Half-year Report

RNS Number : 8174S

Fidelity Emerging Markets Limited

13 March 2023

 

Fidelity Emerging Markets Limited (the 'Company or 'FEML')

Legal Entity Identifier: 213800HWWQPUJ4K1GS84

Half Year Report and Unaudited Financial Statements for the six months ended 31 December 2022

 

Total Return in GBP for the six months to 31 December 2022

Share Price Total Return 1,2 -2.9%	Net Asset Value per Participating Preference Share Total Return 1,2 -3.2%
MSCI Emerging Markets Index 1,3 -2.1%	Active Share 2 119.8%

Source: Fidelity

1 Includes reinvested income.

2 Alternative Performance Measure

3 The Company's Benchmark Index

As at 31 December 2022

E quity Shareholder's Funds	£623.1m
M arket Capitalisation	£548.4m
C apital Structure Number of Participating Preference Shares in Issue	91,100,066

Summary of the key aspects of the Investment Policy

The Company aims to achieve long term growth by primarily investing in securities and financial instruments providing exposure to emerging markets companies.

The Investment Manager invests at least 80% in companies with head offices, listings, assets, operations, income, or revenues predominantly in or derived from emerging markets.

A diversified portfolio of at least 75 holdings in companies listed or operating in at least 15 countries is maintained.

The Company may also invest into other transferable securities, investment companies, money market instruments, unlisted shares, cash and deposits. It is able to use derivatives for efficient portfolio management, to gain additional market exposure (gearing), to seek a positive return from falling asset prices, and for other investment purposes.

Financial Performance

	31 December	30 June
Assets	2022	2022
USD
Gross Asset Exposure1	$1,115.5m	$1,120.1m
Equity Shareholders' Funds	$749.5m	$796.8m
NAV per Participating Preference Share2	$8.23	$8.75
Gross Gearing2,3	48.8%	40.6%
Net Gearing2,4	(1.0%)	(7.6%)
GBP
Gross Asset Exposure1,5	£927.3m	£922.2m
Equity Shareholders' Funds5	£623.1m	£656.0m
NAV per Participating Preference Share2,5	£6.84	£7.20
Participating Preference Share Price and Discount Data
Participating Preference Share Price at the period end	£6.02	£6.34
Discount to NAV per Participating Preference Share at period end2	11.99%	12.00%
Number of Participating Preference Shares in issue	91,100,066	91,100,066
Results for the six months ended 31 December	2022	2021
Revenue Earnings per Participating Preference Share6	$0.09	$0.02
Capital (Loss)/Earnings per Participating Preference Share6	($0.45)	($1.49)
Total (Loss)/Earnings per Participating Preference Share6	($0.36)	($1.47)
Ongoing charges ratio2	0.84%	0.49%

1 The value of the portfolio exposed to market price movements.

2 Alternative Performance Measure.

3 Gross Asset Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.

4 Net Market Exposure less Equity Shareholders' Funds expressed as a percentage of Equity Shareholders' Funds.

5 The Conversion from USD to GBP is based on exchange rates prevailing at the reporting dates.

6 Calculated based on weighted average number of participating preference shares in issue during the period.

Chairman's Statement

I present to the shareholders the Half Year Report of the Company for the six months ended 31 December 2022.

I present my first report as Chair of Fidelity Emerging Markets Limited. As an experienced Chief Investment Officer and career investor in Asia and Emerging Markets, I look forward to working with my colleagues on the Board of the Company and the investment teams at Fidelity to deliver strong results for you, our shareholders. I would like to express my deep thanks to Hélène Ploix, the outgoing Chairman for her commitment, energy, and wisdom over many years and to the outgoing Director Sujit Banerji, also, for his long dedication to the Company and its shareholders.

Overview

Amid slowing growth, rising global inflation, geopolitical tensions and a market driven by sentiment rather than fundamentals, the environment in which our portfolio managers, Nick Price and Chris Tennant, operated in the period under review remained testing. At an especially difficult time for emerging market equities, the portfolio faced a challenging year and lagged the index in the fourth quarter of 2022. Russian assets remain within the portfolio. However, sanctions on such assets remain in force making them untradeable and, as such, written down to zero.

During the six-month period to the end of 31 December 2022 the net asset value ("NAV") total return of the Company fell by 3.2% (in GBP terms) and the share price by 2.9%, compared with a 2.1% decline for the benchmark index (all figures stated on a total returns basis). Weakness in Chinese material companies amid property sector challenges, was the primary cause for the lag. The discount saw some volatility. It stood at 12.0% at the end of June and widened for much of the period under review, before narrowing in December and ending the year also at 12.0%.

