Half Yearly Report

RNS Number : 6364P

Genesis Emerging Markets Fund Ld

19 February 2016

 

GENESIS EMERGING MARKETS FUND LIMITED

(The 'Company'; the 'Fund')

Registered in Guernsey

(Registration Number: 20790)

STOCK EXCHANGE ANNOUNCEMENT

HALF YEAR REPORT

The Directors of Genesis Emerging Markets Fund Limited announce the Fund's results for the six months ended 31^st December 2015. The Half Year Report will shortly be available from the Manager's website www.giml.co.uk and also for inspection on the National Storage Mechanism, which is located at 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

	31st December 2015	30th June 2015
Published net asset value*	£693.9m	£771.4m
Published net asset value per Participating Preference Share*	£5.14	£5.72
Published net asset value per Participating Preference Share*	US$7.58	US$8.99
Earnings per Participating Preference Share	$(1.41)	$(0.89)

* Figures are based on the last traded price for investments.

CHAIRMAN'S STATEMENT

Emerging market returns were clearly extremely disappointing in the second half of 2015, as investors responded to slowing growth (principally in China, but in other markets too), further weakening in commodity prices, and an awareness of a lack of necessary reform in a number of developing countries (Brazil being a major example). Over the six months to the end of December the MSCI EM (TR) Index ('Index') fell 11.6% in sterling terms.

Over the half-year period, the Fund's net asset value per share declined from £5.72 to £5.14, a loss of 10.1%. (The Fund's share price also fell by 10.1% during the period with the discount ending 2015 at 11.9%). Although this result was slightly ahead of the Index, it is fair to say that both the Board and the Manager feel that relative returns in 2015 have been disappointing, given that when this kind of environment has occurred in the past, the Manager's investment approach and process has generally delivered better returns than the market. The Fund's risk exposure to commodity companies, however, was in hindsight excessively high during the most recent period, and has consequently had a significant negative impact on performance.  2015 results have had the effect of depressing the Fund's longer-term performance record too, and - as shareholders will expect - this is a topic that forms an important part of the regular dialogue my colleagues and I have with the Manager. The Investment Manager's Review that follows this Statement addresses this performance in more detail, as well as explaining some of the changes to the portfolio in recent months.

The Fund held its Annual General Meeting at the end of October, with all proposed resolutions passed by shareholders; as always, the Board would like to thank them for their continued support. The Fund also held its regular Shareholder Information Meeting in London in October, where shareholders were able to hear views direct from, and to ask questions of the Manager's representatives.

Many shareholders will of course be aware that the Board's Chairman Coen Teulings chose not to stand for re-election at the AGM: Coen had been closely associated with the Fund for many years, including the last ten as Chairman, and played a key role in its success. As his successor, I look forward to continuing the job of leading the Board in protecting shareholders' interests. The discussions I have had with a number of shareholders since assuming the Chairmanship have been most beneficial in understanding what you expect of the Fund, and I am looking forward to maintaining this open channel of communication with you, and thereby working as effectively as possible on your behalf.

The difficulties faced by emerging market economies in general over recent years appear likely to continue in the near-term. Emerging markets have now entered a lower-growth environment and are more integrated with the rest of the world when compared with most of the Fund's life, which means that structural issues like the lack of political and economic reform in many countries, fewer of the penetration opportunities that have traditionally characterised emerging markets, increased competition from global players, and high valuations in some sectors as a result of QE activity will all limit the returns many companies can deliver for their shareholders.

Investors should therefore be aware that the current economic environment may mean lower returns in aggregate than have been experienced in the past. That said, good investment opportunities continue to exist and these have the potential to enable the Fund to generate strong performance, even in more challenging investment conditions. Following our discussions with the Manager to address the reasons for performance weakness, and to understand recent evolution and strengthening of the investment process, we continue to believe the Manager's approach (which includes a focus on sustainability in terms of governance and social factors) remains appropriate for identifying those high-quality businesses that are suitable as long-term investments for the Fund.

