BLACKROCK FRONTIERS INVESTMENT TRUST PLC
BlackRock Frontiers Investment Trust plc
(LEI: 5493003K5E043LHLO706)
Annual results announcement for the year ended 30 September 2021
PERFORMANCE RECORD
The Company’s financial statements are presented in US Dollars. The Company’s shares are listed on the London Stock Exchange and quoted in British Pound Sterling. The British Pound Sterling amounts for performance returns shown below are presented for convenience. The difference in performance returns measured in US Dollars and in British Pound Sterling reflects the change in the value of British Pound Sterling versus the US Dollar over the period.
|
As at 30 September 2021 |
As at 30 September 2020 | |
| US Dollar | ||
| Net assets (US$’000)1 | 352,778 | 305,984 |
| Net asset value per ordinary share (cents) | 186.33 | 126.85 |
| Ordinary share price (mid market)2 (cents) | 165.18 | 120.62 |
| --------------- | --------------- | |
| British Pound Sterling | ||
| Net assets (£’000)1,2 | 261,627 | 236,683 |
| Net asset value per ordinary share2 (pence) | 138.19 | 98.12 |
| Ordinary share price (mid market) (pence) | 122.50 | 93.30 |
| Discount4 | 11.4% | 4.9% |
| ======== | ======== |
Performance |
For the year ended 30 September 2021 % |
For the year ended 30 September 2020 % | Since inception3, 5 % |
| US Dollar | |||
| Net asset value per share (with dividends reinvested)4 | +53.0 | -20.0 | +79.3 |
| Benchmark Index (NR)5,6 | +27.3 | -15.6 | +46.0 |
| MSCI Frontier Markets Index (NR)5,6 | +32.2 | -2.7 | +66.7 |
| MSCI Emerging Markets Index (NR)6 | +18.2 | +10.5 | +46.1 |
| Ordinary share price (with dividends reinvested)4 | +42.8 | -22.1 | +56.3 |
| --------------- | --------------- | --------------- | |
| British Pound Sterling | |||
| Net asset value per share (with dividends reinvested)4 | +46.7 | -23.8 | +106.8 |
| Benchmark Index (NR)5,6 | +22.1 | -19.6 | +67.5 |
| MSCI Frontier Markets Index (NR)5,6 | +26.8 | -7.3 | +92.8 |
| MSCI Emerging Markets Index (NR)6 | +13.3 | +5.4 | +69.0 |
| Ordinary share price (with dividends reinvested)4 | +36.9 | -25.8 | +80.0 |
| ======== | ======== | ======== |
1 The change in net assets reflects the tender offer held in the year, dividends paid and market movements.
2 Based on an exchange rate of US$1.3484 to £1 at 30 September 2021 and US$1.2928 to £1 at 30 September 2020.
3 The Company was incorporated on 15 October 2010 and its shares were admitted to trading on the London Stock Exchange on 17 December 2010.
4 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 30 September 2021.
5 With effect from 1 April 2018, the Benchmark Index changed to the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Prior to 1 April 2018, the Benchmark Index was the MSCI Frontier Markets Index. The performance returns of the Benchmark Index since inception have been blended to reflect this change.
6 Net return (NR) indices calculate the reinvestment of dividends net of withholding taxes.
CHAIRMAN’S STATEMENT
DEAR SHAREHOLDER
OVERVIEW
I am pleased to report that during the year to 30 September 2021, your Company’s Net Asset Value per share increased by an impressive 53.0%, compared to an increase in the Benchmark Index of 27.3%, an outperformance of 25.7%. Since the financial year end, and up to close of business on 29 November 2021, the Company’s NAV has increased by 0.3% compared with a fall in the Benchmark Index of 1.1% over the same period (all performance figures are stated on a US Dollar basis with dividends reinvested).
The impressive return generated by our investment portfolio demonstrates the real opportunities available in the frontier and smaller emerging markets. We believe exposure to an asset class within which differentiated and uncorrelated markets can deliver strong growth, despite the challenging macroeconomic backdrop, continues to represent a compelling opportunity. In addition to capital growth, the Company also provides its investors with an attractive yield.
As I mentioned in my Chairman’s statement in the Half-yearly Financial Report, following a challenging year in 2020, it is pleasing to see evidence of recovery in many countries within our investment universe. This is particularly so within Eastern Europe and the Middle East, regions to which our portfolio is well exposed, and which both contributed strongly to performance this year. Your Investment Managers provide a detailed description of the key contributors and detractors to performance during the period, portfolio positioning and their views on the outlook for the forthcoming year in their report which follows.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return per share for the year amounted to 7.09 cents (2020: 5.05 cents). It is encouraging to see portfolio revenue recover to pre-pandemic levels this year. Total revenue has been enhanced this year by a small proportion of non-recurring special dividends. The Directors are recommending the payment of a final dividend of 4.25 cents per ordinary share (2020: 4.25 cents) in respect of the year ended 30 September 2021. Together with the interim dividend of 2.75 cents per share (2020: 2.75 cents), this represents a total of 7.00 cents per share (2020: 7.00 cents). The total dividend for the year to 30 September 2021 has been fully covered by revenue received in the financial year.
Subject to shareholder approval, this dividend will be paid on 11 February 2022 to shareholders on the register at close of business on 7 January 2022. The ex-dividend date will be 6 December 2021. The Company does not have a policy of actively targeting income; nevertheless, this return, which has been supported by the Company’s reserves, represents an attractive yield of 4.0% (please see the Glossary in the Company’s Annual Report for the year ended 30 September 2021).
As mentioned in my statement to shareholders in the Half-yearly Financial Report published earlier this year, the Board reviews the Company’s revenue forecast at each meeting and seeks the opinion of our Investment Manager on the anticipated levels of revenue.
In the current environment it is more difficult than usual to forecast our 2022 revenue with any certainty. However, the dividend may be supported by distributable reserves if deemed appropriate to do so.
SHARE CAPITAL
The Directors recognise the importance to investors of ensuring that the Company’s share price is as close to its underlying NAV as possible. Accordingly, the Directors monitor the share price closely and will consider the issue of shares at a premium or the repurchase at a discount to help balance demand and supply in the market. As at 30 September 2021, the Company had 189,325,748 ordinary shares in issue, including 52,497,053 shares held in treasury. No new shares were issued or bought back during the period from 1 October 2021 up to the date of this report.
For the year under review, the Company’s ordinary shares have traded at an average discount to NAV of 4.2% and were trading at a discount of 6.8% on a cum-income basis at 29 November 2021, the latest practicable date prior to the issue of this report.
The Directors have been granted the authority by shareholders to buy back up to 14.99% of the Company’s issued share capital (excluding any shares held in treasury) and also to issue or sell from treasury on a non-pre-emptive basis up to 10% of the Company’s issued share capital. Both authorities expire on the conclusion of the forthcoming Annual General Meeting (AGM) to be held on Tuesday, 8 February 2022, at which time resolutions will be put to shareholders seeking a renewal of these powers. Further information can be found in the Directors’ Report below.
GEARING
One of the advantages of the investment trust structure it that it can use gearing with the objective of increasing portfolio returns. The Company utilised its ability to gear the portfolio through its CFD exposure during the year which aided overall portfolio performance. As at the year end net gearing stood at 7.6%.
PERIODIC OPPORTUNITIES FOR RETURN OF CAPITAL
As referenced in the Company’s Half-yearly Financial Report this year, in January 2021 the Company published a shareholder Circular in which it was proposed that all shareholders should have the opportunity to participate in a 100% Tender Offer. The Tender Offer closed on 19 February 2021 and implementation was approved by shareholders at a general meeting of the Company held on 23 February 2021. It was pleasing to see that following the Tender Offer election period, the majority of the Company’s shareholders chose to retain their investment in the Company. 21.5% (the majority of which was by three shareholders) of the Company’s issued shares were tendered and the shares bought back were transferred to treasury.
FEES AND OTHER COSTS
Following an impressive outperformance of the Benchmark Index during the financial year, the Manager has generated a performance fee. Further details of the Company's costs and charges can be found in note 4 below and in the glossary in the Company’s Annual Report for the year ended 30 September 2021.
BOARD COMPOSITION
As at 30 September 2021 the Board consisted of four independent non-executive Directors. As part of its succession plan the Board regularly considers its composition to ensure that a suitable balance of skills, knowledge, experience, independence and diversity is achieved to enable the Board to effectively discharge its duties.
Having served on the Board since November 2010, Mr Pitts-Tucker advised the Board of his intention to retire at the 2021 Annual General Meeting (AGM) and stepped down from the Board at its conclusion. On behalf of the Board, I would like to take this opportunity to thank him for his invaluable contribution to the long-term success of the Company during his tenure.
During the year the Board undertook a thorough search and selection process, and with the assistance of an external search consultant, we identified several impressive candidates. I am pleased to report the appointment of Ms Liz Airey and Mrs Lucy Taylor-Smith to the Board with effect from 10 December 2021. They bring a wealth of relevant experience and expertise, both strengthening and complementing the skills of the existing Board. I welcome them both and very much look forward to working with them. Further information on their backgrounds, and that of all of the Directors, can be found in the Company’s Annual Report for the year ended 30 September 2021.
In accordance with the UK Corporate Governance Code, the Directors will submit themselves to annual re-election and therefore all Directors will either stand for election or re-election at the forthcoming AGM. Further information on all of the Directors can be found in their biographies in the Company’s Annual Report for the year ended 30 September 2021.
CORPORATE REPORTING
The Board takes its governance responsibilities very seriously and follows best practice requirements as closely as possible. The revised UK Code of Corporate Governance (the UK Code) published in 2018 requires enhanced disclosure setting out how we, as Directors, have fulfilled our duties in taking into account the wider interests of stakeholders in promoting the success of the Company. As part of this reporting, and given the environmental, social and governance (ESG) issues that are faced by many companies within the Company’s Benchmark Index and the Company's investment portfolio, we have provided a detailed report on these matters in the Strategic Report below. We have also provided more information on our Manager’s approach to shareholder engagement and voting activities.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
ESG issues can present both opportunities and risks to long-term investment performance. These ethical and sustainability issues are a key focus of the Company, and your Board is committed to a diligent oversight of the activities of our Investment Manager in these areas. The frontier markets in which the Company can invest are home to over 3 billion of the world’s population and through our investments we bring much needed capital to markets largely overlooked by developed world investors.
We believe that the companies in which the portfolio is invested should operate within a healthy ecosystem of all their stakeholders whether these are shareholders, employees, customers, regulators, or suppliers and that this may aid the sustainability of long-term returns.