While this is disappointing in the near-term, our longer-term prospects remain compelling. Viewed in aggregate, the long book exhibits particularly attractive, high-quality characteristics, comprising of companies with well above average returns on assets and strong balance sheets. Periods of underperformance are inevitable in almost any investment strategy and a committed and disciplined focus on a strong process - one which has proven itself at Fidelity over a multi-year period - remains critical for future success. In an environment where recessionary risks are front of mind, the prudent approach of our managers is reassuring, as is their acknowledgement of the importance of value in the prevailing environment of uncertainty. The ability to short, too, is a helpful lever. The investment team's successful analysis of a weakening consumer environment and thus reduced demand in the Apple supply chain is just one successful example.

After many months of travel restrictions, fellow Board members and I had the privilege of travelling to Singapore and Indonesia in September 2022 to visit Fidelity's office as part of our due diligence visit. We met with investment risk specialists, ESG professionals and senior management within the investment team in Asia to discuss how equity analysts are best placed to deliver alpha for your Company's portfolio. We gained tremendous insight by accompanying senior analysts, alongside Nick Price, to observe Fidelity's powerful corporate access and thorough research process, meeting with Sea Ltd and GoTo in Singapore. We also saw how far Fidelity's research capabilities extend and their deep penetration in markets by meeting Bank Rakyat Indonesia, Bank Central Asia and Unilever Indonesia, as well as some less well known but very interesting opportunities in Jakarta. The prospects in Indonesia are an exciting and differentiated way to diversify the portfolio. The Board and I were impressed with Fidelity's bottom-up stock picking approach. To read the latest investment thinking of the team, please refer to the website fidelity.co.uk/emergingmarkets.

2022 AGM and Final Dividend

The Company held its Annual General Meeting ('AGM') on 8 December 2022, and I appreciate the shareholders' support and thank you for your approval of all resolutions presented at the meeting. A final dividend of $0.16 per Participating Preference Share was approved by shareholders and paid on 16 December 2022.

Changes to the Board of Directors

In the period under review, we welcomed Julian Healy to the Board after Sujit Banerji and Hélène Ploix stepped down at the AGM on 8 December 2022.

Outlook

Coming to the portfolio with 'fresh eyes' it is clear there are considerable opportunities and potential upside in the companies we hold and, in the months and years ahead we will be engaging closely with our investment managers to strive to deliver excellent results for you, our shareholders. We, and they, will also be closely monitoring the progress, and most importantly risk management, of geopolitical events. Consequently, country positioning and diversification will be core to future positioning. Against a backdrop of the recent and global large-scale stock deratings and volatility, the portfolio managers are looking to capitalise the underlying inherent value in the portfolio going forward. Despite global gloom, there is much at a local level to be encouraged by, not least China's reopening post - Covid and new supportive policies there around property. This combined with now falling inflation and the pullback in the US dollar, should prove a supportive environment in the coming months.

I look forward to reporting on our progress.

Heather Manners

Chairman

13 March 2023

Investment Manager's Half Year Review

Macroeconomic review

During the second half of 2022, oscillating sentiment continued to act as the main determinant of market direction. The decline in emerging market stocks over the period was concentrated in Q3, when the index fell by 3.8%, before rallying by 1.8% (in GBP terms) in the final quarter.

The Q3 decline marked the sharpest fall in emerging markets since the pandemic outbreak in the first quarter of 2020. Consecutive interest rate hikes from the Federal Reserve rattled nerves and triggered a particularly severe sell-off in September. Emerging market central banks also continued to tighten.

Unsurprisingly given volatile conditions, there were significant differences in regional performance over the second half of the year. Latin America led the gains, supported by its strength during the first part of the period, although the region's equities lost their shine in Q4. Emerging Europe, the Middle East and Africa (EMEA) equities made some gains towards the end of the period, but performance was lacklustre over the six-month period, while emerging Asian equities performed broadly in line with the broader benchmark. Increased optimism following China's National Congress, and signs that Beijing would start to rein back regulation on a beleaguered internet sector brought further relief. This, coupled with supportive property policies and indications that China's zero-Covid policy was coming to an end, resulted in emerging market equities outperforming their developed market counterparts over the year's final quarter. Value stocks fared marginally better than their growth counterparts over the period.

Portfolio performance for the six months to 31 December 2022

Over the six-month period ending 31 December 2022, the net asset value ("NAV") total return of Fidelity Emerging Markets Limited fell by 3.2% (in GBP terms) and the share price declined by 2.9%, compared with a 2.1% decline for the benchmark index (all figures are stated on a total return basis).

When sentiment, rather than fundamentals, influences the market in the short-term this is a challenging backdrop for stock pickers. The portfolio underperformed the benchmark index, largely due to weakness in Chinese material names. As a counter to this, the financials holdings in the portfolio added considerable value over the period, as did stock picking in Kazakhstan, South Africa, and India.

