoing discussion with the Manager about medium-term performance but fundamentally - given the experience of the Manager's team in emerging markets and the long history of its business, as well as its response to recent challenges - the Board considers that shareholders' interests remain well-served by the ongoing appointment of Genesis and this is reviewed every year.

Management Fee

After discussions between the Board and the Manager, the management fee payable to Genesis Asset Managers, LLP was reduced at the start of the financial year, 1st July 2017, to 0.95% of NAV per annum. (The figure was previously 1.25% per annum.) We believe that this change makes the Fund's management fee competitive in the immediate peer group of similar closed-end funds; naturally the Board continues to monitor this position.

Discount

The Fund's share price moved from 540.0p to 652.5p over the year, a rise of 20.8%. The discount to NAV therefore narrowed marginally from 13.1% at the beginning of the period to 12.9% at the end. For most of this time, however, the discount was generally tighter: the average level over the twelve months was 12.2% as it fluctuated in a range roughly between 10.6% and 13.6%.

These statistics, and the potential options for appropriate active management of the discount, are considered carefully by the Board. The Fund's ability to buy back shares remains in place, but this year (as in previous years) the Board felt that no action in this regard was warranted. It is notable that while the Fund's discount at present is wider than most of its history, it remains closely in line with the comparable group of peer funds.

Dividend

Shareholders will be aware that the Fund's stated objective is to achieve capital growth, and that - reflecting this aim - has not paid shareholders a dividend for many years. The topic of potential dividend payments has, however, been a point of discussion at many of my meetings with shareholders over the past several months, and it is clear that there is increased interest in the Fund distributing income on an ongoing basis.

The Directors have accordingly considered this matter, and have concluded that it would be appropriate to establish a policy of paying out, as a dividend, the available income received by the Fund from its underlying investments.

At the same time, the Board has also reviewed the Fund's allocation of expenses and has concluded that - starting from the beginning of the current financial year on 1^st July 2017 - 80% of the annual management fee should be allocated to the capital account, rather than to the revenue account. This reallocation is a reflection of the Board's long-term assessment of the balance of returns between capital and revenue (and will have the effect of increasing revenue earnings while reducing capital returns by a corresponding amount). For shareholders, this will result in a higher level of income available for distribution as a dividend.

Revenue earnings per share for the past financial year were 5.5 US cents. Consequently, we wish to recommend to shareholders that the Fund distributes a dividend of 14.0 US cents per share in respect of the 2016-17 financial year, subject to approval at the Annual General Meeting ('AGM') in November. (While declared in US dollars, the dividend will be paid in sterling; we should note to shareholders that the distribution amount will not be hedged between the time of this announcement and the payment date.) Based on our discussions with shareholders and our understanding of their current views, the Board believes that this level of dividend represents an appropriate balance between the various differing interests, and opinions, held across the shareholder base - and maintains the fundamental focus on capital growth that remains the Fund's objective.

Because the reallocation of expenses noted above was not in place for the 2016-17 financial year, for this period the dividend would be paid from the Fund's revenue reserves.

The Board of Directors

We announced in July the appointment of Katherine Tsang as a Non-Executive Director. I am very confident that Katherine's considerable experience in the banking and investment management sectors will be a valuable source of knowledge and insight for the Board in their discussions, particularly on China, and East Asia more generally. This appointment brings the number of Directors to six.

Shareholders will have the opportunity to approve Katherine's appointment at the AGM, at which the remaining five Directors will also stand for re-election, in accordance with the requirements of the AIC Code of Corporate Governance and the UK Corporate Governance Code. Following the Board's internal evaluation process, I wholeheartedly recommend all Directors for re-election; I hope that shareholders will continue to feel confident in our ability to protect their interests, and thus support us with their vote.

AGM, Shareholder Meeting, and Shareholder Communication

At the end of the Annual Report is the notice convening the AGM to be held on 6^th November 2017 in Guernsey, along with the schedule of resolutions for consideration. As ever, we request that all shareholders take up the opportunity to vote on these.

The Board wishes to ensure that shareholders have access to a range of up-to-date information about the Fund. As well as releasing announcements to the London Stock Exchange and issuing the Annual and Half-Yearly Reports, we encourage all shareholders to refer to the information on investment performance and portfolio activity contained in the Fund's monthly factsheets. These - and other Fund literature - can be found on the Fund's website www.genesisemf.com.

Shareholders will also find at the end of the Annual Report an invitation to the Fund's annual Shareholder Information Meeting which this year will take place on 7^th November 2017 at the Investment Adviser's office in London. We hope that as many shareholders as possible will take this opportunity to hear directly from representatives of the Manager.

