Half Year
Report for the six months ended 31 December
2023
-
Fidelity
Emerging Markets Limited reported a Net Asset Value (NAV) return of
+3.2% and a Share Price Total Return of +7.5% in the six months
ended 31 December 2023
-
The
Company’s benchmark index, the MSCI Emerging Markets Index, rose
+4.4% over the same timeframe
-
During the
period, the Company’s short book added over 100bps to relative
returns
-
The
portfolio managers remain focused on looking for well capitalised
businesses with under-levered balance sheets in the long book and
making use of the Company’s flexible investment
capabilities
Financial
Highlights
|
31 December
2023
|
30 June
2023
|
Assets
|
|
|
USD
|
|
|
Gross
Asset Exposure1
|
$1,220.2m
|
$1,185.0m
|
Equity
Shareholders’ Funds
|
$800.9m
|
$796.7m
|
NAV per
Participating Preference Share2
|
$8.85
|
$8.75
|
Gross
Gearing2,3
|
52.3%
|
48.7%
|
Net
Gearing2,4
|
(1.7)%
|
(3.9)%
|
GBP
|
|
|
Gross
Asset Exposure1,5
|
£957.2m
|
£932.1m
|
Equity
Shareholders’ Funds5
|
£628.3m
|
£626.7m
|
NAV per
Participating Preference Share2,5
|
£6.94
|
£6.88
|
Participating
Preference Share Price and Discount Data
|
|
|
Participating
Preference Share Price at the period end
|
£6.16
|
£5.88
|
Discount
to NAV per Participating Preference Share at period
end2
|
11.29%
|
14.61%
|
Number of
Participating Preference Shares in issue
|
90,462,891
|
91,100,066
|
Earning
for the six months ended 31 December
|
2023
|
2022
|
Revenue
Earnings per Participating Preference Share6
|
$0.06
|
$0.09
|
Capital
Earnings/(Loss) per Participating Preference
Share6
|
$0.23
|
($0.45)
|
Total
Earnings/(Loss) per Participating Preference
Share6
|
$0.29
|
($0.36)
|
Ongoing
charges ratio2
|
0.82%
|
0.84%
|
1 The
value of the portfolio exposed to market price
movements.
2 Alternative
Performance Measures. See Glossary of Terms in the Half Year Report
for the six months ended 31 December
2023 .
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.
Contacts
For
further information please contact:
Nira Mistry
Company
Secretary
07778 354
517
FIL
Investments International
Chairman’s
Statement
Heather Manners, Chairman
I am
pleased to present your Company’s half-year report, covering a
period in which portfolio performance has been encouraging with the
share price total return increasing by 7.5% in spite of continued
geopolitical volatility.
Overview
In the six
months under review, China – the
largest emerging market, yet an underweight in the Company’s
portfolio compared with the benchmark – continued to struggle amid
a slower-than-expected post-Covid reopening and an ongoing debt
crisis in the property market. Conversely, less prominent areas
such as South East Asia and
Latin America have been reaping
the benefits of the trend towards developed market companies
relocating manufacturing capacity away from China, while an uptick in the semiconductor
cycle has been positive for leading chipmakers in Taiwan. The Company’s retained holdings in
Russian entities have been written down to $Nil in the balance
sheet. For further information please refer to the Portfolio
Manager’s review and to Note 10 of the financial statements in the
Half Year Report for the six months ended 31 December
2023.
Against
this backdrop, net asset value (‘NAV’) total return performance for
the six months ended 31 December
2023 was positive, at 3.2%. While this was slightly behind
the 4.4% sterling return of the Company’s benchmark, the MSCI
Emerging Markets Total Return Index (‘the Index’), the share price
total return per Participating Preference Share notably
outperformed the Index, rising by 7.5%. This is particularly
pleasing not just because it suggests an improvement in sentiment
towards emerging markets as an asset class, but also as it
underlines the hard work of your Board and Fidelity’s efforts to
promote the Company’s enhanced investment proposition and narrow
the share price discount to NAV.
Fundamental
to this is Fidelity’s unique investment process. The managers’
ability to hold short as well as long positions – investing in well
financed, well managed businesses that can drive growth, while also
making money from identifying those at risk of disruption – is a
key differentiating factor that is increasingly feeding into
positive performance for the Company. While we are yet to reach a
three-year track record under the management of Fidelity’s
Nick Price and Chris Tennant (appointed in September 2021), performance for the 12 months
ended 31 December
2023 was ahead of the benchmark on both a share price and a
NAV total return basis. As well as having a full investment
toolkit, your Company also benefits from Fidelity’s large and
experienced team of portfolio managers and analysts, the majority
of whom are based in the markets they cover, giving them an
invaluable advantage in terms of identifying new investment
opportunities.
At Board
level, your Directors and I have continued to focus on building
awareness of the strength of Fidelity’s approach, as well as
keeping costs in check (our ongoing charges ratio is the lowest in
the AIC Global Emerging Markets sector, at 0.82%) and taking
deliberate action to limit the discount to NAV. During the period
under consideration, the discount narrowed from 14.6% to 11.3%.
While a 3.3% narrowing is not inconsiderable, the discount remains
wider than we would like. We have the authority to repurchase up to
14.99% of the issued share capital each year in order to manage the
discount, and in November 2023 we
launched a buyback programme under which 637,175 shares (c. 0.7% of
the total) were bought back into treasury between
13 November
and 31 December.
Since then, a further 458,056 shares have been repurchased,
bringing the total bought back to date under the current programme
to 1,095,231 (c. 1.2%). In addition, we have announced our
intention to implement a tender offer for up to 15% of the issued
share capital, expected to be at a 2% discount to the prevailing
NAV. We expect the tender offer to conclude in the first quarter of
2024.
2023 AGM
and final dividend
The
Company held its Annual General Meeting (‘AGM’) on
7 December
2023, and I appreciate the shareholders’ support and thank
you for your approval of all resolutions presented at the meeting.
A final dividend of $0.19 (15.27p)
per Participating Preference Share (2022: $0.16) was approved by shareholders and paid on
15 December
2023.
Shareholders
should note that the Board will review the final dividend payment
later in the year based on dividend receipts from the companies
held in the portfolio.
Board
changes
Following
the December 2023 AGM, Julian Healy, Chairman of the Audit Committee,
announced his intention to step down from the Board for personal
reasons. We wish him well and thank him for his significant
contribution to the Company. On 17 January
we announced the appointment to the Board of Mark Little, who replaces Julian both as a
Director and as Chairman of the Audit and Risk Committee with
immediate effect. Mark is a Chartered Accountant with extensive
financial services experience in fund management, research and
private banking, and has a strong understanding of compliance and
regulation in the modern financial services world, as well as a
successful track record as an investment company director. He will
stand for election at the next AGM in December 2024.
Outlook
Although
developed markets (particularly the US, driven by the ‘magnificent
seven’ major technology stocks) once again performed better than
emerging markets in 2023, we continue to believe there are
compelling reasons to consider a long-term allocation to emerging
markets. In contrast with many Western economies, emerging nations
largely did not undertake massive fiscal support programmes during
the Covid pandemic, and as such they have not been subject to the
same inflationary pressures as restrictions have eased. Away from
China, and as noted above, the
trend towards deglobalisation and the relocation of manufacturing
capacity is boosting markets from India to Vietnam to Mexico. All of these factors are positive for
potential investment returns from emerging markets, with the added
bonus that (with the notable exception of some areas of the Indian
stock market) valuations generally look very favourable compared
with developed markets. Furthermore, the global push towards a
lower-carbon future provides a tailwind for commodity prices, which
should benefit developing nations across the EMEA and Latin America regions which are rich in
natural resources.