Hélène Ploix

Chairman

19 February 2016

DIRECTORS' REPORT

CAPITAL VALUES

At 31^st December 2015, the value of Equity Shareholders' Funds was $1,022,932,000 (30^th June 2015: $1,213,314,000) and the Equity per Participating Preference Share was $7.58 (30^th June 2015: $8.99), or in sterling terms, £5.14 (30^th June 2015: £5.72).

PRINCIPAL RISKS AND UNCERTAINTIES

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 below. 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, the 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 normally 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 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.

Lack of liquidity

Trading volumes on the stock exchanges of developing countries can be substantially less than in the leading stock markets of the developed world. This lower level of liquidity exaggerates 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's key operational risk is 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.

Manager

In the opinion of the Directors, in order to achieve the investment objective of the Fund, and having taken into consideration the performance of the Fund, the continuing appointment of the Manager is in the interests of the shareholders as a whole.

A more detailed commentary of important events that have occurred during the period and their impact on these financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year are contained in the Manager's Review.

Directors

The following directors served throughout the period under review (except where noted otherwise): Hélène Ploix, Sujit Banerji, Russell Edey, Michael Hamson, Saffet Karpat, Dr John Llewellyn and Coen Teulings. Coen Teulings, did not offer himself for re-election and accordingly resigned from the Board at the Annual General Meeting in October 2015. Hélène Ploix succeeded Coen Teulings as Chairman of the Board with effect from the day following the Annual General Meeting.

As at 31^st December 2015, Participating Preference Shares were held by Sujit Banerji (10,000), Michael Hamson (8,700), Saffet Karpat (20,000) and Hélène Ploix (15,000).

Related Party Transactions

During the reporting period, there were no transactions with related parties which materially affected the financial position or performance of the Fund. However, details of related party transactions are contained in the Annual Financial Report for the year ended 30th June 2015 which should be read in conjunction with this Half Year Report.

Going Concern

The Directors believe that the going concern basis of accounting is appropriate in preparing the financial statements and there are no material uncertainties to the Fund's ability to continue to do so.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

-        the condensed set of financial statements 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 Fund;

-        the Half Year Report includes a fair review of important events that have occurred during the first six months of the financial year, their impact on the condensed financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

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

Approved by the Board

Hélène Ploix                                                                                                                   Saffet Karpat

Director                                                                                                                                  Director

19 February 2016

MANAGER'S REVIEW

Economic growth, corporate earnings, commodity prices and currencies were generally weaker than expected in 2015. In this difficult environment stock markets, as measured by the MSCI Emerging Markets Index, fell 11.6% in sterling terms over the half year. The Fund's net asset value performed slightly better than the Index, falling by 10.1%. However, the Index outperformed the Fund over the last twelve months. When the market is down or flat, the Fund's relative performance is generally strong. Last year was an exception. While mistakes are an inevitable part of investing, we were too positive going into the current global environment of weaker growth and depressed demand - most notably in investments in commodity-producing companies.

While the long-term emerging markets investment opportunity remains fundamentally attractive  - driven by income growth and institutional quality improvement - progress is never linear. As the benefit of strong China-led growth has receded, and the start of a US interest rate tightening cycle has negatively affected investor sentiment, there have been a number of examples of countries with poor governance and a seeming inability or reluctance to undertake needed reforms. The structural factors supporting emerging markets have taken a cyclical step back.

In terms of significant drivers of relative performance, one of the largest holdings in the portfolio, SABMiller, rose by 27% after rival brewer AB InBev made a proposal to acquire the company. Elsewhere holdings in China also contributed, led by technology firm AAC and China Resources Beer (up 24% and 37% respectively). Stock selection gains in India and Thailand, and being underweight in the weak Brazilian market were further positive drivers.

Conversely, three commodity-producing companies were the largest detractors over the six month period. Diversified miner Anglo American and copper producer First Quantum fell by 67% and 69% respectively, and Tullow Oil, the African oil exploration and production company, fell by 51%. All three experienced balance sheet stress in an environment of weaker commodity prices and poor market sentiment, but while this means our estimates of their intrinsic value are also now lower, these figures have not declined to the same degree as the stock price. As a result, we believe that all three companies still warrant a continued place in the portfolio, albeit only at the much lower weightings that their fall in price means they now represent. Naturally these weightings will continue to be carefully monitored.