In general, the Manager will usually be best placed to address queries from shareholders. Clearly, however, it is important for shareholders to be able to communicate directly with the Board when necessary. I have continued to speak regularly with major shareholders over the year, but invite any shareholders to contact me or Russell Edey (as Senior Independent Director), or indeed any of the Board, with comments and feedback: we can be reached via either the Manager or the Administrator at the addresses on the Annual Financial Report.

Outlook

My report to shareholders a year ago noted the variety of challenges facing emerging markets companies, which included increased competition, declining penetration opportunities, a lack of business-friendly reforms, along with - in many cases - high valuations. While the past year's 20%+ absolute returns are welcome, they have of course meant that valuations have become even more elevated, while none of the other issues have receded. At the same time, a more positive view about the health of the Chinese economy may well turn out to be less warranted than many investors seem to believe, and some countries (arguably Brazil, Turkey, South Africa) have seen political governance quality move backwards rather than forwards.

There are thus plenty of reasons to be wary of the short-term environment. We believe very strongly, however, that investors should keep in mind the longer-term attractions underpinning emerging markets. The income levels of populations in developing countries populations are gradually moving towards those in developed markets; progress in governance - while not linear - continues to take place at both country and company level; and emerging stock markets still exhibit significant inefficiencies for investors who can identify them. A carefully selected portfolio of the right companies, capitalising on these three fundamental characteristics, still offers investors the potential for attractive long-term returns from emerging markets.

Hélène Ploix,

Chairman

28^th September 2017

 

Strategy, Business Model and Principal Risks

Fund Objective

The objective of the Fund is to achieve long-term capital growth, primarily through investment in equity markets of developing countries.

Strategy

The core element of our strategy is to appoint and retain a high-quality manager whose investment philosophy best matches the Fund's objective, and carefully monitor the Fund's performance.

Genesis, the Fund's Manager, believes that it can best deliver excellent long-term performance by working as a team to make investments in quality businesses at attractive prices as explained below.

Business Model and Investment Process

The Fund has no employees or premises and the Board is comprised of non-executive Directors. The day-to-day operations and functions of the Fund have been delegated to third-party service providers who are subject to the oversight of the Board.

During the year under review Genesis provided investment and risk management services, JP Morgan Chase Bank was the Custodian and JP Morgan Administration Services (Guernsey) Limited was the Administrator and Company Secretary. The Board regularly reviews the performance and risks of its primary service providers and checks that they have appropriate frameworks in place for the oversight of their internal controls, monitoring and reporting.

In line with the stated investment philosophy, the Manager employs a bottom-up investment approach with all members of its investment team taking responsibility for analysis on individual companies. The investment process is founded on proprietary internal research, with the Manager's structure designed to allow a cohesive team of investors to generate fundamental research insights and, subject to rigorous challenge, express those insights in portfolios. The Fund's portfolio is diversified across countries and industries and comprises approximately 130 holdings (currently representing some 36 different countries), to give a range of 10-15 per team member. The Manager believes that when its team concentrates on a smaller number of ideas, the research can be deeper and insights more valuable. Over the last three years, the Manager has increased this depth of focus and concentration, actively reducing the number of holdings in the Fund's portfolio from 160 three years ago to 125 at the end of the 2016-17 financial year.

Portfolios comprise holdings in predominantly high-quality, sustainable businesses, both large and small. As part of their analysis the Manager's team determines quality ratings for each company, which primarily measure a business' ability to generate sustainable excess returns on capital and US$ intrinsic value stability. Many factors are incorporated into this analysis: as well as company-specific elements, the team considers the political and macroeconomic framework in which the company operates. Environmental, Social and Governance ('ESG') considerations are included in the analysis of sustainability, and the team takes ESG factors into account when determining the quality rating of a business. The Manager recognises that governance issues in particular are relevant to all companies and has laid out the key principles that it expects companies to follow from a corporate governance perspective.

Given that the average holding period of investments in client portfolios has consistently been more than five years (and is currently in excess of six) and that this characteristic is expected to persist, the Manager is comfortable buying into relatively illiquid situations and building positions gradually. In the Manager's experience the trading liquidity of a stock improves as its underlying merits are gradually appreciated by a wider domestic and international investor base. Turnover is correspondingly low; typically of the order of 20-25% per annum.