OPERATIONAL RESILIENCE
Throughout the COVID-19 pandemic the Board has been working closely with our Manager, BlackRock, and the Company’s key service providers to minimise the risk the virus poses to the health and wellbeing of all those involved with the management and administration of the Company. We have also received regular updates on the positioning and the resilience of the portfolio. I am pleased to report that the Company’s operations have not been adversely affected and that established business continuity plans have been operating effectively. I am also pleased to report that the Board has recently returned to meeting physically, which both we and the Manager welcome.
ANNUAL GENERAL MEETING
I am pleased to report that it is the Board’s intention that this year’s AGM will be held in person at 12:00 noon on Tuesday, 8 February 2022 at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL.
At present UK Government restrictions on public gatherings are no longer in force in connection with COVID-19 and the AGM can be held in the normal way with physical attendance by shareholders. However, shareholders should be aware that it is possible that such restrictions could be reimposed prior to the date of the AGM. In such event, these restrictions could mean that the AGM is required to be held as a closed meeting as happened last year with physical attendance limited to only a small number of attendees comprising the required quorum for the meeting and those persons whose attendance is necessary for the conduct of the meeting, and that any other persons will be refused entry. Accordingly, all shareholders are recommended to vote by proxy in advance of the AGM and to appoint the Chairman of the meeting as their proxy. This will ensure that shareholders’ votes will be counted even if they (or any appointed proxy) are not able to attend. All votes will be taken by poll so that all proxy votes are counted.
The Company may impose entry restrictions on persons wishing to attend the AGM (including, if required, refusing entry) in order to secure the orderly conduct of the AGM and the safety of the attendees.
All shareholders intending to attend should either be fully vaccinated or obtain a negative COVID-19 test result before entering the venue. Negative test results must be obtained no earlier than one day before entering the venue and fully vaccinated shareholders are also strongly encouraged to get tested. Attendees will also be required to wear a face covering at all times within the venue except when seated in the relevant meeting room.
Shareholders are also requested not to attend the AGM if they have tested positive for COVID-19 in the 10 days prior to the AGM, are experiencing new or worsening COVID-19 related symptoms, have been in close contact with anyone who is experiencing symptoms or has contracted COVID-19 during the 14 days prior to the AGM, or are required to self isolate pursuant to UK Government guidance.
In the absence of any reimpostion of restrictions, the Board very much looks forward to meeting with shareholders.
SHAREHOLDER COMMUNICATION
We appreciate how important access to regular information is to our shareholders. To supplement our Company website, we now offer shareholders the ability to sign up to the Trust Matters newsletter which includes information on the Company as well as news, views and insights.
OUTLOOK
As you will read in our Investment Manager’s report which follows, many of the countries in our universe have relatively low levels of foreign debt, higher yields, superior growth prospects, and are trading at a significant valuation discount relative to both the developed markets and their own history. Our Investment Manager sees many value opportunities in the frontier and smaller emerging markets. Not only are these markets under-researched, which can result in significant undervaluation, but they have generally lagged the wider market recovery seen in the developed world. As always, stock selection is key, but the Board remains confident that our Investment Manager can continue to deliver on the performance achieved this year, having extensive resources deployed to these inefficient markets and the local market knowledge required to capitalise in this dynamic and exciting asset class.
AUDLEY TWISTON-DAVIES
CHAIRMAN
1 December 2021
INVESTMENT MANAGER’S REPORT
MARKET AND PERFORMANCE REVIEW
After a torrid 2020 for frontier markets, our financial year started with a profound shift in market sentiment driven by vaccine optimism and an election result in the United States of America widely expected to pave the way for a more predictable and stable geopolitical landscape. The strong economic restart has translated into strong market performance. The Company saw an absolute NAV return of +53.0%, significantly outperforming our benchmark, which was up +27.3%. Meanwhile, the MSCI Emerging Markets Index was up +18.2% and MSCI World Index was up +28.8% (all figures are in US Dollar terms with dividends reinvested).
During 2020, China was the main driver of returns in emerging markets. However, that picture has changed significantly in 2021. We have seen performance broaden out to other emerging markets as China has receded, and has finally started to reach our frontier universe.
Our positioning set us up for strong performance going into 2021 as the recovery thesis started to play out. We have maintained a relatively elevated beta throughout the period (1.15 as of 30 September 2021) reflecting our pro-cyclical view. Interestingly, we saw positive relative returns from 10 out of 11 industry sectors – Utilities being the only marginal exception. We also benefited from our use of gearing during the year as many of our markets recovered having lagged the rebound seen in developed markets.
It is worth noting that while economic recovery became more broad-based during 2021, the performance of frontier markets over the last two years has remained more muted than we expected. Thus, going forward, we would not be surprised to see continued outperformance from our asset class.
In parts of our universe, like Dubai, where an early and robust vaccination roll-out has taken place, we have seen significant easing of travel restrictions, and bars and gyms are bustling. The one region where COVID-19 remained a significant economic challenge during the second half of our financial year was the ASEAN region which was hit by the third wave, in part due to low vaccination rates, as demonstrated by the mobility trend chart in the Company’s Annual Report for the year ended 30 September 2021. However, the situation has improved significantly with infection rates falling in all the major countries. We anticipate a meaningful recovery in mobility will lead to improved economic activity and ultimately drive strong market returns.
Performance across the majority of frontier market countries was either strong or very strong, as after several years, there was some convergence between earnings and share prices.
In Eastern Europe, performance was driven by expectations of policy stimulus, in particular the EUR 750bn EU Recovery Fund. The most notable performers were Hungary (+72.8%) and Romania (+39.2%).
In the Middle East, markets did well as energy prices rebounded, particularly UAE (+50.6%), Saudi Arabia (+47.8%), Qatar (+14.9%). The vaccine roll-out has also been impressive.
In Asia performance was led by Kazakhstan (+111.1%), Vietnam (+44.1%), Indonesia (+26.4%) and Thailand (+20.1%) which have all benefited from improvements in global trade driving exports to new all-time highs.
Pakistan performed poorly due to the perfect storm of MSCI market classification downgrade (from emerging markets back to frontier markets), weak balance of payments position and a depreciating currency.
A TIDE OF STRONG PERFORMANCE IN OUR UNIVERSE
12 months total return in US Dollars to 30 September 2021
| % | |
| Hungary | 72.8 |
| UAE | 50.6 |
| Saudi Arabia | 47.8 |
| Vietnam | 44.1 |
| Poland | 29.5 |
| MSCI World Index | 28.8 |
| Kuwait | 27.8 |
| Benchmark Index | 27.3 |
| Indonesia | 26.4 |
| Thailand | 20.1 |
| Chile | 18.7 |
| MSCI Emerging Markets Index | 18.2 |
| Qatar | 14.9 |
| Philippines | 13.3 |
| Turkey | 5.1 |
| Peru | -5.8 |
Source: BlackRock, 30 September 2021.
To us, this is yet another reminder of the range of potential opportunities within our universe, and consequently, the importance of our ability to choose where we would like to participate. The fact that we are not forced to invest in a single country or region continues to aid performance returns.
STOCK PERFORMANCE
At the stock level, JSC Kaspi (+165%), a Kazakh fintech platform, which we bought at IPO in October 2020, was the strongest contributor, driven by strong earnings growth (Q2 earnings up 87% year on year). With attractive trends across payments, marketplace, and lending, it remains high conviction. Holding Kazatomprom (+196%), the world’s leading uranium miner, also contributed strongly to returns. Uranium has returned to prominence as Europe looks to decarbonise.
Stock selection in Vietnam was especially lucrative. Information technology services company, FPT (+101%) proved its quality as it continued to win business in key geographies with United States +64% year on year and Europe +25% year on year in the most recent quarter. For the first nine months of the year the value of new overseas contracts signed rose 33% year on year driven by acceleration in sales of digital transformation services. Electronics and grocery retailer, Mobile World (+92%) performed well as it continued to open new grocery stores, grown from nothing to a more than USD 1bn revenue business in the last five years.
In Poland, fashion retailer, LPP rose 79%. Their omnichannel approach proved successful in gaining market share, driven by the rollout of Sinsay which saw store footprint more than double over the last 3 years.
Saudi Arabian methanol producer, Sahara International Petrochemical, rose 164% during the year. As an alternative biofuel for internal combustion engines, methanol prices rose together with the broader oil basket.
On the other hand, Turkey was a significant detractor – we had a position in a petrol refining company, Turkiye Petrol Rafinerileri (-4.4%). At a macro level, we expected more policy orthodoxy and a rate hike but the unexpected replacement of central bank governor, Naci Agbal, with a more dovish central bank lead hurt the currency and asset prices in general.
Other detractors included Philippines-based casino and hotel operator, Bloomberry Resorts (-23%), as tourism prospects dimmed for 2021.
INVESTMENT THEMES AND ACTIVITY
We believe our universe provides many exciting opportunities that address the growing social needs of one-third of the world’s population. Despite their key role in serving the world’s poorest and enabling the transition to net zero, frontier markets, unfortunately, are for now the forgotten child of a world moving towards Environmental, Social and Governance (ESG) and sustainable investing.
Through an ESG lens, the countries in our Benchmark Index represent approximately 15% of global carbon dioxide emissions. These countries are also home to large reserves of commodity resources, the responsible extraction of which is crucial to long-term sustainable value. In particular, decarbonisation of the power system and electrification of the transport sector will require commodity resources for the infrastructure build out. Companies that have linkages to alternative energy sources can help drive down emissions through time.
The turbocharged global recovery has accelerated demand, but has also exposed cracks in supply chains and trade ecosystems. The charts in the Company’s Annual Report for the year ended 30 September 2021, showing significant delay in delivery times, and significant surge in China freight prices, indicate the sheer scale of the supply chain challenge. We believe several frontier markets, particularly Vietnam, are poised to benefit as the world continues to diversify away from a China-oriented supply chain risk.
In terms of portfolio activity, in line with the recovery theme, we added to Emirati low-cost airline, Air Arabia, which is able to operate at one of the lowest costs globally. We bought Hungarian bank OTP Bank, where we expect a re-rating driven by stronger loan growth and fee income. The bank stands out in Emerging Europe for its strong profitability.
We upped our holdings in Indonesia given the underperformance of the region and our expectations of a surge in economic activity. We bought the country’s largest microfinance provider, Bank Rakyat which was being weighed down by concerns over its rights issue and asset quality. In our view their high return on assets can generate sufficient profitability to grow out of these problems.