With an
improving trend of performance, solid action to manage the
discount, continued efforts to raise your Company’s profile and
decent prospects for investment returns in an arena that boasts
significant hidden value, your Board and I are hopeful that the
remainder of the financial year will build further on the progress
the Company has achieved over the last year.
Heather Manners
Chairman
11 March 2024
Investment
Manager’s Half Year Review
Macroeconomic
Review
Emerging
markets rose over the second half of 2023, closing out the first
calendar year of positive performance for the index since 2020.
Sentiment oscillated over the period as emerging markets continued
to grapple with tighter monetary policy and continued weakness in
China. Markets declined from the
end of the summer, with October another weak month as rising
government bond yields dented risk appetite. The market then
rebounded significantly in November as the dollar pulled back and
bond yields came down, and it appeared that the Fed was reaching
the end of its rate tightening cycle, with this rally continuing
into December.
Performance
across regions was mixed. Latin
America rallied significantly as interest rates came down,
most notably in Brazil. Emerging
Asia was weaker, largely due to
the underwhelming recovery in China, although this was somewhat offset by
strength in India as the country
benefited from higher spending in advance of an election year and
improving consumer confidence. Several emerging European markets
also rallied following a market-friendly election result in
Poland and interest-rate cuts both
there and in Hungary.
We also
saw dispersion between sectors. Technology stocks continued to
perform well, enjoying the tailwind from the improved outlook for
AI-related demand, while energy stocks also rallied in a relatively
high oil price environment. Returns across other sectors were more
varied, with the communication services and real estate sectors
impacted by weakness in China. The
US dollar was broadly flat, rallying through the late summer, and
then falling back as the outlook for interest-rate rises
moderated.
Portfolio
performance for the six months
to 31 December
2023
Over the
six-month period ending 31 December
2023, the net asset value (“NAV”) total return of Fidelity
Emerging Markets Limited was 3.2% (net of fees, in GBP terms),
while the share price rose by 7.5%. This was relative to a 4.4%
increase for the benchmark index (all figures are stated on a total
return basis, in GBP terms).
The
portfolio’s small underperformance relative to the index over the
last six months of the year followed a strong first half of the
year, which meant the portfolio outperformed the index over the
calendar year in aggregate. While the long book detracted overall,
the short book performed well, and added over 100bps to relative
returns over the six-month period.
Weakness
in the second half of the year was largely due to the continued
derating of the high-quality Chinese consumer names we hold. This
was despite our underweight exposure to China (which we view as China and Hong
Kong combined). Although this underweight positioning
helped, our positioning in the country detracted overall as many of
the Hong Kong listed names that we
hold sold off much more than the broader market as foreign
investors looked to exit the region.
There was
marked dispersion among consumer companies, however, and some of
the strong performers over the period included consumer
discretionary names outside of China, for example in India and Poland. Consumer names accounted for half of
both the top ten contributors and detractors, emphasising just how
much variation there was within the sector. The portfolio’s
underweight exposure to the communication services sector also
helped us as the industry came under pressure from new regulations
on Chinese gaming companies. There was also a contribution from
Russia as we took steps to reduce
exposure when liquidity was offered up (see later).
Top five
contributors and detractors, six months ending
31 December
2023
Order
|
Security
|
Sector
|
Relative
(%)
|
Actual
CRR
(bps)
|
Top
5
|
|
|
|
|
1
|
MakeMyTrip
Limited
|
Consumer
Discretionary
|
1.56
|
73
|
2
|
Short
position
|
Information
Technology
|
-0.36
|
66
|
3
|
Tencent
Holdings Ltd
|
Communication
Services
|
-3.97
|
65
|
4
|
Kaspi.KZ
JSC
|
Financials
|
4.84
|
64
|
5
|
Short
position
|
Consumer
Discretionary
|
-0.33
|
62
|
Bottom
5
|
|
|
|
|
1
|
Li Ning Co
Ltd
|
Consumer
Discretionary
|
1.64
|
-138
|
2
|
China
Mengniu Dairy Co
|
Consumer
Staples
|
2.89
|
-126
|
3
|
First
Quantum Minerals Ltd
|
Materials
|
1.40
|
-90
|
4
|
AIA Group
Ltd
|
Financials
|
3.36
|
-80
|
5
|
PDD
Holdings Inc
|
Consumer
Discretionary
|
-0.89
|
-61
|
Source:
Fidelity International, 31 December
2023.
High-quality
Chinese consumer stocks derate
A
persistent feature of the last six months has been continued
weakness in Chinese consumption as the economic reopening remains
lacklustre and the property market continues to come under
pressure, which has significant implications for consumer
confidence. The portfolio’s weakest performers over the period were
largely China positions, with
sportswear company Li Ning and dairy
company China Mengniu among the most significant detractors. There
is no doubt that the consumer environment has been weaker than
expected against the soft economic backdrop. However, it is
important to say that these moves can primarily be attributed to
multiple compression, as opposed to disappointing results. Many of
these names are also blue-chip H-shares with high foreign ownership
that have suffered from international shareholders exiting the
region.
Stock
specific weakness in the materials sector
One of the
weaker performers over the period was the Canada listed copper miner First Quantum
Minerals, which sold off after the closure of its Cobre mine in
Panama, due to a contested
government contract. Although we believe that the expropriation of
the mine without full compensation is unlikely, we are closely
monitoring the situation and have trimmed the portfolio’s exposure
to the company.
Dispersion
among financials holdings
The
performance of the portfolio’s financials positions was mixed. The
weakest performer was Hong Kong
listed insurer AIA Group, which sold off as investors looked to
reduce exposure to China, and in
particular high-quality H shares. We are of the view that this is
largely sentiment driven, as AIA has had a strong year, with
upgrades to premiums earned and a rising value of new business.
India’s largest private sector bank, HDFC Bank, also declined due
to some short-term concerns about its recent merger, although it
performed better towards the tail-end of the year following a
strong showing for the incumbent party at the local elections in
India.
More
positive was the performance of Kazakhstan’s ecommerce and payments
platform Kaspi, which has continued to deliver very strong earnings
growth, and has kept paying out dividends and buying back shares.
Russia’s TCS Group, a provider of online retail financial services,
also contributed after we partially exited the position in
Q4.
A positive
six months for the short book
It was a
strong period for the short book. This was in part due to the
market backdrop during the first part of the period, with several
highly shorted stocks unwinding after an unprecedented squeeze in
June and July. However, strong stock picking was also in evidence,
with short positions accounting for two of the portfolio’s top five
contributors to performance, a notable achievement given that short
positions are capped at 100bps.
The best
performer was a US-listed Indian technology company that carried
out an unsuccessful equity raise and later filed for bankruptcy. A
short position in a Latin
America-based retailer also performed well after it carried
out a failed rights issue and continued to lose market share. The
rallying market at the end of Q4 created a less favourable
environment for shorting and meant that two short positions in
Asian technology businesses detracted as they rose with the broader
market.
Consumer
discretionary names outside China
rally
As
inflation moderates and rates come down, the backdrop for the
consumer has improved in many emerging economies. Several consumer
holdings outside of China
performed well over the period, with Indian online travel agency
MakeMyTrip a particularly strong performer, after it posted strong
results and benefited from a recovery in international travel. We
think that the travel industry in India has huge scope for growth, and that
MakeMyTrip, as the dominant operator in the market, should be a
direct beneficiary of this. Polish auto components distributor Auto
Partner also did well after demonstrating continually strong
monthly sales data pointing to market share gains. Russia’s Detsky
Mir, a children’s retailer, also contributed after we exited the
position in the latter half of the year (see later).