There is no specific company market capitalisation range in which the Manager invests, and it is prepared to take positions in smaller-capitalisation stocks where compelling investment cases are found, in the belief that these can be a source of particularly attractive long-term investment opportunities. The Fund invests in a large number of emerging markets, many of which are not represented in the standard indices. The Manager aims to retain as much flexibility as possible with respect to portfolio constraints.

Because the Manager aims to invest in companies that can compound shareholders' capital, but also aims to invest at a discount to intrinsic value, the portfolio tends to have both growth and value characteristics.

The portfolio's investments are primarily listed equity securities. However, the Fund will also hold positions in Genesis affiliated investment companies, Participatory notes and Investee Funds, where appropriate.

The Fund does not engage in any active management of foreign currency risk and the portfolio is currently unleveraged.

The Fund entered into a securities lending programme with JP Morgan Chase Bank N.A. in April 2016.

Principal Risks and Risk Management

The main risks to the value of its assets arising from the Fund's investment in financial instruments are unanticipated adverse changes in market prices and foreign currency exchange rates and an absence of liquidity. The Board reviews and agrees with the Manager policies for managing each of these risks and they are summarised on the following page. These policies have remained unchanged since the beginning of the period to which these financial statements relate.

Volatility of emerging markets and market risk

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

Foreign currency exposure

The Fund's assets will be invested in securities of companies in various countries and income will be received by the Fund in a variety of currencies. However, the Fund will compute its net asset value and distributions in US dollars. The value of the assets of the Fund as measured in US dollars may be affected favourably or unfavourably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies. The Fund has opted not to engage in any active management of foreign currency risk, and therefore all its open foreign exchange positions are typically unhedged.

Lack of liquidity

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stockmarkets of the developed world and trading may even be temporarily suspended during certain periods. Liquidity can also be negatively impacted by temporary capital controls in certain markets. A lower level of liquidity can exaggerate the fluctuations in the value of investments described previously. The restrictions on concentration and the diversification requirements detailed above also serve normally to protect the overall value of the Fund from the risks created by the lower level of liquidity in the markets in which the Fund operates.

Custody risk

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

Other Matters

Viability Statement

In accordance with provision C.2.2. of the 2016 UK Corporate Governance Code, the Board has assessed the prospects of the Fund over the next three years. The Board considers that this period of time is appropriate to assess the viability of the Fund given the inherent uncertainty in the global emerging markets and the Fund's investment cycle. As part of its assessment, the Board has considered the Fund's business model including its investment objective and investment policy as well as the principal risks and uncertainties that may affect the Fund.

The Board has noted that:

-        The Fund's investment objective is to achieve capital growth over the long term and the Board regards the Fund as a long-term investment. The average holding period for companies in the Fund's portfolio is currently over six years, with turnover at around 24% over the last twelve months. These attributes reflect the Manager's long-term fundamental approach.

-        The Fund's portfolio consists of a diversified group of companies from a large number of emerging market countries. The majority of these are traded on major international stock exchanges. In the opinion of the Manager, the portfolio is sufficiently liquid to meet all ongoing and future liabilities arising from the Fund's day-to-day business.

-        No significant increases to ongoing charges or operational expenses are anticipated.

The Board has therefore concluded that there is a reasonable expectation that the Fund will be able to continue in operation and meet its liabilities as they fall due over the next three years.

Environmental, Social and Governance Factors

Genesis meaningfully integrates ESG factors into the investment process as part of its ongoing qualitative judgement of a company's sustainable competitive advantage. Genesis recognises that ESG factors can expose potential investment opportunities and risks, reflect the quality of management and impact a company's financial performance. ESG factors are assessed in the context of materiality and particular attention is paid to the quality of company management and the alignment of interests with minority investors.

Signed on behalf of the Board

Hélène Ploix,

28^th September 2017

Governance Report

Corporate Governance

The Board is accountable to shareholders for the governance of the Fund's affairs. The Directors use this Report to detail the Fund's corporate governance statement.

The Fund is a member of the Association of Investment Companies ('AIC') and the Board has considered the principles and recommendations of the 2016 AIC Code of Corporate Governance ('AIC Code') by reference to the AIC Corporate Governance Guide for Investment Companies ('AIC Guide'). The AIC Code addresses all the principles set out in the UK Corporate Governance Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to the Fund. The Board considers that reporting against the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Corporate Governance Code), will provide better information to shareholders.

As a Guernsey incorporated company listed on the London Stock Exchange within the FTSE 250, the Fund is required to comply with Listing Rule 9.8.7 (for overseas incorporated companies). This requires the Fund to state how it has applied the main principles set out in the 2016 UK Corporate Governance Code and whether it has complied with these provisions throughout the accounting period.