Elsewhere in Asia we rotated our Thai holdings, swapping out Energy company PTT Exploration & Production which had rallied with oil and bought into hospital operator Bangkok Dusit Medical Services which we think could benefit from the re-opening of medical tourism to the country. We purchased refining company IRPC Public Company, on expectation of a normalisation of refining margins which we believe will be helped by a recovery in regional transport demand.
We have added to cyclicals in Saudi Arabia, as we expect economic growth to accelerate driven by increased government spending as the government looks to pivot the economy away from oil. It is worth noting the extent to which we have seen changes in the socioeconomic and political landscape in Saudi Arabia over the last decade; we see a compelling opportunity to participate as the country’s financial markets liberalise further.
In Peru, we believe the political uncertainty is creating an opportunity for alpha generation. The investor expectations of market unfriendly appointments under the new president, Pedro Castillo, reflect peak pessimism. We think that there are enough checks and balances embedded within the political setup to prevent drastic left-wing action. We have maintained our position in Credicorp, driven by a cheap valuation and what we see as an inflection point in most operating lines of the bank.
There do remain areas of frontier markets where we have some minor concerns. As iron ore tailwinds abated, we reduced our positions in Ukrainian metals player Ferrexpo. In Turkey, perceived governmental interference in the role of the independent central bank continues to be a headwind. We are currently zero-weighted in the country.
FRONTIER MARKETS REMAIN ATTRACTIVELY VALUED
| Forward Price to Earnings (P/E) Ratios | |
| Company portfolio P/E | 15x |
| Benchmark Index* P/E | 17x |
| MSCI World Index P/E | 23x |
| Price to Book (P/E) Ratios | |
| Company portfolio P/B | 1.4x |
| Benchmark Index* P/B | 1.8x |
| MSCI World Index P/B | 3.1x |
Sources: BlackRock, Bloomberg as of 30 September 2021.
Forward Price to Earnings ratio divides the current share price of a company by the estimated future (”forward”) earnings per share.
Price to Book ratio divides the current share price of a company by its book value. Book value is the value of the company according to its balance sheet.
* Benchmark Index represents the MSCI Emerging Markets ex-Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index.
OUTLOOK
We are optimistic on the medium-term outlook for frontier markets. While the markets have re-rated, it still looks cheap compared to many of its more developed peers.
The reopening thesis and associated earnings recovery still have some way to go. Notably, in our investment universe, fiscal spend was much more controlled than in the developed world, allowing many of our countries to enter 2022 in a much stronger fiscal position than expected. In addition, these fiscal balances look resilient when compared to their own history.
Through a structural lens, frontier markets are home to 30% of the world’s population, 12% of total gross domestic product (GDP), and 5% of net profits. Despite this, they account for only 1% of world indices, a number that has declined significantly over the last 10 years. We maintain conviction that over time frontier markets’ index representation should grow towards their share of world profits, which in turn should be more reflective of their contribution to GDP. Over the longer term, as these countries become richer, we believe that considerably more than 1% of investors’ capital will be allocated to the countries in which nearly 3 billion people live.
The world’s attention is focused firmly on developed markets: investors fret about whether the Federal Reserve will shift direction on monetary policy, whether US stocks are over-valued, whether technology will continue to lead markets higher, or whether value will continue its resurgence. In this environment, few are thinking about frontier markets.
As active stock pickers in the world’s smaller, truly “emerging” markets, we see some advantages in this neglect. It means these companies are under-researched, leaving those with the resources to dig deep, to understand local dynamics and risks, with an opportunity to add considerable value.
Our first research trips post COVID-19 across three continents have shown that while the world has changed much during the last twenty challenging months, the opportunities in frontier markets remain largely unexplored and untapped.
We believe this is particularly important today. Frontier markets have lagged the recovery trade that has swept through larger markets. In particular, many of the ASEAN markets have been struggling under a third wave of COVID-19 and have only just started to reopen. There is an opportunity to participate as they recover. We believe the performance dynamics of this year serve as a good reminder of the excitement of our universe and may finally bring some attention to this oft-ignored asset class.
SAM VECHT AND EMILY FLETCHER
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
1 December 2021
PORTFOLIO
TEN LARGEST INVESTMENTS1 AS AT 30 SEPTEMBER 2021
1 + Saudi National Bank (2020: n/a)
Financials (Saudi Arabia)
Portfolio value: $16,938,000
Percentage of net assets: 4.8% (2020: nil)
The Saudi National Bank (SNB) is the largest financial institution in Saudi Arabia, created following the merger of National Commercial Bank and Samba Financial Group in April 2021, providing a range of financial services from personal and corporate banking to brokerage and investment banking in Saudi Arabia. It also has international presence in the Middle East, South Asia and Turkey.
2 + Bank Rakyat (2020: 27th)
Financials (Indonesia)
Portfolio value: $13,408,000
Percentage of net assets: 3.8% (2020: 1.9%)
Bank Rakyat is one of the largest banks in Indonesia. It specialises in small scale and microfinance style borrowing from and lending to its approximately 30 million retail clients through its over 4,000 branches, units and rural service posts.
3 = Mobile World (2020: 3rd)
Consumer Discretionary (Vietnam)
Portfolio value: $13,301,000
Percentage of net assets: 3.8% (2020: 3.0%)
Mobile World is Vietnam’s top mobile phone retailer by revenue and net profit after tax with 2,200+ stores nationwide. Mobile World operates the following concepts: “The Gioi Di Dong” mobile phone retail chain, “Dien May Xanh” consumer electronics retail chains and “Bach Hoa Xanh” grocery retail chain. In addition, Mobile World expanded to regional markets with the first mobile phone retail chain named “Bigphone” in Cambodia.
During the pandemic, the company pivoted over 1,000 stores to online point of sales to comply with government lockdown rules.
4 + FPT (2020: 15th)
Information Technology (Vietnam)
Portfolio value: $12,174,000
Percentage of net assets: 3.5% (2020: 2.3%)
FPT is the largest information technology service company in Vietnam with its core business focusing on the provision of ICT-related services to both domestic and foreign companies. The company is benefiting, in particular, from the digitisation of domestic companies.
5 + JSC Kaspi (2020: n/a)
Financials (Kazakhstan)
Portfolio value: $11,905,000
Percentage of net assets: 3.4% (2020: nil)
JSC Kaspi is the largest payments, marketplace and fintech ecosystem in Kazakhstan. The company has seen strong growth particularly in its marketplace and payments verticals. JSC Kaspi began as a bank at first but expanded into peer-to-peer payments and online marketplaces, particularly proving vital for businesses during lockdowns in March/April of last year. Their super app was also involved in delivering more than 60% of the government’s coronavirus relief payments to eligible citizens. The company is working on expanding into other markets in Central Asia.
6 + Saudi British Bank (2020: n/a)
Financials (Saudi Arabia)
Portfolio value: $11,425,000
Percentage of net assets: 3.2% (2020: nil)
Saudi British Bank is an associate of HSBC Group and the leading international bank in the Kingdom of Saudi Arabia. The bank has been an active partner in supporting Saudi Arabia’s economic growth and social development by offering an array of corporate, institutional, retail banking and wealth management services since 1978.
7 + Emaar Properties (2020: 37th)
Real Estate (United Arab Emirates)
Portfolio value: $11,062,000
Percentage of net assets: 3.1% (2020: 1.7%)
Emaar Properties is a real estate development company located in the UAE. It operates internationally providing both development and property management services. It is diversified across several property types, including commercial and residential, as well as malls and hospitality.
8 + OTP Bank (2020: n/a)
Financials (Hungary)
Portfolio value: $10,665,000
Percentage of net assets: 3.0% (2020: nil)
OTP Bank is a large financial services provider serving several countries in Central and Eastern Europe, including Hungary, Bulgaria, Serbia, Romania, Croatia, Ukraine, Montenegro, Albania and Russia. The company operates in insurance, real estate, factoring, leasing, asset management, investment, and pension funds.
9 + MOL Group2 (2020: n/a)
Energy (Hungary)
Portfolio value: $9,963,000
Percentage of net assets: 2.8% (2020: nil)
MOL Group is a Central Eastern European multinational oil and gas company headquartered in Budapest, Hungary. It operates in over 30 countries, is vertically integrated, active across exploration and production, refining, distribution and marketing, petrochemicals, power generation, trading and retail.
10 - CP All (2020: 7th)
Consumer Staples (Thailand)
Portfolio value: $9,491,000
Percentage of portfolio: 2.7% (2020: 2.6%)
CP All was initially established to operate convenience stores in Thailand under the “7-Eleven” trademark, and has now expanded to include bill payment and collection services, manufacturing and sale of convenience store food and bakery products, and more recently, membership-based wholesale services through the Makro brand.
1 Gross market exposure as a % of net assets. Percentages in brackets represent the portfolio holding at 30 September 2020.
2 Includes exposure gained via both contracts for difference and equity holdings.
PORTFOLIO ANALYSIS AS AT 30 SEPTEMBER 2021
Country allocation: Absolute weights
(Gross market exposure as a % of net assets)1
| % | |
| Saudi Arabia | 18.2 |
| Indonesia | 11.1 |
| Vietnam | 9.6 |
| Greece | 7.6 |
| Thailand | 7.6 |
| Kazakhstan | 6.5 |
| Malaysia | 6.0 |
| Hungary | 5.8 |
| Egypt | 5.5 |
| Poland | 5.0 |
| United Arab Emirates | 5.0 |
| Philippines | 4.3 |
| Chile | 2.8 |
| Romania | 2.3 |
| Kenya | 2.1 |
| United States | 1.9 |
| Peru | 1.9 |
| Panama | 1.6 |
| Pakistan | 1.5 |
| Ukraine | 1.2 |
| Qatar | 0.6 |
| Nigeria | 0.4 |
Country allocation relative to the Benchmark Index (%)1
| % | |
| Vietnam | 7.2 |
| Greece | 6.3 |
| Kazakhstan | 5.9 |
| Egypt | 5.0 |
| Hungary | 4.0 |
| United States | 1.9 |
| Romania | 1.8 |
| Panama | 1.6 |
| Indonesia | 1.6 |
| Kenya | 1.5 |
| Pakistan | 1.4 |
| Ukraine | 1.2 |
| Peru | 0.7 |
| Poland | 0.2 |
| Nigeria | 0.0 |
| Senegal | -0.1 |
| Lithuania | -0.1 |
| Tunisia | -0.1 |
| Estonia | -0.1 |
| Sri Lanka | -0.1 |
| Croatia | -0.1 |
| Jordan | -0.1 |
| Philippines | -0.2 |
| Mauritius | -0.2 |
| Oman | -0.2 |
| Bangladesh | -0.3 |
| Chile | -0.3 |
| Slovenia | -0.4 |
| Luxembourg | -0.5 |
| Bahrain | -0.6 |
| Iceland | -0.6 |
| United Arab Emirates | -0.7 |
| Czech Republic | -0.9 |
| Morocco | -0.9 |
| Argentina | -1.1 |
| Colombia | -1.2 |
| Turkey | -1.8 |
| Malaysia | -3.3 |
| Thailand | -3.8 |
| Kuwait | -4.2 |
| Qatar | -4.6 |
| Saudi Arabia | -5.3 |
1 Includes exposure gained through equity positions and long CFD positions.
Sources: BlackRock and Datastream.