Portfolio
positioning as of 31 December
2023
In the
long book we continue to look for well capitalised businesses with
under-levered balance sheets. We are conservatively positioned,
meaning that the companies we own should be better prepared for
what could remain a challenging environment. Although the long book
remains quality focused, a deliberate, continued search for value
(without compromising on quality) has remained central to our
thinking.
Looking to
the portfolio’s extended toolkit, the ability to venture further
down the market cap spectrum remains vital, allowing us to gain
exposure to companies benefiting from excellent structural growth
drivers, including those in smaller, frontier markets such as
Kazakhstan and Vietnam.
When
identifying ideas for the short book, we continue to make use of
our excellent research team to identify companies with
characteristics such as poor corporate governance, weak balance
sheets, or deteriorating competitive positions.
Regional
positioning
Positioning
changes in China have continued to
centre around stocks that have clear programs of cash returning to
shareholders, generally via share buybacks. This demonstrates a
clear alignment of interest with shareholders, and it means we have
a buyer of equity in the market in the absence of buyers of Chinese
equity.
The
derating in Chinese stocks has largely been driven by multiple
compression rather than earnings downgrades and has been much more
extreme in H shares given their high foreign ownership. We do see
significant value in the China
market, and a growing prevalence of companies that are returning
capital to shareholders. China Mengniu Dairy, Zhongsheng Group,
Vipshop and AIA Group are just some examples of companies with
progressive buyback policies that are trading on very attractive
valuations given weak sentiment towards the Chinese
market.
We do,
however, remain conscious of the more muted backdrop for the
consumer. It is likely that China’s property market will not be the
strong driver of economic growth that it has been in the past,
which has a knock-on effect on consumer confidence. With an eye on
managing risk and country level exposures, we have looked to reduce
our aggregate position in the country (which we view as
China and Hong Kong combined). As part of this we have a
basket of short positions in indebted, privately owned Chinese real
estate developers, which is paired against a position in a leading
state-owned developer that stands to gain as its private peers exit
the market.
We see a
multitude of opportunities beyond China, too. India is a strong long-term structural growth
story and there are also several near-term tailwinds. Following an
extended period of underinvestment, the country will benefit from
the current capex cycle, and could also see an uptick in activity
as some international companies move their manufacturing operations
from China to India. Exposure to the Indian market is
predominantly via financials, given that these trade on more
attractive valuations than the broader market, but there are also
positions in companies across IT services, online travel,
motorcycles, and private security.
While the
portfolio has an underweight exposure to South Korea and Taiwan, we retain our core positions in
semiconductor and memory names, where there has been disciplined
profit taking following the significant market rally last year.
Despite this bout of strong performance, these names trade on very
cheap multiples relative to their developed market
peers.
We
increased exposure to Latin
America over the period. We have a positive view on
Mexico, which has a positive
macroeconomic backdrop and is set to benefit from the nascent trend
of nearshoring as the US looks to shift its supply chains closer to
its own borders. The macro environment in Brazil is also very strong, with a trade
balance that is close to the highest level in two decades. With
inflation under control and interest rates coming down, we expect a
positive tailwind for consumers and corporates over the next year.
The Latin America exposure is
broad-based and spans banks, retailers, airlines, transportation
businesses, and miners, among others.
Sector
positioning
Financials
remains the largest sector overweight for the portfolio. A
significant portion of this exposure is not interest-rate
sensitive, and we have looked to add exposure to banks that are
beneficiaries of falling rates – including those that should
benefit from improving loan growth or investment banking activity
as interest rates come down. Here, our ability to look for ideas
across a broad investable universe and examine underexplored areas
of the market is important, with names such as Kazakhstan’s
ecommerce and payments platform Kaspi and Brazilian challenger bank
Nu Holdings being two examples of stocks that were unearthed
through our intense, bottom-up research process.
The
portfolio also has an overweight exposure to consumer companies,
which is well diversified across markets. Although the consumer
recovery in China has certainly
been weaker than expected, we are seeing green shoots across other
markets as inflation moderates and interest rates come down. The
Chinese consumer names we hold include internet platforms, and
those operating in the luggage and sportswear markets, and are all
companies that are returning capital to shareholders. Beyond
China, our exposure includes Latin
American retailers, Indian travel and motorcycle businesses, and
discount food retailers in emerging Europe and South
Africa. There are also several short positions in companies
across markets that are exposed to competitive threats or have
broken balance sheets, including retailers and electric vehicle
makers.
OutlookInterest
rates are coming down across emerging markets…
Although
emerging markets continued to underperform developed markets over
2023, with weakness in China
explaining part of this, the discount at which emerging markets are
trading relative to both history and developed markets remains at
odds with the improving fundamental picture – particularly given
the improving backdrop for inflation and interest rates. Emerging
market central banks have been some of the most proactive in the
world, with Brazil the poster
child of this trend, as both inflation and interest rates in the
country come down. We see a similar picture in other emerging
economies, with Chile,
Poland and Hungary having all cut rates, and other
countries set to follow.
…Although
rates will likely remain higher over the long term
Falling
interest rates should provide a measure of support for
longer-duration growth assets over 2024. However, rates will likely
remain more elevated than they have been over the past 15 years –
which continues to underpin our view that some form of value
exposure has a continued role to play in actively managed
portfolios. In an environment where structurally higher inflation
continues to challenge the outlook for growth, evidence of
companies returning cash to shareholders also remains vital. One
key aspect of the portfolio’s enhanced toolkit is the ability to
short companies, and in a higher interest-rate environment this has
the potential to offer a particularly good source of alpha, as the
unsustainable debt levels of many companies come into focus, and
they pay the price of carrying too much leverage.
Weakness
in China, but signs of
shareholder-friendly activity
As the
largest single constituent of the emerging market universe,
China plays a significant role in
determining the outlook for the asset class in 2024. There remains
marked weakness in the Chinese property market, which has
implications for both consumer confidence and commodity demand. In
an environment where growth is likely to be weaker than it has been
historically, and where demographics are worsening as the
population ages, evidence that companies are returning capital to
shareholders is critical. Valuations are attractive and the extent
of the derating, especially in H shares, means there is potential
for a rebound, although what the catalyst will be and exactly when
it will emerge is unclear.
A diverse
opportunity set, with dispersion apparent
Elsewhere,
we see pockets of the market overlooked, while dispersion is very
broad, as valuations differ significantly across regions. This
throws up some interesting opportunities and offers the potential
to unlock attractive shareholder returns in the year ahead. 2024
will be a busy election year for emerging markets, with polls due
in India, South Africa, Mexico, and Taiwan, among many other countries. These are
the types of events we continue to scrutinise closely, drawing on
external strategists to help us make sense of the elevated
unpredictability we see in markets.
While
valuations have derated significantly, as the rally throughout
November and December showed, bouts of stronger performance can
result in rapid re-rating, underlining the importance of active
management and disciplined position size management. Given the
derating in Chinese H shares, the extent of any market move in this
area could be significant, for example.
The
emerging market universe still presents compelling opportunities
and the relative attractiveness of emerging market valuations
compared to developed markets, particularly the US market, is
clear. However, discipline is critical, as not all markets and not
all sectors and regions are (or will remain) cheap, making an
active approach vital.