Financials positions drive gains in a rising rate environment

With central bank policy front and centre across the developed and emerging world, exposure to a series of banks across all regions made a meaningful contribution to portfolio performance.

The most significant contribution came from Kaspi, the dominant consumer finance, e-commerce, and payments platform in Kazakhstan. Strong earnings also drove significant gains for this highly innovative company, which has transformed from a traditional universal bank to an app for personal lending, credit cards, bill payments, P2P payments, e-commerce, and retail deposits.

India's HDFC Bank also rose after it grew its net interest income at the fastest pace in nine years, and at levels that were much higher than market expectations. Higher rates also provided a tailwind for Brazil's Bradesco, although ultimately, we decided to sell out of the stock, as we saw a deterioration in net interest income and the cost of risk as the period progressed.

Key Contributors
Order	Security	Average Active Weight (%)	Contribution to Relative Returns (%)
Top 5 Contributors
1	Kaspi.KZ	4.39	+2.04
2	HDFC Bank	7.38	+1.27
3	Banco Bradesco	1.13	+0.74
4	Cielo SA	1.09	+0.64
5	TotalEnergies	2.64	+0.47
	Total		+5.16

Key Detractors
Order	Security	Average Active Weight (%)	Contribution to Relative Returns (%)
Bottom 5 Detractors
1	Beijing Oriental	1.22	- 1.19
2	Daqo New Energy	1.00	- 0.65
3	Itaú Unibanco	0.26	- 0.60
4	Zhongsheng Group Holdings	1.49	- 0.58
5	Kweichow Moutai	2.01	- 0.52
	Total		- 3.54

Source: Fidelity International, as at 31 December 2022. Based on actual attribution. Attribution is gross of fees and exclude expenses. Holdings in different securities issued by the same company are aggregated, therefore country/region classification is according to that of the main issuer.

High oil prices boost energy holdings

Our holdings in energy stocks reaped benefits over the period as oil prices remained elevated, with oil major TotalEnergies adding value after it reported stellar results. The fourth largest global oil major, the company has a low-cost upstream portfolio with volumes tilted to conventional on and offshore oil in the likes of west Africa and the Middle East. A smaller position in an Austrian-listed oil and gas company OMV also contributed to returns after it announced strong results and a change in its long-standing progressive dividend policy. It trades at attractive valuations and offers healthy free cash flow and compelling shareholder returns.

Commodity producers deliver strong returns

The period was mixed for the portfolio's materials holdings, as a strong contribution from commodity producers was counterbalanced by weakness from Chinese building related names. Companies such as Adriatic Metals and Southern Copper were among the top contributors to relative returns as copper prices were relatively stable over the six months. Adriatic Metals is a UK-listed company with a world-class zinc development project in Bosnia and a strong pipeline of growth opportunities, with the company gaining over the review period after it announced strong exploration results.

A volatile period for Chinese stocks

Property sector woes weighed on Chinese materials companies early in the period, and although the People's Bank of China cut mortgage rates to invite more real estate investment, Beijing's initial hesitance to scale back its zero-Covid policy had an impact on many companies in the sector. Beijing Oriental Yuhong Waterproofing, China Overseas Land and Zhejiang Weixing (which we later sold out of) all detracted.

Online travel agent Trip.com and e-commerce group Pinduoduo were among the top contributors over the period. South Africa's Naspers, which holds a key stake in Chinese social media giant Tencent, also added notable value. Finally, the decision to add exposure to the Chinese market swiftly, via a long position on the Hang Seng Index, added value.

Mid-cap companies drive returns

One of the key benefits of the portfolio is the ability to invest in companies further down the market cap spectrum. Among these we witnessed a strong contribution from names such as Brazilian IT services company Cielo. Cielo revealed that quarterly earnings had tripled due to better volumes and a favourable pricing environment during the period. TBC Bank, the largest banking group in Georgia, also rose as it benefited from a higher interest-rate environment.

Portfolio positioning as of 31 December 2022

We continue to focus on owning well capitalised businesses with under-levered balance sheets. However, we have acknowledged the importance of value in the current environment and have taken steps to capitalise on this, while remaining cognisant of the continued macroeconomic uncertainty.

Balance sheets are liquid and solvent across all portfolio holdings, while also looking for value - shorter duration and compelling dividends - we do so on a highly selective basis. Areas such as banking, and energy have offered up attractive opportunities. The search for value does not compromise on quality, and attributes such as high ROE businesses remain prevalent among these additional holdings.

We have also been adding breadth and have focused on ensuring we don't become too fixated on the macroeconomic environment, given how unpredictable conditions are. Country diversification has therefore been a focal point.