Sector allocation: Absolute weights
(Gross market exposure as a % of net assets) 1
| % | |
| Financials | 36.3 |
| Consumer Discretionary | 15.4 |
| Industrials | 13.4 |
| Materials | 10.1 |
| Energy | 9.8 |
| Consumer Staples | 6.8 |
| Information Technology | 5.4 |
| Health Care | 4.4 |
| Real Estate | 4.2 |
| Communication Services | 1.4 |
| Utilities | 1.3 |
Sector allocation relative to the Benchmark Index (%)1
| % | |
| Consumer Discretionary | 11.0 |
| Industrials | 7.9 |
| Information Technology | 4.0 |
| Energy | 2.6 |
| Health Care | 1.1 |
| Real Estate | 0.6 |
| Consumer Staples | 0.2 |
| Utilities | -2.7 |
| Materials | -2.9 |
| Financials | -5.0 |
| Communication Services | -8.3 |
1 Includes exposure gained through equity positions and long CFD positions.
Sources: BlackRock and Datastream.
INVESTMENTS AS AT 30 SEPTEMBER 2021
EQUITY PORTFOLIO
Company |
Principal country of operation | Sector | Fair value1 US$’000 |
Gross market exposure as a % of net assets3 |
| Bank Rakyat | Indonesia | Financials | 13,408 | 3.8 |
| Indocement Tunggal Prakarsa | Indonesia | Materials | 8,323 | 2.4 |
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 6,790 | 1.9 |
| AKR Corporindo TBK | Indonesia | Energy | 6,660 | 1.9 |
| Pakuwon Jati | Indonesia | Real Estate | 3,916 | 1.1 |
| ------------ | ------------ | |||
| 39,097 | 11.1 | |||
| ======= | ======= | |||
| CP All | Thailand | Consumer Staples | 9,491 | 2.7 |
| IRPC Public Company | Thailand | Energy | 7,240 | 2.0 |
| Bangkok Dusit Medical Services | Thailand | Health Care | 5,330 | 1.5 |
| PTT Exploration & Production | Thailand | Energy | 4,768 | 1.4 |
| ------------ | ------------ | |||
| 26,829 | 7.6 | |||
| ======= | ======= | |||
| JSC Kaspi | Kazakhstan | Financials | 11,905 | 3.4 |
| Kazatomprom | Kazakhstan | Energy | 6,035 | 1.7 |
| Halyk Savings Bank | Kazakhstan | Financials | 4,898 | 1.4 |
| ------------ | ------------ | |||
| 22,838 | 6.5 | |||
| ======= | ======= | |||
| Hellenic Telecom Organisation | Greece | Communication Services | 4,818 | 1.4 |
| Terna Energy | Greece | Utilities | 4,583 | 1.3 |
| National Bank of Greece | Greece | Financials | 4,418 | 1.3 |
| Eurobank Ergasias Services & Holdings | Greece | Financials | 4,029 | 1.1 |
| Titan Cement International | Greece | Materials | 2,375 | 0.7 |
| ------------ | ------------ | |||
| 20,223 | 5.8 | |||
| ======= | ======= | |||
| Genting | Malaysia | Consumer Discretionary | 7,904 | 2.2 |
| Frontken Corp | Malaysia | Industrials | 5,561 | 1.6 |
| RHB Bank | Malaysia | Financials | 3,161 | 0.9 |
| Westports Holdings | Malaysia | Industrials | 3,090 | 0.9 |
| ------------ | ------------ | |||
| 19,716 | 5.6 | |||
| ======= | ======= | |||
| Eastern Company | Egypt | Consumer Staples | 6,527 | 1.8 |
| EFG Hermes Holdings | Egypt | Financials | 6,177 | 1.8 |
| Orascom Construction | Egypt | Industrials | 3,591 | 1.0 |
| Integrated Diagnostics | Egypt | Health Care | 2,986 | 0.8 |
| ------------ | ------------ | |||
| 19,281 | 5.4 | |||
| ======= | ======= | |||
| Emaar Properties | United Arab Emirates | Real Estate | 11,062 | 3.1 |
| Air Arabia | United Arab Emirates | Industrials | 6,783 | 1.9 |
| ------------ | ------------ | |||
| 17,845 | 5.0 | |||
| ======= | ======= | |||
| LT Group | Philippines | Industrials | 6,404 | 1.8 |
| International Container Terminal Services | Philippines | Industrials | 4,853 | 1.4 |
| Bloomberry Resorts | Philippines | Consumer Discretionary | 4,049 | 1.1 |
| ------------ | ------------ | |||
| 15,306 | 4.3 | |||
| ======= | ======= | |||
| KRUK | Poland | Financials | 8,520 | 2.4 |
| LPP | Poland | Consumer Discretionary | 4,063 | 1.2 |
| ------------ | ------------ | |||
| 12,583 | 3.6 | |||
| ======= | ======= | |||
| OTP Bank | Hungary | Financials | 10,665 | 3.0 |
| MOL Group | Hungary | Energy | 1,787 | 0.5 |
| ------------ | ------------ | |||
| 12,452 | 3.5 | |||
| ======= | ======= | |||
| Empresas CMPC | Chile | Materials | 5,389 | 1.5 |
| Falabella | Chile | Consumer Discretionary | 4,607 | 1.3 |
| ------------ | ------------ | |||
| 9,996 | 2.8 | |||
| ======= | ======= | |||
| Banca Transilvania | Romania | Financials | 7,995 | 2.3 |
| ------------ | ------------ | |||
| 7,995 | 2.3 | |||
| ======= | ======= | |||
| Equity Group | Kenya | Financials | 7,072 | 2.0 |
| ------------ | ------------ | |||
| 7,072 | 2.0 | |||
| ======= | ======= | |||
| Credicorp | Peru | Financials | 6,894 | 1.9 |
| ------------ | ------------ | |||
| 6,894 | 1.9 | |||
| ======= | ======= | |||
| Albemarle | United States of America | Materials | 6,543 | 1.9 |
| ------------ | ------------ | |||
| 6,543 | 1.9 | |||
| ======= | ======= | |||
| Copa Airlines | Panama | Industrials | 5,470 | 1.6 |
| ------------ | ------------ | |||
| 5,470 | 1.6 | |||
| ======= | ======= | |||
| Ferrexpo | Ukraine | Materials | 4,223 | 1.2 |
| ------------ | ------------ | |||
| 4,223 | 1.2 | |||
| ======= | ======= | |||
| Industries Qatar | Qatar | Industrials | 2,007 | 0.6 |
| ------------ | ------------ | |||
| 2,007 | 0.6 | |||
| ======= | ======= | |||
| Guaranty Trust Bank | Nigeria | Financials | 1,436 | 0.4 |
| ------------ | ------------ | |||
| 1,436 | 0.4 | |||
| ======= | ======= | |||
| Equity investments | 257,806 | 73.1 | ||
| ======= | ======= | |||
| BlackRock’s Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund (Cash Fund) | 96,269 | 27.3 | ||
| ------------ | ------------ | |||
| Total equity investments (including Cash Fund) | 354,075 | 100.4 | ||
| ======= | ======= |
CFD PORTFOLIO
Company |
Principal country of operation | Sector | Fair value1 US$’000 |
Gross market exposure2 US$’000 |
Gross market exposure as a % of net assets3 |
| Long positions | |||||
| Saudi National Bank | Saudi Arabia | Financials | 16,938 | 4.8 | |
| Saudi British Bank | Saudi Arabia | Financials | 11,425 | 3.2 | |
| United International Transport | Saudi Arabia | Industrials | 8,816 | 2.5 | |
| Leejam Sports | Saudi Arabia | Consumer Discretionary | 8,777 | 2.5 | |
| Arabian Internet & Communication Services | Saudi Arabia | Information Technology | 6,656 | 1.9 | |
| National Medical Care | Saudi Arabia | Health Care | 5,882 | 1.7 | |
| Saudi Arabian Mining Company | Saudi Arabia | Materials | 5,696 | 1.6 | |
| ------------ | ------------ | ||||
| 64,190 | 18.2 | ||||
| ======= | ======= | ||||
| Mobile World | Vietnam | Consumer Discretionary | 13,301 | 3.8 | |
| FPT | Vietnam | Information Technology | 12,174 | 3.5 | |
| Vietnam Dairy Products | Vietnam | Consumer Staples | 4,971 | 1.4 | |
| Quang Ngai Sugar | Vietnam | Consumer Staples | 3,157 | 0.9 | |
| ------------ | ------------ | ||||
| 33,603 | 9.6 | ||||
| ======= | ======= | ||||
| MOL Group | Hungary | Energy | 8,176 | 2.3 | |
| ------------ | ------------ | ||||
| 8,176 | 2.3 | ||||
| ======= | ======= | ||||
| National Bank of Greece | Greece | Financials | 3,652 | 1.0 | |
| Titan Cement International | Greece | Materials | 2,926 | 0.8 | |
| ------------ | ------------ | ||||
| 6,578 | 1.8 | ||||
| ======= | ======= | ||||
| MCB Bank | Pakistan | Financials | 5,123 | 1.5 | |
| ------------ | ------------ | ||||
| 5,123 | 1.5 | ||||
| ======= | ======= | ||||
| LPP | Poland | Consumer Discretionary | 4,898 | 1.4 | |
| ------------ | ------------ | ||||
| 4,898 | 1.4 | ||||
| ======= | ======= | ||||
| Equity Group | Kenya | Financials | 377 | 0.1 | |
| ------------ | ------------ | ||||
| 377 | 0.1 | ||||
| ======= | ======= | ||||
| Orascom Construction | Egypt | Industrials | 340 | 0.1 | |
| ------------ | ------------ | ||||
| 340 | 0.1 | ||||
| ======= | ======= | ||||
| Mitra Adiperkasa | Indonesia | Consumer Discretionary | 120 | 0.0 | |
| ------------ | ------------ | ||||
| 120 | 0.0 | ||||
| ======= | ======= | ||||
| Total long CFD positions | 5,840 | 123,405 | 35.0 | ||
| ======= | ======= | ======= | |||
| Total short CFD positions | (23) | (1,495) | (0.4) | ||
| ------------ | ======= | ======= | |||
| Total CFD portfolio | 5,817 | 121,910 | 34.6 | ||
| ======= | ======= | ======= |
FAIR VALUE AND GROSS MARKET EXPOSURE OF INVESTMENTS AS AT 30 SEPTEMBER 2021
Portfolio | Fair value1 US$’000 |
Gross market exposure2 US$’000 |
Gross market exposure as a % of net assets3 | |
| 2021 | 2020 | |||
| Equity investments | 257,806 | 257,806 | 73.1 | 78.6 |
| Total long CFD positions | 5,840 | 123,405 | 35.0 | 29.2 |
| Total short CFD positions | (23) | (1,495) | (0.4) | 0.0 |
| Forward currency positions | 346 | 16,614 | 4.6 | 0.0 |
| ------------ | ------------ | ------------ | ------------ | |
| Total gross exposure | 263,969 | 396,330 | 112.3 | 107.8 |
| ======= | ======= | ======= | ======= | |
| Cash Fund | 96,269 | 96,269 | 27.3 | 21.1 |
| ------------ | ------------ | ------------ | ------------ | |
| Total investments | 360,238 | 492,599 | 139.6 | 128.9 |
| ======= | ======= | ======= | ======= | |
| Cash and cash equivalents1,2 | 5,717 | (126,644) | (35.9) | (28.7) |
| Net other current liabilities | (13,158) | (13,158) | (3.7) | (0.2) |
| Non-current liabilities | (19) | (19) | 0.0 | 0.0 |
| ------------ | ------------ | ------------ | ------------ | |
| Net assets | 352,778 | 352,778 | 100.0 | 100.0 |
| ======= | ======= | ======= | ======= | |
The Company was geared through the use of long and short CFD positions and gross and net gearing as at 30 September 2021 was 8.5% and 7.6% respectively (30 September 2020 : 7.8% and 7.8%). Gross and net gearing are Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 30 September 2021.