Strong
fundamentals and attractive valuations
The
macroeconomic backdrop is uncertain, and it remains to be seen
whether the US will achieve a soft landing or when consumer
confidence in China will start to
recover – two factors that will have a significant influence on the
outlook for emerging markets in 2024. Nonetheless, falling interest
rates will act as a tailwind for companies and consumers, and
should also create a shift in mindset as investors retreat from
safe-haven assets and start to consider opportunity costs, looking
at the value on offer in markets, including in risk assets such as
emerging market equities.
A
go-anywhere approach to emerging markets
The extent
of the derating within emerging markets over the last few years
means that there are many high-quality names trading at very
attractive valuations. In the portfolio’s long book, we continue to
look for companies that should be better prepared for what could
remain a challenging environment. We are also focused on putting to
work the portfolio’s extended toolkit, scouring the entire breadth
of the market cap spectrum for ideas, and making use of our
excellent team of global research analysts to identify candidates
for the short book – taking a truly ‘go anywhere’ approach to
ensure we maximise our ability to profit from businesses of all
kinds.
Nick Price
Chris Tennant
Portfolio
Managers
11 March 2024
In 2023 we
transacted in the shares of two Russian companies,
TCS
Group Holdings and
Detsky
Mir. The
contribution from these stocks reflects the realisation of value.
In November 2022 Detsky Mir announced
that it intended to convert its business into a private company.
Subsequently we were informed we were entitled to sell their Detsky
Mir shares under a voluntary tender offer. Fidelity elected to
participate in the tender offer. The funds were then automatically
converted by the custodian and repatriated into the portfolio. In
December 2023 we partially sold
shares in a Russian company, TCS
Group Holdings. These
decisions were made with the view to protecting the interests of
our shareholders, and after close consultation with internal
Fidelity teams, we concluded that it would be in the best interest
of shareholders to transact.
Spotlight
on the Top 5 Holdings
as at
31 December
2023
The top
five holdings comprise 28.7% of the Company’s Net
Assets.
Taiwan
Semiconductor Manufacturing
Industry: Information
Technology
Country: Taiwan
%
of Net Assets 10.4%
TSMC is a
Taiwanese semiconductor foundry with leading-edge technology, which
reinforces the company’s competitive position and ability to
generate incremental return on invested capital. The company has
built a technological moat over the past three decades and occupies
an especially dominant position at the forefront of the industry as
competitors have dropped from the race due to technical hurdles and
the barrier of high required capital expenditures. TSMC’s ability
to hire the best talent while continuously improving its know-how
keeps it ahead of the competition and able to generate cashflow to
feed back into investing in R&D and capacity.
HDFC
Bank
Industry: Financials
Country: India
%
of Net Assets 5.1%
HDFC Bank
is India’s largest private bank with a vast banking network
spanning over 7,800 branches and almost 20,000 ATMs, allowing the
business to serve a broad customer base in rural and urban
India. The bank has invested
heavily in technology and operates in a highly automated
environment, while management has consistently delivered growth
without compromising on asset quality. HDFC has an immense future
growth opportunity due to the increase in retail credit
penetration, branch expansion, market share gains and better cross
selling to existing customers.
Samsung
Electronics
Industry: Information
Technology
Country: South
Korea
%
of Net Assets 4.8%
Samsung
Electronics is a technology powerhouse with products spanning
upstream manufacturing to downstream consumer products. The
company’s device experience division produces product such as
mobile handsets, tablets, business networks and medical and health
equipment, while its device solutions segment captures its memory
and foundry business. Innovations in artificial intelligence, 5G
and 6G, automotive electronics and a wide range of robotics are
also core to Samsung’s strategy.
Kaspi.KZ
Industry: Financials
Country: Kazakhstan
%
of Net Assets 4.7%
Kaspi is
the dominant consumer finance, e-commerce, and payments platform in
Kazakhstan. It provides
interconnected technology and products and services that help
people to pay, shop, and manage their finances. Its ecosystem
connects consumers and merchants, enabling digital payments,
e-commerce, and financial services. The company’s gateway to its
ecosystem is the mobile app, which is powered by the company’s
proprietary technology and enables users to navigate between
interconnected products and services.
Axis
Bank
Industry: Financials
Country: India
%
of Net Assets 3.7%
Axis Bank
is the third largest private sector bank in India. It caters to large companies, small and
medium size enterprises, the agricultural sector, and a retail
customer base. It has a significant footprint of 5,000 domestic
branches spread across the country. The company’s return on assets
has improved over time and has moved closer to competitors such as
HDFC Bank, despite the fact that is still trades at a discount to
its peers. Like the other private sector Indian bans, Axis Bank has
a very large future growth opportunity as retail credit penetration
increases, with branch expansion and market share gains expected to
underpin growth in the years ahead.
Twenty
Largest Investments
as at
31 December
2023
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 (in
effect, the unrealised gain or loss on the exposed positions).
Where the
Company only holds shares, the Fair Value and Asset Exposure will
be the same.
|
Asset
Exposure
|
Fair
value
|
|
$’000
|
%1
|
$’000
|
Taiwan
Semiconductor Manufacturing
(shares
and long CFD)
|
83,264
|
10.4
|
67,435
|
Information
Technology
|
|
|
|
HDFC
Bank
|
40,982
|
5.1
|
40,982
|
Financials
|
|
|
|
Samsung
Electronics (shares and long CFD)
|
38,366
|
4.8
|
9,842
|
Information
Technology
|
|
|
|
Kaspi.KZ
|
37,909
|
4.7
|
37,909
|
Financials
|
|
|
|
Axis
Bank (shares and long CFD)
|
29,511
|
3.7
|
5,776
|
Financials
|
|
|
|
NU
Holdings (long CFD)
|
28,133
|
3.4
|
(408)
|
Financials
|
|
|
|
ICICI
Bank (shares and long CFD)
|
27,055
|
3.4
|
6,233
|
Financials
|
|
|
|
AIA
Group (shares, option and long CFD)
|
26,971
|
3.4
|
5,515
|
Financials
|
|
|
|
Bank
Central Asia
|
25,393
|
3.2
|
25,393
|
Financials
|
|
|
|
Naspers
|
25,332
|
3.2
|
25,332
|
Consumer
Discretionary
|
|
|
|
Grupo
Mexico (long CFD)
|
24,357
|
3.1
|
1,718
|
Materials
|
|
|
|
Samsonite
International (shares and long CFD)
|
20,725
|
2.6
|
10,566
|
Consumer
Discretionary
|
|
|
|
MakeMyTrip
(long CFD)
|
20,616
|
2.6
|
18
|
Consumer
Discretionary
|
|
|
|
China
Mengniu Dairy (shares and long CFD)
|
20,305
|
2.5
|
1,723
|
Consumer
Staples
|
|
|
|
AlKhorayef
Water & Power Technologies
|
19,748
|
2.5
|
19,748
|
Utilities
|
|
|
|
SK
Hynix (long CFD)
|
16,289
|
2.0
|
1,550
|
Information
Technology
|
|
|
|
Grupo
Aeroportuario del Pacifico
|
15,400
|
1.9
|
15,400
|
Industrials
|
|
|
|
National
Bank of Greece
|
15,359
|
1.9
|
15,359
|
Financials
|
|
|
|
Banco
BTG Pactual
|
15,151
|
1.9
|
15,151
|
Financials
|
|
|
|
Auto
Partner
|
14,419
|
1.8
|
14,419
|
Consumer
Discretionary
|
|
|
|
Twenty
largest long exposures
|
545,285
|
68.1
|
319,661
|
Other long
exposures
|
580,245
|
72.4
|
452,982
|
Total
long exposures before long futures and hedges
|
1,125,530
|
140.5
|
772,643
|
Add:
long future contracts
|
|
|
|
Hang Seng
China Enterprises Index
|
24,049
|
3.0
|
429
|
Total
long futures contracts
|
24,049
|
3.0
|
429
|
Less:
hedging exposures
|
|
|
|
MSCI
Emerging Markets Index (future contract)
|
(145,390)
|
(18.2)
|
(6,414)
|
Total
hedging exposures
|
(145,390)
|
(18.2)
|
(6,414)
|
Total
long exposures after the netting of hedges
|
1,004,189
|
125.3
|
766,658
|
Short
exposures
|
|
|
|
Short
CFDs
|
203,570
|
25.4
|
(5,776)
|
Short
futures
|
9,605
|
1.2
|
(377)
|
Short
options
|
2,810
|
0.4
|
(173)
|
Total
short exposures
|
215,985
|
27.0
|
(6,326)
|
Gross
Asset Exposure2
|
1,220,174
|
152.3
|
|
Portfolio
Fair Value3
|
|
|
760,332
|
Net
current assets (excluding derivative assets
and liabilities)
|
|
|
40,568
|
Total
Shareholders’ Funds/Net Assets
|
|
|
800,900
|
1 Asset
Exposure (as defined in the Glossary of Terms in the Half Year
Report for the six months ended 31 December
2023) expressed as a percentage of Net Assets.