Regional positioning

Over the second half of 2022, our positioning in China shifted in response to the rapidly changing policy landscape. While exposure was initially reduced over the course of Q3, as visibility started to improve and policy eased following the National Congress in October, we started to add to China, and continued to do so after it became clear that the country was abandoning its zero- Covid policy. Elsewhere in the emerging Asia region we raised exposure to Indonesia following a September trip, together with the board. Here, our research on the ground gave rise to greater conviction in select consumer facing businesses and the banking sector.

We trimmed exposure to Latin America; the primary drivers here were a deterioration in the loan books of the banks and the completion of the election cycle with the re-election of Brazil's President Lula in October. With a clear move to the left across the region, we think it is important to be vigilant about the risks that populist policies can pose to corporate activity. We have added shorts in Brazilian retailers, as more public spending and more debt could result in higher rates for longer.

We continue to see opportunities in other areas of the market, including India, which we believe remains a great structural growth story. Our exposure is centred on financial holdings; HDFC Bank is a very high-quality bank that has been held in the strategy for close to a decade, as well as newer additions such as ICICI Bank, the largest private sector bank in India that has significantly strengthened its balance sheet in recent years.

Sector positioning

Financials remain our largest sector overweight. A more hawkish European Central Bank has given rise to new opportunities among financial institutions with operations in Central Eastern Europe (CEE), with examples such as Erste Group, an Austrian bank. Overall, we are confident that financials have the potential to be advantaged in the current environment, given their cheap valuations and decent dividend yield. While we are nearer to the end of the rate-rising cycle than the beginning, rates are likely to remain higher than the preceding five years.

In energy, there are limited stocks in emerging markets that offer broad energy price exposure but that are not expensive or carry policy risk. As a result, we own French oil major TotalEnergies and initiated a new position in Austrian oil and gas company OMV.

Market outlook

A recession is largely priced in

Inflation, geopolitical tensions and slowing growth all wreaked havoc on markets throughout 2022, and investors continue to grapple with recessionary risks. Earnings downgrades in certain industries will come, and some companies will be particularly vulnerable. However, it's easy to become fixated on the past and forget that the market is a forward discounting mechanism. We think a lot is already reflected in the price given that the emerging market asset class has derated significantly.

Inflation should ease in the near term but longer term the outlook is less clear cut

Although markets have been buffeted by highly unusual levels of inflation over the past year, and inflation figures have been stickier than anticipated, we expect inflation to fall, driven by a sharp decline in M2 money supply, restrictive monetary policies, and high levels of inventories. This should provide a better backdrop for equities in the near term.

We should, however, acknowledge that the price trajectory of key commodities is very hard to predict. There is currently a lot of uncertainty about the direction of oil prices, which could range from $50 to $130 a barrel in 2023 and will have very different outcomes for the level of inflation and the direction of markets.

We are mindful that inflationary pressures can reignite over the medium term, driven by China's economic reopening and the resumption of exports, as well as the inability of central banks to live with higher rates. Deglobalisation, ageing populations and shrinking workforces should also prove inflationary over the longer term, as will the shift to green energy and the impact of climate change in agriculture, soft commodities, and supply chain security.

China's reopening and accommodative policy set to buoy markets

We are currently seeing a considerably more accommodative backdrop and Chinese policy is expected to remain supportive throughout 2023. A rollback of regulation on internet companies follows an extended period of tightening.

Policy loosening can be seen in the property market, evidenced by increasing provisions and more local relaxations, including looser purchase restrictions and lower down payments introduced in high-tier cities. With the relaxation of China's zero-Covid policy and domestic mobility recovering, there appears to be ample room for a consumer recovery, with excess household savings and cheap mortgages offering additional fuel as China reopens.

Over the next year, market participants will need to be vigilant and judge how the situation is evolving, given that China plays a central role in driving sentiment towards the emerging market asset class and its influence on returns.

Looking ahead

Although as a risk asset, emerging market equities could come under pressure in a recessionary environment, we have witnessed bouts of dollar weakening in recent months which lends support to the asset class and should mitigate this to some extent.

With the emergence of more pronounced country risks, we have spent more time examining exogenous threats - and will continue to do so this year. Deglobalisation and geopolitics have a more profound impact, in some cases impairing the corporate activity or weighing heavily on sentiment.

We've remained focused on what we do best, and we've been active in repositioning and diversifying the portfolio as the period unfolded. Exposures to banks across all regions is an area which has worked well against a backdrop of synchronised rate hikes, as has the move to increase exposure to China as the country eases policies and regulatory pressure on key sectors.

We are in a secular bear market, and our focus is on trying to ensure that we buy the dips and sell the rallies. However, we see scope for the rest of the world to outperform the US, where net profit margins have been at record levels (and will revert), valuations are extended, and high sovereign debt levels will serve to constrain growth and hamper the ability to fight inflation. By contrast EM benefits from low valuation multiples by any standard.