The Fund is an Authorised Closed-Ended Investment Scheme regulated by the Guernsey Financial Services Commission ('GFSC'). The GFSC requires compliance with the principles set out in the Finance Sector Code of Corporate Governance ('Guernsey Code'), or alternative codes accepted by the GFSC, in the context of the nature, scale and complexity of the business.

Statement of compliance

The Directors believe that during the year under review, they have complied with the provisions of the AIC Code and therefore, insofar as they apply to the Fund's business, with the provisions of the 2016 UK Corporate Governance Code and Guernsey Code except as noted below.

-        The role of Chief Executive

          Since all Directors are non-executive and day-to-day management responsibilities are sub-contracted to the Manager, the Fund does not have a Chief Executive.

-        Executive Directors' remuneration

          As the Board has no Executive Directors, it is not required to comply with the principles of the 2016 UK Corporate Governance Code in respect of Executive Directors' remuneration and does not have a Remuneration Committee.

-        Internal audit function

          As the Fund delegates to third parties its day-to-day operations and has no employees, the Board has determined that there is no requirement for an internal audit function. The Directors annually review whether a function equivalent to internal audit is needed and will continue to monitor the Fund's systems of internal controls in order to provide assurance that they operate as intended. In particular, the Directors review the processes and controls managed by relevant specialist staff at the Manager.

Shareholders

Shareholder relations

The Board recognises the need for good communications with its shareholders. The primary medium through which the Fund communicates with shareholders is the Annual and Half Year Financial Report and the monthly Fact Sheet, which are available via the Fund's website, www.genesisemf.co.uk. The Chairman of the Fund (and other Directors, periodically) is available for meetings with the Fund's major shareholders at their request, and all Members of the Board are available for shareholders' questions and significant matters arising. On behalf of the Board - and often with members of the Board in attendance - the Manager holds periodic meetings with the Fund's major shareholders to discuss aspects of the Fund's positioning, performance and outlook. In addition, all shareholders are invited to attend the Fund's annual Information Meeting. The Board monitors the trading in the Fund's shares and shareholder profile on a regular basis and maintains regular contact with the Fund's brokers to ascertain the views of the market. Sentiment is also ascertained by careful monitoring of the discount/premium that the shares trade on versus their NAV and the comparison with the Fund's peer group.

Significant shareholdings

The Fund has a diversified shareholder population. The Directors are however aware of the following shareholdings which represented beneficial interests of 3% or more of the issued share capital of the Fund.

Shareholder	Participating Preference Shares Held	30th June 2017 %	Participating Preference Shares Held	31st August 2017 %
Strathclyde Pension Fund	29,991,155	22.2	29,991,155	22.2
Lazard Asset Management LLC Group	16,588,581	12.3	16,337,052	12.1
City of London Investment Management	12,292,003	9.1	13,421,257	9.9
Wells Capital Management	9,395,765	7.0	9,740,508	7.2
Banque Degroof Petercam SA	9,102,709	6.7	8,168,559	6.1
Banque Degroof Luxembourg SA	7,762,929	5.8	6,935,341	5.1
Rathbones	4,469,735	3.3	4,511,567	3.3
Derbyshire County Council	4,300,000	3.2	4,300,000	3.2

Website: www.genesisemf.com

The Annual Financial Report is published on the website, www.genesisemf.com, which is maintained by Genesis Investment Management, LLP ('Investment Adviser'). The maintenance and integrity of the website is, so far as relates to the Fund, the responsibility of the Investment Adviser. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Annual Financial Report since they were initially presented on the website.

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

Regulatory Disclosures

The Alternative Investment Fund Managers Directive ('AIFMD')

The Manager is a limited liability partnership organised under the law of Delaware, USA and qualifies as a non-EU alternative investment fund manager ('non-EU AIFM'). Article 22 of AIFMD requires certain qualitative and quantitative disclosures on remuneration to assist the understanding of the risk profile of the Fund. Details of the Remuneration Policy of the Manager and amounts attributable to the Fund are available on the www.giml.co.uk website.

UK Listing Authority Listing Rules ('LR') - compliance with rule 9.8.4

None of the disclosures required under LR 9.8.4 are applicable to the Fund.

The Board

The Board, chaired by Hélène Ploix, consists of non-executive Directors, all of whom are considered to be independent of the Manager. The Board has consisted of no more than six Directors during the year and the Directors feel that given the fact that they do not have executive roles, it is not necessary to establish a separate Remuneration Committee. There is also no separate Management Engagement Committee as the Board, as a whole, regularly meet with the Manager and the Company Secretary to discuss their performance. Russell Edey held the role of Senior Independent Director during the year. The Audit and Risk Committee and the Nomination Committee both now have separate reports.