2 Gross
Asset Exposure comprises market exposure to investments of
$768,579,000 plus market exposure to
derivative instruments of $451,595,000.
3 Portfolio
Fair Value comprises investments of $768,579,000 plus derivative assets of
$12,766,000 less derivative
liabilities of $21,013,000 (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;
changing investor sentiment; cybercrime and information security
risk; discount to net asset value (NAV) risk; lack of market
liquidity risk; business continuity and event management risk;
gearing risk; foreign currency exposure risk; environmental, social
and governance (ESG) risk and key person risk. Full details of
these risks and how they are managed are set out
in the
Company’s Annual Report for the year ended 30 June
2023 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.
The
Manager also has responsibility for risk management for the
Company. It works with the Board to identify and manage the
principal and emerging risks and uncertainties and to ensure that
the Board can continue to meet its Corporate Governance
obligations.
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 or an increase in
tensions in the South China Sea; 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.
Transactions
with the Alternative Investment Fund Manager and Related
Parties
The
Alternative Investment Fund Manager (“AIFM”) has delegated the
Company’s investment management to FIL Investments International.
Transactions with the AIFM and related party transactions with the
Directors are disclosed in Note 12 of the Half Year Report for the
six months ended 31 December
2023.
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
continued evolving variants of COVID 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;
and
-
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
11 March 2024
Statement
of Comprehensive Income
for the
six months ended 31 December
2023
|
|
Six
months ended 31 December
2023
unaudited
|
Year ended
30 June
2023
audited
|
Six months
ended 31 December
2022
unaudited
|
|
Note
|
Revenue
$’000
|
Capital
$’000
|
Total
$’000
|
Revenue
$’000
|
Capital
$’000
|
Total
$’000
|
Revenue
$’000
|
Capital
$’000
|
Total
$’000
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Investment
income
|
4
|
9,449
|
–
|
9,449
|
22,272
|
–
|
22,272
|
8,476
|
–
|
8,476
|
Derivative
income
|
4
|
7,656
|
–
|
7,656
|
17,709
|
–
|
17,709
|
7,653
|
–
|
7,653
|
Other
income
|
4
|
596
|
–
|
596
|
620
|
–
|
620
|
344
|
–
|
344
|
Total
Income
|
|
17,701
|
–
|
17,701
|
40,601
|
–
|
40,601
|
16,473
|
–
|
16,473
|
Net
gains/(losses) on financial assets at fair value through profit or
loss1
|
|
–
|
39,483
|
39,483
|
–
|
36,553
|
36,553
|
–
|
(2,843)
|
(2,843)
|
Net losses
on derivative instruments
|
|
–
|
(15,667)
|
(15,667)
|
–
|
(37,809)
|
(37,809)
|
–
|
(34,477)
|
(34,477)
|
Net
foreign exchange losses
|
|
–
|
(522)
|
(522)
|
–
|
(933)
|
(933)
|
–
|
(686)
|
(686)
|
Total
income and gains/(losses)
|
|
17,701
|
23,294
|
40,995
|
40,601
|
(2,189)
|
38,412
|
16,473
|
(38,006)
|
(21,533)
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Management
fees
|
5
|
(469)
|
(1,875)
|
(2,344)
|
(923)
|
(3,690)
|
(4,613)
|
(452)
|
(1,810)
|
(2,262)
|
Other
expenses1
|
|
(860)
|
–
|
(860)
|
(1,619)
|
–
|
(1,619)
|
(910)
|
–
|
(910)
|
Profit/(loss)
before finance costs and taxation
|
|
16,372
|
21,419
|
37,791
|
38,059
|
(5,879)
|
32,180
|
15,111
|
(39,816)
|
(24,705)
|
Finance
costs
|
6
|
(10,201)
|
–
|
(10,201)
|
(15,653)
|
–
|
(15,653)
|
(6,443)
|
–
|
(6,443)
|
Profit/(loss)
before taxation
|
|
6,171
|
21,419
|
27,590
|
22,406
|
(5,879)
|
16,527
|
8,668
|
(39,816)
|
(31,148)
|
Taxation
|
|
(1,022)
|
(270)
|
(1,292)
|
(2,622)
|
644
|
(1,978)
|
(724)
|
(797)
|
(1,521)
|
Profit/(loss)
after taxation for the period attributable to Participating
Preference Shares
|
|
5,149
|
21,149
|
26,298
|
19,784
|
(5,235)
|
14,549
|
7,944
|
(40,613)
|
(32,669)
|
Earnings/(loss)
per Participating Preference Share (basic and
diluted)
|
7
|
$0.06
|
$0.23
|
$0.29
|
$0.22
|
($0.06)
|
$0.16
|
$0.09
|
($0.45)
|
($0.36)
|
1 Transaction
costs directly associated with purchases and sales of
non-derivative securities changed presentation in the annual
financial statements for the year ended 30 June
2023 to be included under the ‘Net gains/(losses) on
financial assets at fair value through profit or loss’ line in the
capital column of the Statement of Comprehensive Income. In the
prior accounting periods such directly associated transaction costs
were included under ‘Other expenses’. The presentation of directly
associated transaction costs was consistently applied for both for
the current period and comparative reporting periods. This was
applied in order to align with best market practice as relevant for
investment companies.
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.