The market will gradually accept that the age of free money is over, and while this volatility persists, we will continue to cast the net wide and look for opportunities in areas of the market that offer up quality at an attractive price.

Nick Price

Portfolio Manager

13 March 2023

Twenty Largest Investments

as at 31 December 2022

The Asset Exposures shown below measure the exposure of the Company's portfolio to market price movements in the shares and equity linked notes owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Statement of Financial Position. Where a contract for difference ("CFD") is held, the fair value reflects the profit or loss on the contract since it was opened and is based on how much the price of the underlying shares has moved.  

	Asset Exposure		Fair value
	$'000	%1	$'000
Long Exposures - shares unless otherwise stated
Taiwan Semiconductor Manufacturing (shares and option)
Information Technology	113,968	10.0	113,968
HDFC Bank
Financials	96,775	8.5	46,176
Kaspi.KZ
Financials	67,818	6.0	67,818
AIA Group (shares and long CFD)
Financials	64,653	5.7	46,077
Naspers
Consumer Discretionary	63,573	5.6	63,573
Alibaba Group Holding (shares, option and long CFD)
Consumer Discretionary	52,923	4.7	(1,078)
China Mengniu Dairy (long CFD)
Consumer Staples	46,387	4.1	46,387
TotalEnergies (long CFD)
Energy	46,323	4.1	46,323
Infosys (long CFD)
Information Technology	43,841	3.9	39,951
ICICI Bank
Financials	41,527	3.7	1,280
Southern Copper (long CFD)
Materials	36,127	3.2	(1,953)
MediaTek
Information Technology	34,848	3.1	34,848
Chailease Holding
Financials	34,257	3.0	34,257
Li Ning (shares and option)
Consumer Discretionary	30,620	2.7	30,620
Samsung Electronics (shares and long CFD)
Information Technology	17,712	2.4	16,272
OMV
Energy	17,562	2.3	17,562
Localiza Rent a Car
Industrials	17,543	2.3	17,543
Bank Central Asia
Financials	17,061	2.3	17,061
Trip.com Group (option and long CFD)
Consumer Discretionary	16,555	2.2	481
SK Hynix (shares, option and long CFD)
Information Technology	16,539	2.1	671
Twenty largest long exposures	546,079	72.9	353,244
Other long exposures	451,601	60.3	363,390
Total long exposures before long futures and hedges	997,680	133.2	716,634
Add: long futures
Hang Seng China Enterprises Index	46,597	6.2	19
Less: hedging exposures
MSCI Emerging Markets Index (future)	(115,416)	(15.5)	963
Total hedging exposures	(115,416)	(15.5)	963
Total long exposures after the netting of hedges	928,861	123.9	717,616
Short exposures
Short CFDs (66 holdings)	183,908	24.5	(154)
Short options (6 holdings)	2,696	0.4	(206)
Total short exposures	186,604	24.9	(360)
Gross Asset Exposure2	1,115,465	148.8
Portfolio Fair Value3			717,256
Net current assets (excluding derivative assets and liabilities)			32,260
Total Shareholders' Funds/Net Assets			749,516

1 Asset Exposure is expressed as a percentage of net assets.

2 Asset Exposure comprises market exposure to investments of $720,229,000 plus market exposure to derivative instruments of $395,236,000.

3 Portfolio Fair Value comprises investments of $720,229,000 plus derivative assets of $10,736,000 less derivative liabilities of $13,709,000 (per the Statement of Financial Position).

Interim Management Report

Principal and Emerging Risks and Uncertainties, Risk Management

In accordance with the AIC Code, the Board has in place a robust process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager, has developed a list of risks which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties faced by the Company. The list of risks includes: volatility of emerging markets and market risk; investment performance risk; cybercrime and information security risk; business continuity and event management risk; gearing risk; discount to net asset value (NAV) risk; unlisted securities risk; foreign currency exposure risk; lack of market liquidity risk; environmental, social and governance (ESG) risk and people risk. Full details of these risks and how they are managed are set out on pages 25 to 27 of the Company's Annual Report for the year ended 30 June 2022 which is available on the Company's website at www.fidelity.co.uk/emergingmarkets. The Audit and Risk Committee continues to identify new emerging risks and take any necessary action to mitigate their potential impact. The risks identified are placed on the Company's risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit and Risk Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

Key emerging issues that the Board has identified include; rising geopolitical tensions, including contagion of the Ukraine crisis or tensions between China and Taiwan into the wider region; rising inflation and the so-called cost of living crisis impacting demand for UK‑listed shares; and climate change, which is one of the most critical emerging issues confronting asset managers and their investors. Macro and ESG considerations, including climate change have been included into the Company's investment process. The Board continues to monitor these issues.