1 Fair value is determined as follows:
– Listed investments are valued at bid prices where available, otherwise at latest market traded quoted prices.
– The sum of the fair value column for the CFD contracts totalling US$5,817,000 represents the net fair valuation of all the CFD contracts, which is determined based on the difference between the notional transaction price and market value of the underlying shares in the contract (in effect the unrealised gains/ (losses) on the exposed long and short CFD positions). The cost of purchasing the securities held through long CFD positions directly in the market would have amounted to US$117,565,000 at the time of purchase, and subsequent movement in market prices have resulted in unrealised gains on the long CFD positions of US$5,840,000 resulting in the value of the total long CFD market exposure to the underlying securities increasing to US$123,405,000 as at 30 September 2021. The notional price of selling the securities to which exposure was gained via the short CFD positions would have been US$1,472,000 at the time of entering into the contract, and subsequent movement in market prices have resulted in unrealised losses on the short CFD positions of US$23,000 resulting in the value of the total short CFD market exposure of these investments increasing to US$1,495,000 at 30 September 2021. If the short positions had been closed on 30 September 2021 this would have resulted in a loss of US$23,000 for the Company.
2 The gross market exposure column for cash and cash equivalents has been adjusted to assume the Company purchased/sold direct holdings rather than exposure being gained through long and short CFDs and forward currency positions.
3 Market exposure in the case of equity investments is the same as fair value. In the case of long and short CFDs it is the market value of the underlying shares to which the portfolio is exposed via the contract. Market exposure in the case of forward currency positions is the value of the receivable portion of the forward currency contracts. The notional value of the forward currency positions was US$16,268,000 at the time of purchase, and subsequent market movements in prices have resulted in unrealised gains on these positions of US$346,000 resulting in the value of forward currency positions increasing to US$16,614,000 as at 30 September 2021.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 30 September 2021.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment.
INVESTMENT OBJECTIVE
The Company’s investment objective is to achieve long-term capital growth by investing in companies domiciled or listed in or exercising the predominant part of their economic activity in, less developed countries. These countries (the “Frontiers Universe”) are any country which is neither part of the MSCI World Index of developed markets, nor one of the eight largest countries by market capitalisation in the MSCI Emerging Markets Index: being Brazil, China, India, South Korea, Mexico, Russia, South Africa and Taiwan (the “Selected Countries”).
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
Strategy
To achieve its objective, the Company invests globally in the securities of companies domiciled or listed in or exercising the predominant part of their economic activity in, the Frontiers Universe.
Business model
The Company’s business model follows that of an externally managed investment trust; therefore the Company does not have any employees and outsources its activities to third-party service providers, including BlackRock Fund Managers Ltd (BlackRock or BFM) (‘the Manager’) which is the principal service provider.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (BIM (UK)) (‘the Investment Manager’). The contractual arrangements with, and assessment of, the Manager are summarised are summarised in the Company’s Annual Report for the year ended 30 September 2021. The Investment Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company. Other service providers include the Depositary and the Fund Accountant, The Bank of New York Mellon (International) Limited (BNYM), and the Registrar, Computershare Investor Services PLC (Computershare). Details of the contractual terms with third-party service providers are set out in the Directors’ Report in the Annual Report for the year ended 30 September 2021.
Investment policy
The Company will seek to maximise total return and will invest globally in the securities of companies domiciled or listed in or exercising the predominant part of their economic activity in, the Frontiers Universe. Performance is measured against the Company’s Benchmark Index, which is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index (net total return, USD). The Investment Manager is not constrained by the geographical weightings of the Benchmark Index and the Company’s portfolio may frequently be overweight or underweight any particular country relative to the Benchmark Index. The Company will exit any investment as soon as reasonably practicable following the relevant company ceasing to be domiciled or listed in or exercising the predominant part of its economic activity in, the Frontiers Universe.
In order to achieve the Company’s investment objective, the Investment Manager selects investments through a process of fundamental and geopolitical analysis, seeking long-term appreciation from mispriced value or growth. The Investment Manager employs both a top-down and bottom-up approach to investing. It is expected that the Company will have exposure to between 35 to 65 holdings.
Where possible, investment will generally be made directly in the stock markets of the Frontiers Universe. Where the Investment Manager determines it appropriate, investment may be made through collective investment schemes, although such investments are not likely to be significant. Investment in other closed-ended investment funds admitted to the Official List will not exceed more than 10 per cent, in aggregate, of the value of the Gross Assets (calculated at the time of any relevant investment). It is intended that the Company will generally be invested in equity investments; however, the Investment Manager may invest in equity-related investments, such as derivatives or convertibles, and, to a lesser extent, in bonds or other fixed-income securities, including high risk debt securities. These securities may be below investment grade.
Due to national and/or international regulation, excessive operational risk, prohibitive costs and/or the time period involved in establishing trading and custody accounts in certain countries in the Frontiers Universe, the Company may be unable to invest (whether directly or through nominees) in companies in certain countries in the Frontiers Universe or, in the opinion of the Company and/or the Investment Manager, it may not be advisable to do so. In such circumstances, or in countries where acceptable custodial and other arrangements are not in place to safeguard the Company’s investments, the Company intends to gain economic exposure to companies in such countries by investing indirectly through derivatives. Derivatives are financial instruments linked to the performance of another asset or security, such as promissory notes, contracts for difference, futures or traded options. Save as provided below, there is no restriction on the Company investing in derivatives in such circumstances or for efficient portfolio management purposes.
The Company may be geared through borrowings and/or by entering into derivative transactions (taking both long and short positions) that have the effect of gearing the Company’s portfolio to enhance performance. The Company may also use borrowings for the settlement of transactions, to facilitate share repurchases (where applicable) and to meet on-going expenses.
The respective limits on gearing (whether through the use of derivatives, borrowings or a combination of both) are set out below:
- Maximum gearing through the use of derivatives or borrowings to gain exposure to long positions in securities: 140 per cent of net assets
- Maximum exposure to short positions (for shorting purposes the Company may use indices or individual stocks): 10 per cent of net assets
- Maximum gross exposure (total long exposure plus total short exposure): 150 per cent of net assets
- Maximum net exposure (total long exposure minus total short exposure): 130 per cent of net assets
In normal circumstances, the Company will typically have net exposure of between 95 per cent and 120 per cent of net assets.
When investing via derivatives, the Company will seek to mitigate and/or spread its counterparty risk exposure by collateralisation and/or contracting with a potential range of counterparty banks, as appropriate, each of which shall, at the time of entering into such derivatives, have a Standard & Poor’s credit rating of at least A- on its long-term senior unsecured debt.
The Company may invest up to 5 per cent of its Gross Assets (at the time of such investment) in unquoted securities. The Company will invest so as not to hold more than 15 per cent of its Gross Assets in any one stock or derivative position at the time of investment (excluding cash management activities).
No material change will be made to the investment policy without the approval of shareholders by ordinary resolution.
A detailed analysis of the Company’s portfolio has been provided above.
INVESTMENT APPROACH AND PROCESS
Portfolio construction is a continuous process, with the Investment Manager analysing constantly the impact of new ideas and information on the portfolio as a whole. The approach is flexible, varying through market and economic cycles to create a portfolio appropriate to the focused and unconstrained strategy of the Company. The macro environment is factored into all portfolio decisions. In general, macro analysis is a more dominant factor in investment decision making when the outlook is negative. The macro process is comprised of three parts: political assessment, macroeconomic analysis and appraisal of the valuation of a country’s market, which can only take place with thorough analysis of stock specific opportunities.
The Investment Manager’s research team generates ideas from a diverse range of sources. When permitted, these include frequent travel to the markets in which the Company invests and regular conversations with contacts that allow the Frontiers team to assess the entire ecosystem around a company, namely competitors, suppliers, financiers, customers and regulators. The team leverages the internal research network sharing information between BlackRock’s investment teams using a proprietary research application and database and develops insights from macroeconomic analysis. The Board believes that BlackRock’s research platform is a significant competitive advantage, both in terms of information specific to emerging and frontier market equities and through its global insights across asset classes. Access to companies is extremely good given BlackRock’s market presence, which makes it possible to develop a detailed knowledge of a company and its management.