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 Changes in Equity
for the
six months ended 31 December
2023
|
Note
|
Share
premium
account
$’000
|
Capital
reserve
$’000
|
Revenue
reserve
$’000
|
Total
equity
$’000
|
Six
months ended 31 December
2023 (unaudited)
|
|
|
|
|
|
Total
equity at 30 June
2023
|
|
6,291
|
735,860
|
54,583
|
796,734
|
Profit
after taxation for the period
|
|
–
|
21,149
|
5,149
|
26,298
|
Repurchase
of Participating
Preference
Shares
|
9
|
–
|
(4,827)
|
–
|
(4,827)
|
Dividend
paid to shareholders
|
8
|
–
|
–
|
(17,305)
|
(17,305)
|
Total
equity at 31 December
2023
|
|
6,291
|
752,182
|
42,427
|
800,900
|
Year
ended 30 June
2023
(audited)
|
|
|
|
|
|
Total
equity at 30 June
2022
|
|
6,291
|
741,095
|
49,375
|
796,761
|
(Loss)/profit
after taxation for the year
|
|
–
|
(5,235)
|
19,784
|
14,549
|
Dividend
paid to shareholders
|
8
|
–
|
–
|
(14,576)
|
(14,576)
|
Total
equity at 30 June
2023
|
|
6,291
|
735,860
|
54,583
|
796,734
|
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
|
8
|
–
|
–
|
(14,576)
|
(14,576)
|
Total
equity at 31 December
2022
|
|
6,291
|
700,482
|
42,743
|
749,516
|
Statement
of Financial Position
as at
31 December
2023
|
Note
|
31 December
2023
unaudited
$’000
|
30 June
2023
audited
$’000
|
31 December
2022
unaudited
$’000
|
Non-current
assets
|
|
|
|
|
Financial
assets at fair value through profit
and loss
|
10
|
768,579
|
778,608
|
720,229
|
Current
assets
|
|
|
|
|
Derivative
assets
|
10
|
12,766
|
9,468
|
10,736
|
Amounts
held at futures clearing houses and
brokers
|
|
28,400
|
18,210
|
23,308
|
Other
receivables
|
|
1,989
|
6,480
|
2,697
|
Cash at
bank
|
|
16,435
|
18,057
|
14,277
|
|
|
59,590
|
52,215
|
51,018
|
Current
liabilities
|
|
|
|
|
Derivative
liabilities
|
10
|
21,013
|
12,847
|
13,709
|
Other
payables
|
|
6,256
|
21,242
|
8,022
|
|
|
27,269
|
34,089
|
21,731
|
Net
current assets
|
|
32,321
|
18,126
|
29,287
|
|
|
|
|
|
Net
assets
|
|
800,900
|
796,734
|
749,516
|
Equity
|
|
|
|
|
Share
premium account
|
|
6,291
|
6,291
|
6,291
|
Capital
reserve
|
|
752,182
|
735,860
|
700,482
|
Revenue
reserve
|
|
42,427
|
54,583
|
42,743
|
Total
Equity Shareholders’ Funds
|
|
800,900
|
796,734
|
749,516
|
|
|
|
|
|
Net
asset value per Particpating Preference Share
|
11
|
$8.85
|
$8.75
|
$8.23
|
Statement
of Cash Flows
for the
six months ended 31 December
2023
|
Six
months
ended
31 December
2023
unaudited
$’000
|
Year
ended
30 June
2023
audited
$’000
|
Six
months
ended
31 December
2022
unaudited
$’000
|
Operating
activities
|
|
|
|
Cash
inflow from investment income
|
13,179
|
24,214
|
12,298
|
Cash
inflow from derivative income
|
3,890
|
6,184
|
2,560
|
Cash
inflow from other income
|
20
|
33
|
–
|
Cash
outflow from taxation paid
|
(1,022)
|
(1,063)
|
(724)
|
Cash
outflow from the purchase of investments1
|
(242,310)
|
(928,894)
|
(570,158)
|
Cash
inflow from the sale of investments1
|
276,557
|
930,627
|
576,904
|
Cash
outflow from net proceeds from settlement of derivatives
|
(5,742)
|
(4,819)
|
(5,401)
|
Cash
outflow from amounts held at futures clearing houses
and brokers
|
(10,190)
|
(6,309)
|
(11,407)
|
Cash
outflow from bank charges
|
–
|
–
|
(80)
|
Cash
outflow from operating expenses1
|
(3,231)
|
(5,150)
|
(2,641)
|
Net
cash inflow from operating activities
|
31,151
|
14,823
|
1,351
|
Financing
activities
|
|
|
|
Cash
outflow from CFD interest paid
|
(8,599)
|
(10,111)
|
(3,061)
|
Cash
outflow from short CFD dividends paid
|
(1,539)
|
(5,564)
|
(3,169)
|
Cash
outflow from dividends paid to shareholders
|
(17,305)
|
(14,576)
|
(14,576)
|
Cash
outflow from repurchase of Participating
Preference Shares
|
(4,808)
|
–
|
–
|
Net
cash outflow from financing activities
|
(32,251)
|
(30,251)
|
(20,806)
|
Net
decrease in cash at bank
|
(1,100)
|
(15,428)
|
(19,455)
|
Cash at
bank at the start of the period
|
18,057
|
34,418
|
34,418
|
Effect of
foreign exchange movements
|
(522)
|
(933)
|
(686)
|
Cash
at bank at the end of the period
|
16,435
|
18,057
|
14,277
|
1 Transaction
costs directly associated with purchases and sales of
non-derivative securities changed presentation in the annual
financial statements for the year ended 30 June
2023 to be included under the ‘Net gains/(losses) on
financial assets at fair value through profit or loss’ line in the
capital column of the Statement of Comprehensive Income. In the
prior accounting periods such directly associated transaction costs
were included under ‘Other expenses’. The presentation of directly
associated transaction costs was consistently applied for both for
the current period and comparative reporting periods. This was
applied in order to align with best market practice as relevant for
investment companies.
Notes to
the Financial Statements
for the
six months ended 31 December
2023
1.
Principal Activity
Fidelity
Emerging Markets Limited (the ‘Company’) was incorporated in
Guernsey on 7 June
1989 and commenced activities on 19 September
1989. The Company is an Authorised Closed-Ended
Investment Scheme as defined by The Authorised Closed-Ended
Investment Schemes Rules and Guidance, 2021 (and, as such, is
subject to ongoing supervision by the Guernsey Financial Services
Commission). The Company is listed on the London Stock Exchange and
is a constituent of the FTSE 250 Index.
The
Company’s registered office is at Level 3, Mill Court La
Charroterie, St Peter Port, Guernsey GY1 1EJ,
Channel Islands.
The
Company’s investment objective is to achieve long-term capital
growth from an actively managed portfolio made up primarily of
securities and financial instruments providing exposure
to emerging
market companies, both listed and unlisted.
2.
Publication of Non-statutory Accounts
The
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
2023 is extracted from the latest published annual report of
the Company which was delivered to the Guernsey Financial Services
Commission.
3.
Accounting Policies(i) Basis
of Preparation
The
interim financial statements for the six months period ended
31 December
2023 have been prepared in accordance with International
Accounting Standard 34, ‘Interim Financial Reporting’. The interim
financial statements should be read in conjunction with the annual
financial statements for the year ended 30 June
2023, which have been prepared in accordance with
International Financial Reporting Standards as adopted by the
European Union (‘IFRS’), which comprise standards and
interpretations approved by the International Accounting Standards
Board (‘IASB’), 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 at
least twelve months from the date of approval of these financial
statements. In making their assessment the Directors have reviewed
the income and expense projections, the liquidity of the investment
portfolio, stress testing performed and considered the Company’s
ability to meet liabilities as they fall due. Accordingly, the
Directors consider it appropriate to adopt the going concern basis
of accounting in preparing these financial statements.
4.
Income
|
Six
months
ended
31 December
2023
unaudited
$’000
|
Year
ended
30 June
2023
audited
$’000
|
Six
months
ended
31 December
2022
unaudited
$’000
|
Investment
income
|
|
|
|
UK
dividends
|
325
|
798
|
542
|
Overseas
dividends
|
9,109
|
21,474
|
7,934
|
UK and
overseas scrip dividends
|
15
|
–
|
–
|
|
9,449
|
22,272
|
8,476
|
Derivative
income
|
|
|
|
Dividends
received on long CFDs
|
2,325
|
5,220
|
1,774
|
Interest
received on CFDs
|
1,014
|
1,414
|
519
|
Option
income
|
4,317
|
11,075
|
5,360
|
|
7,656
|
17,709
|
7,653
|
Other
income
|
|
|
|
Interest
income from cash and cash equivalents and
collateral
|
576
|
587
|
344
|
Fee
rebate
|
20
|
33
|
–
|
|
596
|
620
|
344
|
Total
income
|
17,701
|
40,601
|
16,473
|
5.