The Board seeks to ensure high standards of business conduct are adhered to by all of the Company's service providers and that agreed service levels are met. The Board is responsible for promoting the long-term success of the Company for the benefit of all stakeholders and in particular its shareholders. Although the majority of the day-to-day activities of the Company are delegated to the Manager, the Investment Manager, and other third-party service providers, the responsibilities of the Board are set out in the schedule of matters reserved for the Board and the relevant terms of reference of its committees, all of which are reviewed regularly by the Board.

Related Party Transactions

During the period under review, there were no transactions with related parties which materially affected the financial position or performance of the Company. Details of related party transactions are contained in the Company's Annual Report for the year ended 30 June 2022, which should be read in conjunction with this Half Year Report. Details of the current related parties are given in Note 12 below.

Going Concern

In accordance with provision 35 of the 2019 AIC Code of Corporate Governance, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the "Going Concern" basis. The Company is an investment fund with the objective of achieving long-term capital growth by investing in emerging markets. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

The Directors have considered the Company's investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. In preparing the Financial Statements, the Directors have measured the impacts of the war in Ukraine and how the conflict has increased the risk for business continuity as well as the impact of climate change risks. The Board has considered the impact of regulatory changes and how this may affect the Company.

The Board has also assessed the ongoing risks posed on the Company by Covid-19 such as liquidity risks to markets, risks associated with the maintenance of the current dividend policy and business continuity risks for the Company's key service providers. The Board continues to review emerging risks that could have a potential impact on the operational capability of the Investment Manager and the Company's other key service providers. During the year under review, the Board received updates from Fidelity and other key service providers confirming that they continued to service the Company in line with service level agreements and have suitable arrangements in place to ensure that they can continue to provide their services to the Company during the ongoing pandemic.

The Directors, having considered the liquidity of the Company's portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and can continue in operational existence for a period of at least twelve months from the date of this Half Year Report.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

Responsibility Statement

In accordance with Chapter 4 of the Disclosure Guidance and Transparency Rules, the Directors confirm that to the best of their knowledge:

The condensed set of financial statements contained within the Half Year Report has been prepared in accordance with IAS 34 'Interim Financial Reporting' and gives a true and fair view of the assets, liabilities, financial position and return of the Company.

The Half Year Report includes a fair review of the development and performance of the Company and important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements.

The Half Year Report includes a description of the principal risk and uncertainties for the remaining six months of the financial year.

The Half Year Report includes a fair review of the information concerning related party transactions.

The Half Year Report has not been audited or reviewed by the Company's Independent Auditor.

For and on behalf of the Board

Heather Manners

Chairman

13 March 2023

Statement of Financial Position

as at 31 December 2022

	31 December	30 June	31 December
	2022	2022	2021
	unaudited	audited	unaudited
	$'000	$'000	$'000
Non-current assets
Financial assets at fair value through profit and loss	720,229	727,342	1,108,992
Current Assets
Derivative assets	10,736	20,515	7,668
Amounts held at futures clearing houses and brokers	23,308	11,901	17,651
Other receivables	2,697	30,419	2,265
Cash at bank	14,277	34,418	22,435
	51,081	97,253	50,019
Current Liabilities
Derivative liabilities	13,709	14,408	16,241
Other payables	8,022	13,426	8,742
	21,731	27,834	24,983
Net current assets	29,287	69,419	25,036
Net assets	749,516	796,761	1,134,028
Equity
Share premium account	6,291	6,291	6,291
Capital reserve	700,482	741,095	1,091,257
Revenue account	42,743	49,375	36,480
Total equity	749,516	796,761	1,134,028
Net Asset Value per Participating Preference Share	$8.23	$8.75	$12.45

 

 

Statement of Comprehensive Income

for the six months ended 31 December 2022

	Six months ended 31 December 2022 unaudited
	Revenue	Capital	Total
	$'000	$'000	$'000
Net losses on financial assets at fair value through profit or loss
	-	(1,235)	(1,235)
Net (losses)/gains on derivative instruments	-	(34,477)	(34,477)
Net foreign exchange losses	-	(686)	(686)
Investment Income	8,476	-	8,476
Derivative Income	7,653	-	7,653
Other Income	344	-	344
Total income and losses	16,473	(36,398)	(19,925)
Expenses
Management fees	(452)	(1,810)	(2,262)
Other expenses	(910)	(1,608)	(2,518)
Total operating expenses	(1,362)	(3,418)	(4,780)
Profit/(loss) before finance costs and taxation	15,111	(39,816)	(24,705)
Finance costs	(6,443)	-	(6,443)
Profit/(loss) before taxation	8,668	(39,816)	(31,148)
Taxation	(724)	(797)	(1,521)
Profit/(loss) after taxation for the period attributable to Participating Preference Shares
	7,944	(40,613)	(32,669)
Earnings/(loss) per Participating Preference Share (basic and diluted)
	$0.09	($0.45)	($0.36)

The total column of this statement represents the Company's Statement of Other Comprehensive Income prepared in accordance with IFRS. The supplementary information on the allocation between the revenue account and the capital reserve is presented under guidance published by the AIC.