The Board regularly reviews both the performance of, and the contractual arrangements with the Manager, and is satisfied that the continuing appointment of the Manager is in the best interests of shareholders. The management agreement sets out matters over which the Manager has authority and includes management of the Fund's assets and the provision of administrative duties. The agreement further permits the Manager to delegate its administrative duties, subject to the Board's prior consent. All other matters are reserved for the approval of the Board. Under this agreement, for the 2017 financial year, the Manager was entitled to receive a management fee from the Fund, payable monthly, equal to 1.25% per annum, calculated and accrued on the Net Asset Value of the Fund as at each Valuation Day. Following discussion with the Manager, it was agreed that the management fee would be reduced at the start of the new financial year, 1^st July 2017, to 0.95% of NAV per annum. The Manager's appointment is under a rolling contract which may be terminated by three months' written notice given by the Fund, and twelve months' written notice given by the Manager.

The Audit and Risk Committee reviews the performance of, and the contractual arrangements with the Administrator and the Custodian. The Board is satisfied that the continuing appointment of the Administrator and the Custodian is in the best interests of shareholders.

The Board meets at least three times during the year and between these meetings there is regular contact with the Manager who provides the Board with appropriate and timely information. Attendance at those meetings is given below each Director's biography in the Annual Financial Report. Note that attendance at a Board or Committee meeting by proxy does not count as formal attendance (although it does count towards a quorum).

Directors' Insurance and Indemnification

Directors' and Officers' liability insurance cover is held by the Fund to cover Directors against certain liabilities that may arise in the course of their duties.

Other Matters

Voting Policy

The Directors have given the Manager discretion to exercise the Fund's voting rights and the Manager, so far as is practicable, will exercise them in respect of resolutions proposed by investee companies.

The Manager aims to vote in the best interests of the Fund, and to vote on all shares in all markets. Proxy Voting Guidelines are maintained to outline the overall approach to voting and ensure that it is conducted in an appropriate manner. In evaluating specific voting issues, the Manager's team members may engage directly with company management and directors and may also contact interest groups, other shareholders and research providers. Where appropriate, and particularly where a vote against management is warranted, the Manager will contact the company to explain the decision-making process and promote best practice. In a case where securities are on loan ahead of a General Meeting or corporate action it is the Manager's policy to request that such securities be recalled to enable the shares to be voted.

The Manager has contracted with Institutional Shareholder Services, Inc. (ISS), an independent third-party provider of proxy voting and corporate governance services. ISS provides proxy research and recommendations, executes votes as instructed by the Manager, and keeps various records necessary for tracking proxy voting materials and proxy voting actions taken. ISS recommendations are one form of external research which is factored into the Manager's investment decision-making process. Each voting issue is analysed independently, however, and the Manager's votes are not necessarily in line either with company management or the ISS recommendations.

Further details on voting policy are disclosed on the Manager's website www.giml.co.uk, where a proxy voting report for the Fund over the last five years is also available.

Borrowing Facilities

The Articles of Incorporation permit the Fund to borrow up to 10% of the value of its Net Assets. No borrowing facility was used in either 2017 or 2016.

Company Secretary

JP Morgan Administration Services (Guernsey) Limited has been in office for the whole year under review.

Authority to Purchase Own Shares

Under Resolution 9 of the Annual General Meeting held on 8^th November 2016, the shareholders authorised the Company to purchase its own shares. This authority is limited to the maximum number of 20,200,000 Participating Preference Shares of no par value (equivalent to approximately 14.9% of the issued share capital of the Company). This authority expires at this year's Annual General Meeting of the Company. The maximum price that may be paid for a Participating Preference Share will be the amount that is equal to 5% above the average of the middle market prices shown in quotations for a Participating Preference Share in the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which that Participating Preference Share is purchased.

Renewal of the Company's power to purchase its own shares will be sought at the Annual General Meeting on 6^th November 2017. In the event that the Company should purchase shares for cancellation, the Directors would only do so after consideration of the effect on earnings per share and the longer-term benefits for shareholders.

Going Concern

The Directors believe that the Fund has adequate resources to continue in operational existence for twelve months from the approval date of the Annual Financial Report. This is based on various factors including the Fund's forecast expenditure, its ability to meet its current liabilities, the highly liquid nature of its assets, its market price volatility and its closed-ended legal structure. For these reasons, the Directors continue to adopt the going concern basis in preparing the Financial Statements.