The research process focuses on cash flow and future earnings growth, as the investment team believes that this is ultimately the driver of share prices over time. The process is designed with the aim of identifying companies that can translate top line revenue growth to free cash flow and investing in these companies when the analysis suggests that the cash flow stream is undervalued. Financial models are developed focusing on company financials, particularly cash flow statements, rather than relying on third party research.
ESG factors can be useful and relevant indicators for investment purposes and can help the Investment Manager with their decision making through identifying potentially negative events or corporate behaviour. This results in the expectation that there will be an outperformance bias towards better governed companies in the long run. The Investment Manager works closely with BlackRock’s Investment Stewardship team (BIS) to assess the governance quality of companies and investigate any potential issues, risks or opportunities.
Specific to corporate governance, the portfolio management team leverages local expertise in its proprietary, risk-based approach. Financial statement integrity is central to the analysis, where BIS applies a range of systematic measures to highlight companies’ accounting ratios in its assessment of balance sheet and earnings quality risks. For other categories under the corporate governance umbrella (e.g. audit quality, board accountability, executive pay and ownership and control), BIS flags risks based on internal research, including regulatory filings announcements and public news feeds. Governance (G) data from MSCI ESG Research Manager and other data sources may also be employed for supporting consideration. Environmental (E) and Social (S) factors are primarily assessed using BlackRock’s proprietary data and MSCI data, examining whether specific E&S exposure exists, and if so, to determine how well such exposure is being managed. Further information on the Manager’s approach to ESG and Socially Responsible Investing can be found below in the Strategic Report.
The Investment Manager’s research team monitors differing levels of risk throughout the process and believes that avoiding major downside events can generate significant outperformance over the long-term. Inputs from BlackRock’s Risk & Quantitative Analysis Team (RQA) are an integral part of the investment process. RQA analyse market and portfolio risk factors including stress tests, correlations, factor returns, cross-sectional volatility and attributions. BlackRock’s evaluation procedures and financial analysis of the companies within the portfolio also take into account environmental, social and governance matters and other business issues. The Company invests primarily on financial grounds to meet its stated objectives.
PERFORMANCE
Details of the Company’s performance for the year are given in the Chairman’s Statement above. The Investment Manager’s Report above includes a review of the main developments during the period, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive Income below. The total profit for the year, after taxation, was US$149,472,000 (2020: loss of US$77,943,000) of which the revenue return amounted to US$14,904,000 (2020: US$12,200,000) and the capital profit amounted to US$134,568,000 (2020: loss of US$90,143,000).
The Directors are recommending the payment of a final dividend of 4.25 cents per ordinary share in respect of the year ended 30 September 2021 (2020: final dividend of 4.25 cents) as set out in the Chairman’s Statement above.
KEY PERFORMANCE INDICATORS
The Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below.
Performance measured against the Benchmark Index
At each meeting the Board reviews the performance of the portfolio as well as the net asset value and share price for the Company and compares this to the return of the Company’s benchmark. The Board considers this to be an important key performance indicator and has determined that it should also be used to calculate whether a performance fee is payable to BlackRock. The Company’s absolute and relative performance is set out in the performance record table in the Company’s Annual Report for the year ended 30 September 2021.
Share rating and discount
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount or premium to NAV. Accordingly, the Directors monitor the share rating closely and will consider share repurchases in the market if the discount widens significantly, or the issue of shares to the market to meet demand to the extent that the Company’s shares are trading at a premium. In addition, in accordance with the Directors’ commitment at launch the Company will formulate and submit to shareholders proposals to provide them with an opportunity at each five year anniversary since launch, to realise the value of their ordinary shares at the prevailing NAV per share less applicable costs. Such an opportunity took place in the year ended 30 September 2021. The next opportunity will take place on or around the date of the Company’s AGM in February 2026.
For the year under review the Company’s shares traded at an average discount to the cum-income NAV of 4.2% and were trading at a discount of 6.8% on a cum-income basis at 29 November 2021. The Directors have the authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares). The Directors sought and received shareholder authority at the last AGM to issue up to 10% of the Company’s issued share capital (via the issue of new shares or sale of shares from treasury) on a non pre-emptive basis. Further information can be found in the Directors’ Report contained in the Company’s Annual Report for the year ended 30 September 2021.
Ongoing charges
The ongoing charges reflect those expenses which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective investment fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments and performance fees. The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company.
KEY PERFORMANCE INDICATORS (SEE GLOSSARY IN THE COMPANY’S ANNUAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2021).
The table below sets out the key KPIs for the Company.
|
Year ended 30 September 20211 |
Year ended 30 September 20201 | |||
| £% | US$% | £% | US$% | |
| Net asset value total return2 | +46.7 | +53.0 | -23.8 | -20.0 |
| Share price total return3 | +36.9 | +42.8 | -25.8 | -22.1 |
| Benchmark Index return4 | +22.1 | +27.3 | -19.6 | -15.6 |
| Discount to cum income NAV | 11.4 | 4.9 | ||
| Ongoing charges5 | 1.36 | 1.36 | ||
| Ongoing charges including performance fees | 2.44 | 1.36 | ||
| ======== | ======== | |||
1 Based on an exchange rate of US$1.3484 to £1 at 30 September 2021 and US$1.2928 to £1 at 30 September 2020.
2 Calculated with dividends reinvested.
3 Calculated on a mid to mid basis with dividends reinvested.
4 The Benchmark Index is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index. Benchmark return index calculate the reinvestment of dividends net of withholding taxes.
5 Ongoing charges represent the management fee and all other operating expenses, excluding performance fees, finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items, as a % of average daily net assets.
The Board regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance of the Company against a peer group of frontier market open and closed-ended funds.
PRINCIPAL RISKS
As required by the 2018 UK Code of Corporate Governance, the Board has in place a robust, ongoing process to identify, assess and monitor the principal and emerging risks of the Company, including those that they consider would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
A core element of this is the Company’s risk register, which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk, and the quality of the controls operating to mitigate the risk. A residual risk rating is then calculated for each risk based on the outcome of this assessment. This approach allows the effect of any mitigating procedures to be reflected in the final assessment.
The risk register, its method of preparation and the operation of the key controls in BlackRock’s and other third-party service providers’ systems of internal control are reviewed on a regular basis by the Company’s Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit and Management Engagement Committee periodically receives presentations from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams, and reviews Service Organisation Control (SOC 1) reports from BlackRock and the Company’s Custodian and Fund Accountant, The Bank of New York Mellon (International) Limited (BNYM).
The current risk register includes a range of risks spread between performance risk, income/dividend risk, legal and regulatory risk, counterparty risk, operational risk, market risk, political risk and financial risk.
The principal risks and uncertainties faced by the Company during the year, together with the potential effects, controls and mitigating factors, are set out on below.
| Principal Risk | Mitigation/Control |
| Investment Performance Risk The Board is responsible for: · setting the investment policy to fulfil the Company’s objectives; and · monitoring the performance of the Company’s Investment Manager and the strategy adopted. An inappropriate policy or strategy may lead to: · poor performance compared to the Company’s benchmark, peer group or shareholder expectations; · a widening discount to NAV; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. | To manage this risk the Board: · regularly reviews the Company’s investment mandate and long term strategy; · has set, and regularly reviews, the investment guidelines and has put in place appropriate limits on levels of gearing and the use of derivatives; · receives from the Investment Manager a regular explanation of stock selection decisions, portfolio gearing and any changes in gearing and the rationale for the composition of the investment portfolio; · receives from the Investment Manager regular reporting on the portfolio’s exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions; · monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the Company’s investment policy; and · regularly reviews detailed performance attribution analysis. |
| Income/Dividend Risk The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. In addition, any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls imposed by jurisdictions in which the Company invests) may reduce the level of dividends received by shareholders. | Although the Company does not have a policy of actively seeking income, the Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting including any impact on account of dividend cancellations due to the COVID-19 pandemic. The Company also has a revenue reserve and powers to pay dividends from capital which can be used to support the Company’s dividend if required. |
| Legal and Regulatory Risk The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing its investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the Market Abuse Act, the UK Listing Rules and the Disclosure Guidance & Transparency Rules. | The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached, and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of this Directive are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company. Compliance with the accounting standards applicable to quoted companies and those applicable to investment trusts are also regularly monitored to ensure compliance. The Company Secretary and the Company’s professional advisers monitor developments in relevant laws and regulations and provide regular reports to the Board in respect of the Company’s compliance. |
| Counterparty Risk The Company’s investment policy also permits the use of both exchange-traded and over-the-counter derivatives (including contracts for difference). The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. | Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Board reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intra-day monitoring of exposures to ensure that these are within set limits. |
| Operational Risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of BlackRock (the Investment Manager and AIFM), and of The Bank of New York Mellon (International) Limited (the Custodian, Depositary and Fund Accountant), which ensures safe custody of the Company’s assets and maintains the Company’s accounting records. The Company’s share register is maintained by the Registrar, Computershare. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records, as a result of a cyberattack or otherwise, could impact the monitoring and reporting of the Company’s financial position. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. | The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers and compliance with the investment management agreement on a regular basis. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control. The Board considers succession arrangements for key employees of the Manager and the Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the unprecedented risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers setting out the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board are confident that a good level of service has and will be maintained. The Board also receives regular reports from BlackRock’s internal audit function. |
| Political Risk Investments in the Frontiers Universe may include a higher element of risk compared to more developed markets due to greater political instability. Political and diplomatic events in the Frontiers Universe where the Company invests (for example, governmental instability, corruption, adverse changes in legislation or other diplomatic developments such as the outbreak of war or imposition of sanctions) could substantially and adversely affect the economies of such countries or the value of the Company’s investments in those countries. | The Investment Manager mitigates this risk by applying stringent controls over where investments are made and through close monitoring of political risks. The Investment Manager’s approach to filtering the investment universe takes account of the political background to regions and is backed up by rigorous stock specific research and risk analysis, individually and collectively, in constructing the portfolio. The management team has a wide network of business and political contacts which provides economic insights with public and private bodies. This enables the Investment Manager to assess potential investments in an informed and disciplined way, as well as being able to conduct regular monitoring of investments once made. However, given the nature of political risk, all investments will be exposed to a degree of risk and the Investment Manager will ensure that the portfolio remains diversified across countries to mitigate the risk. |
| Financial Risk The Company’s investment activities expose it to a variety of financial risks which include foreign currency risk, liquidity risk, currency risk and interest rate risk. | Details of these risks are disclosed in note 17 to the financial statements in the Company’s Annual Report for the year ended 30 September 2021, together with a summary of the policies for managing these risks. |
| Market Risk Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. The securities markets of the Frontiers Universe are not as large as the more established securities markets and have substantially less trading volume, which may result in a lack of liquidity and higher price volatility. There are fewer attractive investment opportunities in frontier markets, and this may lead to a delay in investment and may affect the price at which such investments may be made and reduce potential investment returns for the Company. There is also exposure to currency, market and political risk due to the location of the operation of the businesses in which the Company may invest. As a consequence of this and other market factors the Company may invest in a concentrated portfolio of shares and this focus may result in higher risk when compared to a portfolio that has spread or diversified investments more broadly. Corruption also remains a significant issue across the Frontiers Universe and the effects of corruption could have a material adverse effect on the Company’s performance. Accounting, auditing and financial reporting standards and practices and disclosure requirements applicable to many companies in developing countries may be less rigorous than in developed markets. As a result, there may be less information available publicly to investors in these securities, and such information as is available is often less reliable. The Company may also gain exposure to the Frontiers Universe by investing indirectly through Participatory Notes (P-Notes) which presents additional risk to the Company as P-Notes are uncollateralised resulting in the Company being subject to full counterparty risk via the P-Note issuer. P-Notes also present liquidity issues as the Company, being a captive client of a P-Note issuer, may only be able to realise its investment through the P-Note issuer and this may have a negative impact on the liquidity of the P-Notes which does not correlate to the liquidity of the underlying security. | Market risk represents the risks of investment in a particular market, country or geographic region. Therefore, this is largely outside of the scope of the Board’s control. However, the Board carefully considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. Market risk is also mitigated through portfolio diversification across countries and regions. The Board monitors the implementation and results of the investment process with the Investment Manager regularly. The Investment Manager regularly reports to the Board on relative market risks associated with investment in such regions. Further information is provided under ‘Political Risk’. The Board recognises the benefits of a closed-end fund structure in extremely volatile markets such as those affected by the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Investment Manager to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. |
VIABILITY STATEMENT
In accordance with the provisions of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Board is cognisant of the uncertainty surrounding the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for many of the Company’s portfolio holdings. Notwithstanding this crisis, and given the factors stated below, the Board expects the Company to continue to meet its liabilities as they fall due for the foreseeable future and has therefore conducted this review for a period of five years. This is generally the investment holding period investors consider while investing in the frontier market sector. The Board also believes that the Company and its key third party service providers have in place appropriate business continuity plans and will be able to maintain service levels through the COVID-19 pandemic. The Board conducted this review for the period up to the AGM in 2027.