The Company does not have any other comprehensive income. Accordingly, the profit/(loss) after taxation for the period is also the total comprehensive income for the period.

All the profit/(loss) and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.

No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.

Statement of Comprehensive Income (continued)

for the six months ended 31 December 2022

	Year ended 30 June 2022 audited
	Revenue	Capital	Total
	$'000	$'000	$'000
Net losses on financial assets at fair value through profit or loss
	-	(529,993)	(529,993)
Net (losses)/gains on derivative instruments	-	23,229	23,229
Net foreign exchange losses	-	(2,707)	(2,707)
Investment Income	24,399	-	24,399
Derivative Income	10,849	-	10,849
Other Income	137	-	137
Total income and losses	35,385	(509,471)	(474,086)
Expenses
Management fees	(927)	(3,709)	(4,636)
Other expenses	(2,451)	(6,357)	(8,808)
Total operating expenses	(3,378)	(10,066)	(13,444)
Profit/(loss) before finance costs and taxation	32,007	(519,537)	(487,530)
Finance costs	(13,946)	-	(13,946)
Profit/(loss) before taxation	18,061	(519,537)	(501,476)
Taxation	(2,954)	6,948	3,994
Profit/(loss) after taxation for the period attributable to Participating Preference Shares
	15,107	(512,589)	(497,482)
Earnings/(loss) per Participating Preference Share (basic and diluted)
	$0.15	($5.11)	($4.96)

.

Statement of Comprehensive Income (continued)

for the six months ended 31 December 2022

	Six months ended 31 December 2021 unaudited
	Revenue	Capital	Total
	$'000	$'000	$'000
Net losses on financial assets at fair value through profit or loss
	-	(182,894)	(182,894)
Net (losses)/gains on derivative instruments	-	24,121	24,121
Net foreign exchange losses	-	(2,478)	(2,478)
Investment Income	12,283	-	12,283
Derivative Income	1,366	-	1,366
Other Income	118	-	118
Total income and losses	13,767	(161,251)	(147,484)
Expenses
Management fees	(927)	(3,709)	(4,636)
Other expenses	(1,170)	(5,155)	(6,325)
Total operating expenses	2,097)	(8,864)	(10,961)
Profit/(loss) before finance costs and taxation	11,670	(170,115)	(158,445)
Finance costs	(7,901)	-	(7,901)
Profit/(loss) before taxation	3,769	(170,115)	(166,346)
Taxation	(1,557)	7,688	6,131
Profit/(loss) after taxation for the period
attributable to Participating Preference Shares	2,212	(162,427)	(160,215)
Earnings/(loss) per Participating
Preference Share (basic and diluted)	$0.02	($1.49)	($1.47)

Statement of Changes in Equity

for the six months ended 31 December 2022

	Share
	premium	Capital	Revenue	Total
	account	reserve	reserve	equity
	$'000	$'000	$'000	$'000
Six months ended 31 December 2022 (unaudited)
Total equity at 30 June 2022	6,291	741,095	49,375	796,761
(Loss)/profit after taxation for  the period	-	(40,613)	7,944	(32,669)
Dividend paid to shareholders	-	-	(14,576)	(14,576)
Total equity as at 31 December 2022	6,291	700,482	42,743	749,516
Year ended 30 June 2022 (audited)
Total equity at 30 June 2020	6,291	1,642,118	50,666	1,699,075
(Loss)/profit after taxation for the year	-	(512,589)	15,107	(497,482)
Write off receivables for shares	-	(134)	-	(134)
Repurchase and cancellation of the Company's own shares
	-	(388,300)	-	(388,300)
Dividend paid to shareholders	-	-	(16,398)	(16,398)
Total equity at 30 June 2022	6,291	741,095	49,375	796,761
Six months ended 31 December 2021 ((unaudited)
Total equity at 30 June 2021	6,291	1,642,118	50,666	1,699,075
(Loss)/profit after taxation for the year	-	(162,427)	2,212	(160,215)
Write off receivables for shares	-	(134)	-	(134)
Repurchase and cancellation of the Company's own shares
	-	(388,300)	-	(388,300)
Dividend paid to shareholders	-	-	(16,398)	(16,398)
Total equity at 31 December 2021	6,291	1,091,257	36,480	1,134,028

 