Signed on behalf of the Board

Hélène Ploix,

28^th September 2017

Manager's Review

Investment Environment

After a prolonged period of weak returns in emerging markets, it is pleasing to report a steady period of strong absolute performance. Many of the drivers noted in the Fund's Half-Year Report six months ago continued to be significant, such as the acceleration of credit growth in China and fewer than expected interest rate rises in the US. The environment has also been characterised by strong returns in the IT sector, particularly technology hardware and internet. This sector outperformed the wider market significantly (up 52%), with large Index positions Tencent and Alibaba rising by 62% and 82% respectively. In this environment, developing stockmarkets, as measured by the MSCI EM (TR) Index, rose 27.8% in sterling terms over the financial year. The Fund's net asset value failed to match the index, gaining 20.6%.

In an environment such as this where performance is driven by a narrow segment of the opportunity set, our philosophy of investing in quality businesses at attractive prices is unlikely to outperform. The Fund has in the past experienced similar periods of relative underperformance, such as the technology boom of the late 1990s and in the period leading up to the global financial crisis where valuations in markets such as China were extreme. Our focus is, as ever, to invest over the long term in a diversified portfolio with a quality bias, identifying companies which can compound value. We believe this philosophy is well suited to capitalise on the structural changes taking place in emerging economies - such as institutional quality improvement, increasing penetration of goods and services, and pricing inefficiencies - and add value relative to the Index over the long term.

Performance

Significant value was lost in the IT sector, predominantly by being underweight in Chinese internet companies. Tencent and Alibaba were large detractors despite the portfolio being invested in both (Tencent through a position in Naspers). We believe these businesses are great franchises with scale, network effects and capable management teams. However, there remains a wide range of outcomes and we believe current valuations, particularly that of Tencent, are skewed toward the upside. Conversely, the portfolio benefitted from its positions in technology hardware giants TSMC (up 45%, Taiwan) and Samsung Electronics (up 73%, South Korea).

Elsewhere, value was lost in the health care sector, particularly through positions in Indian generic drugs manufacturers Sun Pharmaceutical (down 22%) and Lupin (down 26%). Again, these companies have strong franchises with talented management teams. However, despite adding value to the Fund over the long term, recent challenges such as enhanced FDA regulatory scrutiny and a slowdown in the new drug pipeline has affected earnings and our estimates of intrinsic value. These businesses are proactively addressing the regulatory issues and continue to implement a strategy of building out a longer-term pipeline of products. Some companies disappointed for more stock specific reasons, most notably the LatAm/Caribbean telecom operator, LiLAC, and Universal Robina, the dominant producer of branded snacks in the Philippines. On the positive side, value was added in the consumer discretionary sector, where Chinese white goods company Midea and luxury brand owner Richemont - both absent from the benchmark - rose 88% and 50% respectively.

From a country perspective, the largest detractor was India chiefly due to the positions in the pharmaceutical companies noted above. Further value was lost in Thailand, where Bangkok Dusit retreated by 13% and Thai Beverage rose by only 3%, and in Turkey through a combination of stock performance and the overweight position, while the underweight position in Taiwan also hurt the portfolio. These losses were partially offset by gains in South Africa and Mexico through stock selection, and the underweight position in Malaysia.

Portfolio Activity

Consumer, IT and the materials sectors dominated trading activity over the Fund's financial year. Valuations in the consumer sector became more attractive on a relative basis. As a result, we topped up many existing holdings and initiated new positions, including Naspers (South Africa), e-commerce company JD.com (China) and convenience store operator Lojas Americanas (Brazil). Conversely, we took the opportunity to reduce two of the largest positions in the portfolio, both from the technology hardware industry - TSMC and Samsung Electronics - due to strong share price performance. Finally, we maintained our valuation discipline for companies which we view as lower quality, such as those from the materials sector, and reduced miners First Quantum (Zambia) and Anglo American (South Africa) as their share prices continued to rebound. In other sectors, noteworthy new positions included leading private hospital operator Mediclinic (South Africa) and high-quality, private sector bank HDFC (India).

Outlook

As we have noted in previous Manager's Reviews, the key risk in our view remains China. Policymakers are trying to do three things: rebalance the economy from investment to consumption, reduce financial leverage and achieve a soft landing. It has become apparent that they cannot achieve all three at once and in the near term they have allowed credit to continue to build, favouring short-term growth over long-term economic reform.