From a sector perspective, gains were made in financials, where positions including Samsung Fire & Marine Insurance and Kotak Mahindra Bank (up 7.7% and 6.7% respectively) outperformed and in consumer staples due to SABMiller. These gains were partially offset by the losses in the materials sector.

Looking at changes to the Fund's positioning over the six month period, India saw significant selling activity on valuation grounds while holdings in Brazil were reduced due to a confluence of a weaker economic outlook and a lack of political ability or will to resolve the fiscal problems. Market volatility provided opportunities to improve the quality profile of the portfolio. This was clearly demonstrated in China where positions in AIA, Alibaba and Tingyi were all added to; China Merchants Bank was scaled back while Belle and Li Ning exited the portfolio at the end of the period. There were notable additions to holdings in the consumer sector - such as branded snacks producer Universal Robina (Philippines) and food retailer Jeronimo Martins (Poland) - and reductions to holdings in the materials sector, such as OCI (Egypt) and Ambuja Cements (India). Elsewhere we continued to build a position in Aspen Pharmacare (South Africa), a supplier of branded and generic pharmaceutical products, and Cable & Wireless, a telecom service business operating throughout the Caribbean.

Over the next five years, in spite of continued threats from China's structural imbalances as well as excessive leverage in many economies, we think it likely that the Fund's net asset value will perform better than it has in recent years. It is not a high hurdle: the Index ended the year 15% below where it was at the end of 2010. One reason for our cautious optimism in the face of the current weight of negative opinion is that a number of risks have already crystallised including real exchange rate depreciation and lower commodity prices.

The Fund is predominantly comprised of investments in high quality businesses. This stance is reflected in the Fund's median return on equity of 15%. Consumer franchises in emerging markets are a particularly fruitful area for quality-focused investment - about a quarter of the Fund is invested in this area. We think that the classic emerging markets investment theme of consumer companies able to grow price and volume as consumers become richer is alive and well.

Genesis Asset Managers, LLP

19 February 2016

UNAUDITED STATEMENT OF FINANCIAL POSITION

as at 31^st December 2015 and 30^th June 2015

				(Audited)
		31st December 2015 $'000		30th June 2015 $'000
ASSETS
Current assets
Financial assets at fair value through profit or loss		1,005,841		1,196,264
Amounts due from brokers		329		231
Dividends receivable		1,521		4,170
Other receivables and prepayments		230		208
Cash and cash equivalents		16,686		23,729
TOTAL ASSETS		1,024,607		1,224,602
LIABILITIES
Current Liabilities
Amounts due to brokers		78		8,992
Capital gains tax payable		2		217
Payables and accrued expenses		1,595		2,079
TOTAL LIABILITIES		1,675		11,288
TOTAL NET ASSETS		1,022,932		1,213,314
EQUITY
Share premium		134,349		134,349
Capital reserve		853,877		1,045,055
Revenue account		34,706		33,910
TOTAL EQUITY		1,022,932		1,213,314
NET ASSET VALUE PER PARTICIPATING PREFERENCE SHARE*		$7.58		$8.99

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding

(30^th June 2015: 134,963,060).

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 31^st December 2015 and 31^st December 2014

		2015 $'000		2014 $'000
INCOME
Net change in financial assets at fair value through profit or loss		(191,042)		(123,153)
Net exchange (losses)/gains		(136)		1,536
Dividend income		9,816		12,014
Miscellaneous income		5		-
		(181,357)		(109,603)
EXPENSES
Management fees		(6,565)		(9,697)
Transaction costs		(443)		(787)
Custodian fees		(460)		(472)
Directors' fees and expenses		(294)		(267)
Administration fees		(132)		(148)
Audit fees		(42)		(42)
Other expenses		(150)		(157)
TOTAL OPERATING EXPENSES		(8,086)		(11,570)
OPERATING LOSS		(189,443)		(121,173)
Finance Costs		-		-
LOSS BEFORE TAX		(189,443)		(121,173)
Capital gains tax		110		(166)
Withholding taxes		(1,049)		(1,250)
LOSS AFTER TAX		(190,382)		(122,589)
Other Comprehensive Income		-		-
TOTAL COMPREHENSIVE LOSS ATTRIBUTABLE TO PARTICIPATING PREFERENCE SHARES		(190,382)		(122,589)
EARNINGS PER PARTICIPATING PREFERENCE SHARE*		$(1.41)		$(0.91)