Statement of Cash Flows

for the six months ended 31 December 2022

	Six months	Year	Six months
	ended	ended	ended
	31 December	31 June	31 December
	2022	2022	2021
	unaudited	unaudited	unaudited
	$'000	$'000	$'000
Operating activities
Dividend and interest income received	12,298	20,371	15,422
Derivative income received	2,560	3,808	929
Securities lending income received	-	38	38
Taxation paid	(724)	(3,694)	(1,557)
Purchase of investments	(569,308)	(1,645,720)	(1,217,956)
Proceeds from sale of investments	577,662	2,067,514	1,604,773
Net proceeds from the settlement of derivatives	(5,401)	14,119	32,121
Net cash outflow from amounts held at futures clearing houses and brokers	(11,407)	(11,901)	(17,651)
Bank charges	(80)	(63)	(11)

Bank charges	(80)	(63)	(11)
Operating expenses paid	(4,249)	(16,448)	(12,362)
Net cash inflow from operating activities	1,351	428,024	403,746
Financing activities
CFD interest paid	(3,061)	(4,585)	(1,061)
CFD dividends paid	(3,169)	(8,542)	-
Dividend paid	(14,576)	(16,398)	(16,398)
Repurchase and cancellation of the Company's own shares	-	(388,300)	(388,300)
Net cash outflow from financing activities	(20,806)	(417,825)	(405,759)
Effect of foreign exchange movements	(686)	(2,707)	(2,478)
Net (decrease)/increase in cash at bank	(20,141)	7,492	(4,491)
Cash at bank at the beginning of the period	34,418	26,926	26,926
Cash at bank at the end of the period	14,277	34,418	22,435

 

 

Notes to the Financial Statements

for the six months ended 31 December 2022

1. Publication of Non-statutory Accounts

The interim financial statements in this Half Year Report have not been audited by the Company's Independent Auditor. The financial information for the year ended 30 June 2022 is extracted from the latest published Annual Report of the Company which was delivered to the Guernsey Financial Services Commission.

2.  Accounting Policies

(i) Basis of Preparation

The interim financial statements for the six months ended 31 December 2021 have been prepared in accordance with International Accounting Standards 34, 'Interim Financial Reporting'. The interim financial statements should be read in conjunction with the annual financial statements for the year ended 30 June 2021, which have been prepared in accordance with International Financial Reporting Standards ('IFRS'), the IFRS Interpretations Committee and interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect and the Companies (Guernsey) Law, 2008.

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.

(ii) Going Concern

The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of these financial statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these financial statements. This conclusion also takes into account the Board's assessment of the continuing conflict between Russia and Ukraine and the risks related to Covid-19, as disclosed in the Going Concern Statement on page 22 of the report.

Management Fees

Under the Investment Management Agreement ('the IMA'), Fidelity International is entitled to receive a Management Fee of 0.60% per annum of the Net Asset Value of the Company.

Fidelity International waived its entitlement to receive a Management Fee for a period of nine months from its date of appointment. The Management Fee is payable from 1 July 2022. Fees are payable monthly in arrears and calculated on a daily basis.

No Management Fee is payable by the Company in respect of the Company's holdings in collective investment schemes or investment trusts managed or advised by the Investment Manager.

3. Dividend paid to shareholders

	Six months		Six months
	ended	Year ended	ended
	31 December	31 June	31 December
	2022	2022	2021
	$'000	$'000	$'000
Dividend of 16.00 cents pence per ordinary share paid for the year ended 30 June 2022
	14,576	-	-
Dividend of 18.00 cents pence per ordinary Share paid for the year ended 30 June 2021
	-	16,398	16,398

4. Share capital

On 6 September 2021, the Company launched a tender offer to buy back up to 25% of its issued share capital. As a result of the tender offer, on 22 October 2021, the Company repurchased 30,366,688 Participating Preference Shares for cancellation. The resultant number of shares in issue is 91,100,066 Participating Preference Shares.

The costs associated with the cancellation of the shares of $388,300,000 were charged to the capital reserve for the year ended 30 June 2022.

The Company may issue an unlimited number of Unclassified Shares of no par value .

5. Availability of Half Year Report

The calculation of the net asset value per Participating Preference Share is based on the following:

	31 December	30 June	31 December
	2022	2022	2021
	unaudited	audited	unaudited
Net assets	$749,516,000	$796,761,000	$1,134,028,000
Participating Preference Shares in issue	91,100,066	91,100,066	91,100,066
Net asset value per Participating Preference Share
	$8.23	$8.75	$12.45

6.  Availability of Half Year Report

The Half Year Report and Unaudited Financial Statements will shortly be available from the Company's website fidelity.co.uk/emergingmarkets and via the National Storage Mechanism, which is located at https://data.fca.org.uk/#/nsm/nationalstoragemechanism where users can access the regulated information provided by listed entities.

For further information, please contact:

Natalia De Sousa

FIL Investments International

J.P. Morgan Administration Services (Guernsey) Limited

Company Secretary

01481 758 620

13 March 2023

 

END

 

 

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