However, we are encouraged that emerging market economic growth has begun to stabilise after many years of decline. In addition, many of the excesses of the cycle following the global financial crisis, such as elevated corporate profitability, high commodity prices and overvalued currencies, have now reverted to a more sustainable level. Although valuations are not attractive across the board, we are still finding interesting opportunities in a variety of markets.

Genesis Asset Managers, LLP

28^th September 2017

Statement of Financial Position

as at 30^thJune 2017

	2017 $'000	2016 $'000
ASSETS
Current assets
Financial assets at fair value through profit or loss	1,279,759	1,099,567
Amounts due from brokers	4,636	4,261
Dividends receivable	2,295	4,001
Other receivables and prepayments	172	204
Cash and cash equivalents	35,059	20,245
TOTAL ASSETS	1,321,921	1,128,278
LIABILITIES
Current Liabilities
Amounts due to brokers	4,644	4,941
Capital gains tax payable	1,038	141
Payables and accrued expenses	2,055	1,878
TOTAL LIABILITIES	7,737	6,960
TOTAL NET ASSETS	1,314,184	1,121,318
EQUITY
Share Premium	134,349	134,349
Capital reserve	1,132,448	946,972
Revenue account	47,387	39,997
TOTAL EQUITY	1,314,184	1,121,318
NET ASSET VALUE PER PARTICIPATING PREFERENCE SHARE*	$9.74	$8.31

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2016: 134,963,060).

Signed on behalf of the Board of

Genesis Emerging Markets Fund Limited

Hélène Ploix

Russell Edey

28^th September 2017

Statement of Comprehensive Income
for the year ended 30^th June 2017

	2017 $'000	2016 $'000
INCOME
Net change in financial assets at fair value through profit or loss	185,686	(98,311)
Net exchange (losses)/gains	(210)	228
Dividend income	30,000	25,086
Securities lending income	186	4
Interest income	95	6
TOTAL INCOME	215,757	(72,987)
EXPENSES
Management fees	(15,110)	(13,124)
Custodian fees	(1,125)	(910)
Transaction costs	(1,543)	(1,269)
Directors' fees and expenses	(370)	(463)
Administration fees	(280)	(259)
Legal and professional fees	(92)	(84)
Audit fees	(61)	(52)
Other expenses	(170)	(223)
TOTAL OPERATING EXPENSES	(18,751)	(16,384)
OPERATING PROFIT/(LOSS)	197,006	(89,371)
FINANCE COSTS
Bank charges	(4)	(1)
TOTAL FINANCE COSTS	(4)	(1)
TAXATION
Capital gains tax	(897)	(29)
Withholding taxes	(3,239)	(2,595)
TOTAL TAXATION	(4,136)	(2,624)
PROFIT/(LOSS) AFTER TAX FOR THE YEAR ATTRIBUTABLE TO PARTICIPATING PREFERENCE SHARES	192,866	(91,996)
TOTAL COMPREHENSIVE INCOME	192,866	(91,996)
EARNINGS/(LOSS) PER PARTICIPATING PREFERENCE SHARE*	$1.43	$(0.68)

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding (2016: 134,963,060).

 

 

 

Statement of Changes in Equity

for the year ended 30^th June 2017

	2017
	Share Premium $'000	Capital Reserve $'000	Revenue Account $'000	Total $'000
Balance at the beginning of the year	134,349	946,972	39,997	1,121,318
Total Comprehensive Income	-	-	192,866	192,866
Transfer to Capital Reserves*	-	185,476	(185,476)	-
Balance at the end of the year	134,349	1,132,448	47,387	1,314,184

	2016
	Share Premium $'000	Capital Reserve $'000	Revenue Account $'000	Total $'000
Balance at the beginning of the year	134,349	1,045,055	33,910	1,213,314
Total Comprehensive Income	-	-	(91,996)	(91,996)
Transfer from Capital Reserves*	-	(98,083)	98,083	-
Balance at the end of the year	134,349	946,972	39,997	1,121,318

*   Calculated by summing the 'Net change in financial assets at fair value through profit or loss' and 'Net exchange (losses)/gains' in the Statement of Comprehensive Income.

Statement of Cash Flows

for the year ended 30thJune 2017

	2017 $'000	2016 $'000
OPERATING ACTIVITIES
Dividends and interest received	31,801	25,261
Securities lending income received	186	4
Taxation paid	(3,239)	(2,700)
Purchase of investments	(287,402)	(309,415)
Proceeds from sale of investments	292,224	299,720
Interest paid	(4)	(1)
Operating expenses paid	(18,542)	(16,581)
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES	15,024	(3,712)
Effect of exchange (losses)/gains on cash and cash equivalents	(210)	228
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS	14,814	(3,484)
Net cash and cash equivalents at the beginning of the year	20,245	23,729
NET CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR	35,059	20,245
Comprising:
Cash and cash equivalents	35,059	20,245

1.   Basis of Preparation

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

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

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

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

Valuations use observable data to the extent practicable. Changes in any assumptions could affect the reported fair value of the financial instruments. The determination of what constitutes observable requires significant judgement by the Fund. The Fund considers observable data to be 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.