Management Fees
|
Revenue
$’000
|
Capital
$’000
|
Total
$’000
|
Six
months ended 31 December
2023 (unaudited)
|
|
|
|
Management
fees
|
469
|
1,875
|
2,344
|
Year
ended 30 June
2023 (audited)
|
|
|
|
Management
fees
|
923
|
3,690
|
4,613
|
Six
months ended 31 December
2022 (unaudited)
|
|
|
|
Management
fees
|
452
|
1,810
|
2,262
|
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. Fees will be payable monthly in
arrears and calculated on a daily basis.
Management
fees incurred by collective investment schemes or investment
companies managed or advised
by the Investment Manager are reimbursed.
6. Finance
Costs
|
Revenue
$’000
|
Capital
$’000
|
Total
$’000
|
Six
months ended 31 December
2023 (unaudited)
|
|
|
|
Dividends
paid on short CFDs
|
1,517
|
–
|
1,517
|
Interest
paid on CFDs
|
8,684
|
–
|
8,684
|
|
10,201
|
–
|
10,201
|
Year
ended 30 June
2023 (audited)
|
|
|
|
Dividends
paid on short CFDs
|
5,270
|
–
|
5,270
|
Interest
paid on CFDs
|
10,383
|
–
|
10,383
|
|
15,653
|
–
|
15,653
|
Six
months ended 31 December
2022 (unaudited)
|
|
|
|
Bank
charges
|
80
|
–
|
80
|
Dividends
paid on short CFDs
|
2,979
|
–
|
2,979
|
Interest
paid on CFDs
|
3,384
|
–
|
3,384
|
|
6,443
|
–
|
6,443
|
7.
Earnings/(Loss) per Participating Preference Share
|
Six
months
ended
31 December
2023
unaudited
$’000
|
Year
ended
30 June
2023
audited
$’000
|
Six
months
ended
31 December
2022
unaudited
$’000
|
Revenue
earnings per Participating Preference Share
|
$0.06
|
$0.22
|
$0.09
|
Capital
earnings/(loss) per Participating Preference Share
|
$0.23
|
$(0.06)
|
$(0.45)
|
Total
earnings/(loss) per Participating Preference Share – basic and
diluted
|
$0.29
|
$0.16
|
$(0.36)
|
The
earnings/(loss) per Participating Preference Share is based on the
profit/(loss) after taxation for the period divided by the weighted
average number of Participating Preference Shares in issue during
the period, as shown below:
|
Six
months
ended
31 December
2023
unaudited
$’000
|
Year
ended
30 June
2023
audited
$’000
|
Six
months
ended
31 December
2022
unaudited
$’000
|
Revenue
profit after taxation for the period
|
5,149
|
19,784
|
7,944
|
Capital
profit/(loss) after taxation for the period
|
21,149
|
(5,235)
|
(40,613)
|
Total
profit/(loss) after taxation for the period attributable to
Participating Preference Shares
|
26,298
|
14,549
|
(32,669)
|
|
Number
|
Number
|
Number
|
Weighted
average number of Participating Preference Shares in
issue
|
90,985,735
|
91,100,066
|
91,100,066
|
8.
Dividend Paid to Shareholders
|
Six
months
ended
31 December
2023
Unaudited
$’000
|
Year
ended
30 June
2023
audited
$’000
|
Six
months
ended
31 December
2022
unaudited
$’000
|
Dividend
Paid
|
|
|
|
Dividend
of 19.00 cents pence per ordinary share paid
for the year ended 30 June
2023
|
17,305
|
–
|
–
|
Dividend
of 16.00 cents pence per ordinary share paid
for the year ended 30 June
2022
|
–
|
14,576
|
14,576
|
No
dividend has been declared in respect of the six months ended
31 December
2023 (six months ended 31 December
2022: none).
9. Share
Capital
|
31 December
2023
Number
of
shares
|
30 June
2023
Number
of
shares
|
31 December
2022
Number
of
shares
|
Authorised
|
|
|
|
Founder
shares of no par value
|
1,000
|
1,000
|
1,000
|
Issued
|
|
|
|
Participating
Preference Shares held outside Treasury
|
|
|
|
Beginning
of the period
|
91,100,066
|
91,100,066
|
91,100,066
|
Participating
Preference Shares repurchased into Treasury
|
(637,175)
|
–
|
–
|
End
of the period
|
90,462,891
|
91,100,066
|
91,100,066
|
Participating
Preference Shares held in Treasury*
|
|
|
|
Beginning
of the period
|
–
|
–
|
–
|
Participating
Preference Shares repurchased into Treasury
|
637,175
|
–
|
–
|
End
of the year period
|
637,175
|
–
|
–
|
Total
Participating Preference Shares including held
in Treasury
|
91,100,066
|
91,100,066
|
91,100,066
|
* The
ordinary shares held in Treasury carry no rights to vote, to
receive a dividend or to participate in a winding up of the
Company.
The Board
of Directors is mindful that the Company’s shares have traded at a
discount to NAV for some time, and frequently deliberates
appropriate discount control mechanisms to address the imbalance
between the demand and supply of the Company’s shares. In
recognition of this, on 13 November
2023, the Company implemented a share buyback programme to
repurchase up to 14.99% of issued share capital, which was renewed
at the Annual General Meeting on 7 December
2023. The Board intends to continue using its buyback
programme to address the discount to NAV with the ambition that it
may ultimately be maintained in single digits in normal market
conditions on a sustainable basis.
The costs
associated with the repurchase of the shares of $4,827,000 were charged to the capital reserve
for the period ended 31 December
2023.
The
Company may issue an unlimited number of Shares of no par
value.
Founder
Shares
All of the
Founder Shares were issued on 6 June
1989. The Founder Shares were issued at $1 each
par value.
The
Founder Shares are not redeemable. At the Extraordinary General
Meeting of the Company on 30 October
2009 and in accordance with The Companies (Guernsey) Law,
2008 it was approved that each Founder Share be redesignated as no
par value shares.
The
Founder Shares confer no rights upon holders other than at general
meetings, on a poll, every holder is entitled to one vote in
respect of each Founder Share held.
10. Fair
Value Hierarchy
The
Company is required to disclose the fair value hierarchy that
classifies its financial instruments measured at fair value at one
of three levels, according to the relative reliability of the
inputs used to estimate the fair values.