In determining this period, the Board took into account the Company’s investment objective to achieve long-term capital growth and the Company’s projected income and expenditure. The Directors believe that five years is an appropriate investment horizon to assess the viability of the Company. It is satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound.
When the Company was launched in late 2010, the Board made a commitment that before the Company’s fifth AGM and at five yearly intervals thereafter, it would formulate and submit to shareholders proposals to provide shareholders with an opportunity to realise the value of their ordinary shares at the applicable NAV per ordinary share less applicable costs. The Board put proposals to shareholders this year. Following approval of the Tender Offer at a General Meeting of the Company held on 23 February 2021, the Company received elections to tender representing 21.5% of the Company, with the vast majority of shareholders choosing to retain their investment. The Board believes this is indicative of the ongoing attractiveness of the Company’s investment strategy and offering.
In making the longer-term viability assessment the Board has considered the following factors:
· The Company’s principal risks as set out above;
· The level of ongoing demand for the Company’s ordinary shares;
· The impact of a significant fall in Frontier equity markets on the value of the Company’s investment portfolio, factoring in the impact related to the COVID-19 pandemic;
· The ongoing relevance of the Company’s investment objective, business model and investment policy in the current environment;
· The operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future; and
· The effectiveness of business continuity plans in place for the Company and key service providers.
The Board has also considered a number of financial metrics, including:
· The level of current and historic ongoing charges incurred by the Company;
· The Company’s borrowings and its ability to meet its liabilities as they fall due;
· The premium or discount to NAV;
· The level of income generated by the Company;
· Future income forecasts; and
· The liquidity of the Company’s portfolio.
The Company is an investment company with a relatively liquid equity portfolio (as at 30 September 2021, 95% of the equity portfolio was capable of being realised in less than 20 days) and largely fixed overheads (excluding performance fees) which comprise a very small percentage of net assets (1.36%). In addition, any performance fees are capped at 1% of gross assets in years where the NAV per share has fallen or 2.5% of gross assets in years where the NAV per share has increased. Therefore, the Board has concluded that even in exceptionally stressed operating conditions, the Company would comfortably be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges, such as regulatory changes and the tax treatment of investment trusts, or a significant decrease in size due to substantial share buy-back activity or market falls, which may result in the Company no longer being of sufficient market capitalisation to represent viable investment propositions or no longer being able to continue in operation.
The Board has also considered the adverse impact of potential changes in law, regulation and taxation and the matter of foreign exchange risk. They have determined that although there are a number of potential risks associated with the Brexit process, any transition following any agreement, and the legal, fiscal and regulatory landscape thereafter, they do not believe that this represents a material threat to the Company’s strategy and business model, nor do they believe that the Investment Manager would be materially impeded in achieving the Company’s investment objective. In addition, the level of complexity, uncertainty and general lack of information present a number of potential outcomes and scenarios, which may or may not prove to be malign or benign and/or supportive of the Investment Manager in achieving the Company’s investment objective.
The Board has determined that the factors considered are applicable to the period up to the AGM in 2027 and beyond.
In addition, the Board’s assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which can be found in the Directors’ Report in the Company’s Annual Report for the year ended 30 September 2021.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE BLACKROCK FRONTIERS INVESTMENT TRUST PLC
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain more fully how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This enhanced disclosure covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions.
As the Company is an externally managed investment company and does not have any employees or customers, the Board considers the main stakeholders in the Company to be the shareholders, key service providers (being the Manager and Investment Manager, the Custodian, Depositary, Registrar and Broker) and investee companies.
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.
STAKEHOLDERS
Shareholders |
Manager and Investment Manager |
Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term growth and income. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the Financial Conduct Authority (FCA) and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets, and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management of portfolio companies. |
| Area of Engagement | Issue | Engagement | Impact |
| Responsible investing | The Board is committed to promoting the role and success of the Company in delivering on its investment mandate to shareholders over the long term. However, the Board recognises that securities within the Company’s investment remit may involve significant additional risk due to the political volatility and environmental, social and governance concerns facing many of the countries in the Company’s investment universe. These ethical and sustainability issues should be a key focus of our Manager’s research. More than ever, consideration of sustainable investment is a key part of the investment process and must be factored in when making investment decisions. The Board also have responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. |
The Board believes that responsible investment and sustainability are important to the longer-term delivery of growth in capital and income and has worked very closely with the Manager throughout the year to regularly review the Company’s performance, investment strategy and underlying policies and to understand how ESG considerations are integrated into the investment process. The Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Manager reports to the Board in respect of its consideration of ESG factors and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out in the Company’s Annual Report for the year ended 30 September 2021. The Investment Manager’s engagement and voting policy is detailed in the Company’s Annual Report for the year ended 30 September 2021 and on the BlackRock website. | The Board and the Manager believe there is a positive correlation between strong ESG practices and investment performance. Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement above. The portfolio activities undertaken by the Manager, can be found in the Investment Manager’s Report above. |
| Discount Strategy | The Board believes that strong performance and an attractive dividend yield enhances demand for the Company’s shares, which will help to maintain the Company’s discount at as close to the underlying NAV as possible. The dividend is funded out of current year revenue and revenue reserves if current year revenue is insufficient. The Company does not have a policy of seeking income, however the portfolio has, to date, continued to deliver a level of income such that the Board is able to pay an attractive dividend. |
The Manager reports total return performance statistics to the Board on a regular basis, along with the portfolio yield and the impact of dividends paid on brought forward distributable reserves. The Board reviews the Company’s discount/premium to NAV on a regular basis and holds regular discussions with the Manager and the Company’s broker regarding the discount/premium level. | The average discount for the year to 30 September 2021 was 4.2%. During the year the Company’s share price has traded at a maximum discount of 11.3% and a maximum premium of 1.7%. |
| Service levels of third party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service: including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries and the Company’s Brokers in respect of the provision of advice and acting as a market maker for the Company’s shares. |
The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Brokers on an ongoing basis. In light of the continued challenges presented by the COVID-19 pandemic to the operation of business across the globe, the Board has worked closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s service providers. |
All performance evaluations were performed on a timely basis and the Board concluded that all third-party service providers, including the Manager, Custodian, Depositary and Fund Accountant were operating effectively and providing a good level of service. The level of fee paid to the Depositary was 0.95 basis points per annum. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Broker, Registrar and printer, and is confident that arrangements are in place to ensure that a good level of service will continue to be provided despite the ongoing impact of the COVID-19 pandemic. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. |
Over recent years the Board undertook a review of succession planning arrangements and identified the need for action given that, if no action were taken, a majority of Board Directors would have had tenure in excess of nine years. The Board recognises the benefits of diversity and regular refreshment but does not believe tenure alone should determine whether a Director remains independent. A search for a new Director was undertaken in 2021 and following a thorough search and selection process Ms Liz Airey and Mrs Lucy Taylor-Smith were each appointed on 10 December 2021. The Board, discharging the duties of a Nomination Committee will continue to keep the composition of the Board under regular review. If it is determined that a new appointment to the Board is required, it will agree the selection criteria, which will take into account the need to maintain a suitable balance of skills, knowledge, independence and diversity, including that of gender. All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions in respect of the 2021 evaluation process are given in the Company’s Annual Report for the year ended 30 September 2021). All Directors stand for re-election by shareholders annually. Shareholders may attend the AGM and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chairman using the details provided in the Company’s Annual Report for the year ended 30 September 2021 if they wish to raise any issues. | The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in 2021. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2021 AGM are given on the Company’s website at www.blackrock.com/uk/ brfi. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. |
The Board is committed to maintaining open channels of communication and to engage with shareholders. Notwithstanding the challenges posed by the COVID-19 pandemic, in normal operating circumstances the Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders therefore have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Annual Report and Half-yearly Financial Report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at www.blackrock.com/uk/brfi. The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders in respect of the investment mandate and objective. Unlike trading companies, one-to-one shareholder meetings usually take the form of a meeting with the Investment Manager as opposed to members of the Board. As well as attending regular investor meetings the Investment Manager holds regular discussions with wealth management desks and offices to build on the case for, and understanding of, long-term investment opportunities in frontier markets. The Manager also coordinates public relations activity, including meetings between the Investment Manager and relevant industry publications to set out their vision for the portfolio strategy and outlook for the region. The Manager releases monthly portfolio updates to the market to ensure that investors are kept up to date in respect of performance and other portfolio developments and maintains a website on behalf of the Company that contains relevant information in respect of the Company’s investment mandate and objective. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given in the Company’s Annual Report for the year ended 30 September 2021. |
The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. Investors were also impressed with the wide pool of resource available through BlackRock’s Global Emerging Markets team, and the rigorous ‘bottom-up/top-down’ investment approach. Investors were concerned over the volatility of the frontier markets region and market liquidity. |
SUSTAINABILITY AND OUR ESG POLICIES
The Board’s approach
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. The securities within the Company’s investment remit may involve significant additional risk due to the political volatility and ESG concerns facing many of the countries in the Company’s investment universe. These ethical and sustainability issues are a key focus of the Board, and your Board is committed to a diligent oversight of the activities of the Manager in these areas. The Board believes effective engagement with management is, in most cases, the most effective way of driving meaningful positive change in the behaviour of investee company management. This is particularly true for the Company’s Manager given the extent of BlackRock’s shareholder engagement and BlackRock’s capacity to vote against management when they fall short of its expectations. As well as the influence afforded by its sheer scale, the Board believes that BlackRock is well placed as Manager to fulfil these requirements due to the integration of ESG into its investment processes, the emphasis it places on sustainability, its collaborative approach in its investment stewardship activities and its position in the industry as one of the largest suppliers of sustainable investment products in the global market. More information on BlackRock’s approach to sustainability is set out in the Company’s Annual Report for the year ended 30 September 2021.