New standards, amendments and interpretations effective from 1^st July 2016

No new standards were effective or adopted by the Fund during the year having an impact on the financial statements.

New standards, amendments and interpretations issued but not yet effective

The following standards and interpretations have been issued and are expected to be relevant to the Fund in future periods, with effective dates on or after 1^st July 2017:

-        Amendments to IAS 27, 'Equity Method in Separate Financial Statements' (effective 1st January 2017).

-        IFRS 9, Financial Instruments (effective 1st January 2018)

The Directors are currently reviewing these standards with a view to implementation on their effective date, however they do not believe their adoption will have a significant impact on the financial statements.

Early adoption of standards

The Fund did not early adopt any new or amended standards/interpretations for the year ended 30^th June 2017.

9. Related Parties and Other Material Agreements

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

(a) Manager's remuneration and terms of appointment

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

Under the Management Agreement, the Manager is entitled to receive a management fee from the Fund, payable monthly in arrears and is equal to 1.25% per annum, calculated and accrued on the Net Asset Value of the Fund as at each weekly Valuation Day, except for investments in Investee Funds, where the Manager will absorb the expenses of the management of such funds to a maximum of 1% per annum of the value of the Fund's holding in the relevant fund at the relevant time. Genesis affiliated investment companies, refer to note 9(f), do not charge a separate management fee to the Manager.

(b) Administration fees

The Administrator is entitled to receive a fee, payable monthly, based on time incurred. Administration fees for the year were $280,000 and charged by JP Morgan Administration Services (Guernsey) Limited (2016: $259,000).

(c) Custodian fee

Under the Custodian Agreement, the Custodian to the Fund is entitled to receive a fee payable monthly, based on the Net Asset Value of the Fund. All custody services are performed by JP Morgan Chase Bank.

The Fund also reimburses the charges and expenses of other organisations with whom securities are held. The total of all Custodian fees for the year represented approximately 0.09% (2016: 0.09%) per annum of the average Net Assets of the Fund.

(d) Securities lending fees

The Fund earned income of $232,000 (2016: $5,000) from securities lending transactions during the year. Commissions amounting to $46,000 (2016: $1,000) were paid to JPMorgan Chase Bank N.A. during the year in respect of these transactions of which none were outstanding at the year end.

(e) Directors' fees and expenses

Included in Directors' fees and expenses are Directors' fees for the year of $243,000 (2016: $263,000). Also included are travelling, hotel and other expenses which the Directors are entitled to when properly incurred by them in travelling to, attending and returning from meetings and while on other business of the Fund.

 (f) Other group investments

The Genesis Smaller Companies SICAV is a related party of the Fund by virtue of having a common Manager in Genesis Asset Managers, LLP. The Fund's holdings in this fund is summarised in the portfolio statement. Genesis Indian Investment Company Limited was also a related party of the Fund for the same reason although there was no holding in this fund at year end due to its liquidation in 2016. Subscriptions and redemptions during the year under review are detailed in the table below. No dividends were received from this fund during the year (2016: nil).

There were no other transactions between the Fund and such related parties during the year except as disclosed in Notes 9 (a), (b), (c), (d) and (e) above and there were no outstanding balances between these entities at 30^th June 2017.

	2017
	Subscriptions $'000	Redemptions $'000
Genesis Smaller Companies SICAV	-	3,685

	2016
	Subscriptions $'000	Redemptions $'000
Genesis Indian Investment Company Limited	-	18,781
Genesis Smaller Companies SICAV	527	4,767

This Annual Financial Report announcement does not constitute the Company's statutory accounts for the years ended 30^th June 2017 and 30^th June 2016 but is derived from those accounts.

The audited Annual Financial Report for the year ended 30^th June 2017 will be sent to shareholders shortly and will be available for inspection at the registered office: 1^st Floor, Les Echelons Court, Les Echelons, South Esplanade, St. Peter Port, Guernsey GY1 6JB, Channel Islands.

For Genesis Emerging Markets Fund Limited

J.P. Morgan Administration Services (Guernsey) Limited

28^th September 2017

 

 

END

 

 

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