Classification
|
Input
|
Level
1
|
Valued
using quoted prices in active markets for identical
assets
|
Level
2
|
Valued by
reference to inputs other than quoted prices included in level 1
that are observable (i.e. developed using market data) for the
asset or liability, either directly or indirectly
|
Level
3
|
Valued by
reference to valuation techniques using inputs that are not based
on observable market data
|
Categorisation
within the hierarchy has been determined on the basis of the lowest
level input that is significant to the fair value measurement of
the relevant asset. The table below sets out the Company’s
fair value hierarchy:
31 December
2023 (unaudited)
|
Level
1
$’000
|
Level
2
$’000
|
Level
3
$’000
|
Total
$’000
|
Financial
assets at fair value through profit
or loss
|
|
|
|
|
Investments
in equity securities
|
760,349
|
–
|
810
|
761,159
|
Equity
linked notes
|
–
|
2,334
|
–
|
2,334
|
Investee
funds
|
–
|
–
|
5,086
|
5,086
|
Derivative
instrument assets – Futures contracts
|
429
|
–
|
–
|
429
|
Derivative
instrument assets – CFDs
|
–
|
12,337
|
–
|
12,337
|
|
760,778
|
14,671
|
5,896
|
781,345
|
Financial
liabilities at fair value through profit or
loss
|
|
|
|
|
Derivative
instrument liabilities – Futures contracts
|
6,791
|
–
|
–
|
6,791
|
Derivative
instrument liabilities – Options
|
200
|
42
|
–
|
242
|
Derivative
instrument liabilities – CFDs
|
–
|
13,980
|
–
|
13,980
|
|
6,991
|
14,022
|
–
|
21,013
|
30 June
2023 (audited)
|
Level
1
$’000
|
Level
2
$’000
|
Level
3
$’000
|
Total
$’000
|
Financial
assets at fair value through profit
or loss
|
|
|
|
|
Investments
in equity securities
|
751,117
|
–
|
1,009
|
752,126
|
Equity
linked notes
|
–
|
17,433
|
–
|
17,433
|
Investee
funds
|
–
|
3,943
|
5,106
|
9,049
|
Derivative
instrument assets – Futures contracts
|
849
|
–
|
–
|
849
|
Derivative
instrument assets – Options
|
13
|
241
|
–
|
254
|
Derivative
instrument assets – CFDs
|
–
|
8,365
|
–
|
8,365
|
|
751,979
|
29,982
|
6,115
|
788,076
|
Financial
liabilities at fair value through profit or
loss
|
|
|
|
|
Derivative
instrument liabilities – Options
|
1,516
|
425
|
–
|
1,941
|
Derivative
instrument liabilities – CFDs
|
–
|
10,906
|
–
|
10,906
|
|
1,516
|
11,331
|
–
|
12,847
|
31 December
2022 (unaudited)
|
Level
1
$’000
|
Level
2
$’000
|
Level
3
$’000
|
Total
$’000
|
Financial
assets at fair value through profit
or loss
|
|
|
|
|
Investments
in equity securities
|
697,189
|
–
|
–
|
697,189
|
Equity
linked notes
|
–
|
13,603
|
–
|
13,603
|
Investee
funds
|
–
|
3,641
|
5,796
|
9,437
|
Derivative
instrument assets – Futures contracts
|
982
|
–
|
–
|
982
|
Derivative
instrument assets – Options
|
14
|
–
|
–
|
14
|
Derivative
instrument assets – CFDs
|
–
|
9,740
|
–
|
9,740
|
|
698,185
|
26,984
|
5,796
|
730,965
|
Financial
liabilities at fair value through profit or
loss
|
|
|
|
|
Derivative
instrument liabilities – Options
|
599
|
90
|
–
|
689
|
Derivative
instrument liabilities – CFDs
|
–
|
13,020
|
–
|
13,020
|
|
599
|
13,110
|
–
|
13,709
|
Two holdings
in Investee Funds were valued using the most recently available
valuation statements as received from the respective general
partner/manager/administrator, updated to include subsequent cash
flows (year ended 30 June
2023: two Investee Fund holdings, six months ended
31 December
2022: two Investee Funds holdings). Eleven holdings (year
ended 30 June
2023: nine holdings and six month ended
31 December
2022: ten holding) had a nil value.
As the key
input into the valuation of Level 3 investments is official
valuation statements from the Investee Funds, we do not consider it
appropriate to put forward a sensitivity analysis on the basis that
insufficient value is likely to be derived by the end users of this
report.
The
following table summarises the change in value associated with
Level 3 financial instruments carried at fair value for the six
months ended 31 December
2023, year ended 30 June
2023 and for the six months ended 31 December
2022:
Movements
in level 3 investments during the period/year
|
31 December
2023
unaudited
$’000
|
30 June
2023
audited
$’000
|
31 December
2022
unaudited
$’000
|
Opening
balance
|
6,115
|
5,809
|
5,809
|
Sales
|
(4,178)
|
(4,045)
|
(415)
|
Transfers
into level 3
|
–
|
1,009
|
–
|
Realised
(losses)/gains
|
(8,900)
|
3,112
|
302
|
Net change
in unrealised gains
|
12,859
|
230
|
100
|
Closing
balance
|
5,896
|
6,115
|
5,796
|
During the
period the Company participated in a tender offer which was being
undertaken in Detsky Mir’s restructuring from being a public listed
company to a private company. The Company’s application was
successful and it received proceeds of RUB
300.5 million, (approx. $3.1
million based on exchange rates at that time).
The
Company’s retained holdings in Russian entities have been written
down to $Nil.
11. Net
Asset Value per Participating Preference Share
|
31 December
2023
unaudited
|
30 June
2023
audited
|
31 December
2022
unaudited
|
Net
assets
|
$800,900,000
|
$796,734,000
|
$749,516,000
|
Participating
Preference Shares in issue
|
90,462,891
|
91,100,066
|
91,100,066
|
Net Asset
Value per Participating Preference Share
|
$8.85
|
$8.75
|
$8.23
|
12.
Transactions with the Manager and Related Parties
FIL
Investment Services (UK) Limited is the Company’s Alternative
Investment Fund Manager and has delegated portfolio management to
FIL Investment Management International. Both companies are
Fidelity group companies.
Details of
the current fee arrangements are given in Note 5 above. During the
period, management fees of $2,344,000
(year ended 30 June
2023: $4,613,000 and six
months ended 31 December
2022: $2,262,000) were payable
to the Manager. Amounts payable at the reporting date are included
in other payables.
At the
date of this report, the Board consisted of five non-executive
Directors (as shown in the Half Year Report for the six months
ended 31 December 2023) all of whom
are considered to be independent by the Board. None of the
Directors has a service contract with the Company.
The
Chairman receives an annual fee of £50,000, the Chairman of the
Audit Committee and Senior Independent Director receives an annual
fee of £38,000 and a Director receives an annual fee
of £36,000.
The
following members of the Board hold Participating Preference Shares
in the Company at the date of this report: Heather Manners 10,000 shares, Torsten Koster 15,000 shares, Dr Simon Colson 4,416 shares, Katherine Tsang nil shares and Mark Little* nil shares.
* Appointed
17 January
2024
The
financial information contained in this Half-Yearly Results
Announcement does not constitute statutory accounts as defined in
section 435 of the Companies Act 2006. The financial information
for the six months ended 31 December
2023 and 31 December 2022 has
not been audited or reviewed by the Company’s Independent
Auditor.
The
information for the year ended 30 June
2023 has been extracted from the latest published audited
financial statements, which have been filed with the Registrar of
Companies, unless otherwise stated. The report of the Auditor on
those financial statements contained no qualification or statement
under sections 498(2) or (3) of the Companies Act 2006.
Neither
the contents of the Company's website nor the contents of any
website accessible from hyperlinks on the Company's website (or any
other website) is incorporated into, or forms part of, this
announcement.
A copy of
the Half-Yearly Report will shortly be submitted to the National
Storage Mechanism and will be available for inspection at
www.morningstar.co.uk/uk/NSM
The
Half-Yearly Report will also be available on the Company's website
at
www.fidelity.co.uk/emergingmarkets
where up
to date information on the Company, including daily NAV and share
prices, factsheets and other information can also be
found.