* Calculated on an average number of 134,963,060 Participating Preference Shares outstanding

(31^st December 2014: 134,963,060).

UNAUDITED STATEMENT OF CHANGES IN EQUITY

for the six months ended 31^st December 2015 and 31^st December 2014

	For the six months ended 31st December 2015
	Share Premium $'000		Capital Reserve $'000		Revenue Account $'000		Total $'000
Balance at the beginning of the period	134,349		1,045,055		33,910		1,213,314
Total Comprehensive Loss	-		-		(190,382)		(190,382)
Transfer from Capital Reserves	-		(191,178)		191,178		-
Balance at the end of the period	134,349		853,877		34,706		1,022,932
	For the six months ended 31st December 2014
	Share Premium $'000		Capital Reserve $'000		Revenue Account $'000		Total $'000
Balance at the beginning of the period	134,349		1,169,925		29,745		1,334,019
Total Comprehensive Loss	-		-		(122,589)		(122,589)
Transfer from Capital Reserves*	-		(121,617)		121,617		-
Balance at the end of the period	134,349		1,048,308		28,773		1,211,430

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

UNAUDITED STATEMENT OF CASH FLOWS

for the six months ended 31^st December 2015 and 31^st December 2014

		2015 $'000		2014 $'000
OPERATING ACTIVITIES
Dividend received		12,470		12,083
Taxation paid		(1,154)		(1,550)
Purchase of investments		(82,836)		(198,267)
Proceeds from sale of investments		73,205		194,186
Operating expenses paid		(8,592)		(11,962)
NET CASH INFLOW FROM OPERATING ACTIVITIES		(6,907)		(5,510)
Effect of exchange (losses)/gains on cash and cash equivalents		(136)		1,536
		(7,043)		(3,974)
Net cash and cash equivalents at the beginning of the period		23,729		17,416
NET CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD		16,686		13,442
Comprising: Cash and cash equivalents		16,686		13,442

1.   BASIS OF PREPARATION

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

The Interim Financial Information for the six months ended 31^st December 2015 has been prepared in accordance with International Accounting Standards 34, 'Interim Financial Reporting'. The Interim Financial Information should be read in conjunction with the Annual Financial Statements for the year ended 30^th June 2015, which have been prepared in accordance with International Financial Reporting Standards ('IFRS').

The unaudited 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.

2.   COST OF INVESTMENT TRANSACTIONS

During the period, expenses were incurred in acquiring or disposing of investments.

	31st December 2015		31st December 2014
	$'000		$'000
Acquiring	273		407
Disposing	170		380
	443		787

3.   SEGMENT INFORMATION

The Directors, after having considered the way in which internal reporting is provided to them, are of the opinion that the Fund continues to be engaged in a single segment of business, being the provision of a diversified portfolio of investments in emerging markets.

All of the Funds' activities are interrelated, and each activity is dependant on the others. Accordingly, all significant operating decisions are based upon analysis of the Fund operating in one segment.

The financial positions and results from this segment are equivalent to those per the financial statements of the Fund as a whole, as internal reports are prepared on a consistent basis in accordance with the measurement and recognition principles of IFRS.

As at 31^st December 2015 and 30^th June 2015, the Fund has no assets classified as non-current assets.

The Fund is domiciled in Guernsey. All of the Fund's income from investment is from entities in countries or jurisdictions other than Guernsey.

For Genesis Emerging Markets Fund Limited

J.P. Morgan Administration Services (Guernsey) Limited

19 February 2016

 

END

 

 

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