| The importance of considering ESG when investing in the Frontiers Sector | ||
| Environmental | Social | Corporate Governance |
| A key component of our focus on environmental risks and opportunities is the impact of climate change on companies’ business models and strategies over time. Our approach on climate is to focus our efforts on sectors and companies where climate change poses the greatest material risk to our clients’ investments. | BlackRock believes it is vital that companies maintain their social licence to operate. By this, BlackRock believes that companies maintain broad acceptance from their employees, stakeholders, local communities and the national government. The portfolio management team’s site visits to companies’ assets provide them with valuable insight into these issues which often cannot be properly understood from company reports. | In conjunction with the BlackRock Investment Stewardship team, the portfolio management team actively engages with companies on a wide range of governance issues including board independence, executive compensation, shareholder protection and timely disclosure. |
Future prospects
The Board’s main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in both the Chairman’s Statement and in the Investment Manager’s Report above.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider environmental, social and governance factors and human rights issues when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out above and the Manager’s approach is described below.
Modern slavery
As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Directors, gender representation and employees
The Directors of the Company on 30 September 2021 are set out in the Directors’ biographies section in the Company’s Annual Report for the year ended 30 September 2021. As at 10 December 2021, the Board will consist of three men and three women constituting 50% female Board representation. The Company does not have any employees.
BY ORDER OF THE BOARD
KEVIN MAYGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
COMPANY SECRETARY
1 December 2021
RESPONSIBLE OWNERSHIP: BLACKROCK’S APPROACH TO SUSTAINABLE INVESTING
RESPONSIBLE OWNERSHIP – BLACKROCK’S APPROACH
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. From BlackRock’s perspective, business-relevant sustainability issues can contribute to a company’s long-term financial performance, and thus further incorporating these considerations into the investment research, portfolio construction, and stewardship process can enhance long-term risk adjusted returns. By expanding access to data, insights and learning on material ESG risks and opportunities in investment processes across BlackRock’s diverse platform, BlackRock believes that the investment process is greatly enhanced. The Company’s Investment Manager works closely with BlackRock’s Investment Stewardship team to assess the governance quality of companies and sustainable business practices, and investigate any potential issues, risks or opportunities. The Investment Manager uses ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio.
BLACKROCK’S APPROACH TO SUSTAINABLE INVESTING
Considerations about sustainability have been at the centre of BlackRock’s investment approach for many years and the firm offers more than 200 sustainable products and solutions. BlackRock believes that climate change is now a defining factor in companies’ long term prospects, and that it will have a significant and lasting impact on economic growth and prosperity. BlackRock believes that climate risk now equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade.
A detailed summary of the actions taken by BlackRock in 2020 on making sustainability the new standard for investing can be found at: www.blackrock.com/corporate/ sustainability. BlackRock also announced in January 2021 that it was committed to supporting the goal of ‘net zero’ (building an economy that emits no more carbon dioxide than it removes from the atmosphere) by 2050 (the scientifically-established threshold necessary to keep global warming well below 2ºC). BlackRock is taking a number of steps to help investors prepare their portfolios for a net zero world, including capturing opportunities created by the net zero transition.
INVESTMENT STEWARDSHIP
BlackRock also places a strong emphasis on sustainability in its stewardship activities and has engaged with companies on sustainability-related questions for a number of years. BlackRock has made an explicit ask that companies align their disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Sustainability Accounting Standards Board (SASB) standards. This includes each company’s plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock joined Climate Action 100+, a natural progression in our work to advance sustainable business practices aligned with TCFD. BlackRock has aligned its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues.
As the past year has only intensified BlackRock’s conviction that sustainability risk – and climate risk in particular – is investment risk, our stewardship team is continuing to increase its focus on how sustainability-related factors are impacting a company’s ability to generate shareholder returns. As detailed in the 2021 BIS Stewardship Expectations special report, for this year we explicitly ask that all companies disclose a business plan aligned with the goal of limiting global warming to well below 2ºC, consistent with achieving net zero global greenhouse gas (GHG) emissions by 2050. These disclosures are essential to helping investors assess a company’s ability to transition its business to a low-carbon world and to capture value-creation opportunities created by the climate transition.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. This year, BlackRock voted against or withheld votes from 6,560 directors globally at 3,400 different companies driven by concerns regarding director independence, executive compensation, insufficient progress on board diversity, and overcommitted directors reflecting our intensified focus on sustainability risks. In the 2020-21 proxy year, BlackRock voted against 255 directors and against 319 companies for climate-related concerns that could negatively affect long-term shareholder value. More details about BlackRock’s investment stewardship process can be found on BlackRock’s website at www.blackrock.com/us/individual/about-us/investment-stewardship.
In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework.
BlackRock recognise that reporting to these standards requires significant time, analysis, and effort. BlackRock’s own SASB-aligned disclosure is available on its website at www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/blackrock-2020-sasb-disclosure.pdf and BlackRock is committed to publishing a detailed TCFD-aligned report in 2022 on its 2021 activities.
The above forms part of the Strategic Report.
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report in the Company’s Annual Report for the year ended 30 September 2021.
The investment management fee due for the year ended 30 September 2021 amounted to US$3,884,000 (2020: US$3,738,000). In addition, a performance fee of US$3,815,000 (2020: US$nil) is payable for the year. At the year end, US$1,867,000 was outstanding in respect of management fees (2020: US$1,740,000) and US$3,815,000 (2020: US$nil) was outstanding in respect of performance fees.
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 30 September 2021 amounted to US$101,000 excluding VAT (2020: US$116,000) of which marketing fees of US$64,000 excluding VAT (2020: US$71,000) were outstanding as at year end.
The Company has an investment in the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund of US$96,269,000 (2020: US$64,465,000) at the year end, which is a fund managed by a company within the BlackRock Group.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report in the Company’s Annual Report for the year ended 30 September 2021. At 30 September 2021, US$15,000 (£11,000) (2020: US$17,000 (£13,000)) was outstanding in respect of Directors’ fees.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable United Kingdom law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under international accounting standards in conformity with the requirements of the Companies Act 2006 (IASs). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
· present fairly the financial position, financial performance and cash flows of the Company;
· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· make judgements and estimates that are reasonable and prudent;
· state whether the financial statements have been prepared in accordance with IASs, subject to any material departures disclosed and explained in the financial statements;
· provide additional disclosures when compliance with the specific requirements in IASs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s financial position and financial performance; and
· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report, Corporate Governance Statement and the Report of the Audit and Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Investment Manager and the AIFM for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, who were appointed as at the date of the Annual Report, confirms to the best of their knowledge that:
· the financial statements, which have been prepared in accordance with IASs, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and
· the Strategic Report contained in the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit and Management Engagement Committee’s report in the Company’s Annual Report for the year ended 30 September 2021. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 30 September 2021, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
AUDLEY TWISTON-DAVIES
CHAIRMAN
1 December 2021
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2021
| Revenue | Capital | Total | |||||
|
Notes |
2021 US$’000 |
2020 US$’000 |
2021 US$’000 |
2020 US$’000 |
2021 US$’000 |
2020 US$’000 | |
| Income from investments held at fair value through profit or loss | 3 | 10,973 | 11,523 | – | – | 10,973 | 11,523 |
| Net income from contracts for difference | 3 | 7,966 | 4,057 | – | – | 7,966 | 4,057 |
| Other income | 3 | – | 51 | – | – | – | 51 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total income | 18,939 | 15,631 | – | – | 18,939 | 15,631 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Net gain/(loss) on investments held at fair value through profit or loss | – | – | 88,376 | (81,399) | 88,376 | (81,399) | |
| Net loss on foreign exchange | – | – | (1,399) | (101) | (1,399) | (101) | |
| Net profit/(loss) from derivatives | – | – | 53,428 | (6,163) | 53,428 | (6,163) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total | 18,939 | 15,631 | 140,405 | (87,663) | 159,344 | (72,032) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Expenses | |||||||
| Investment management and performance fees | 4 | (777) | (748) | (6,922) | (2,990) | (7,699) | (3,738) |
| Other operating expenses | 5 | (891) | (865) | (60) | (77) | (951) | (942) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total operating expenses | (1,668) | (1,613) | (6,982) | (3,067) | (8,650) | (4,680) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 17,271 | 14,018 | 133,423 | (90,730) | 150,694 | (76,712) | |
| Finance costs | (2) | (4) | (8) | (15) | (10) | (19) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Net profit/(loss) on ordinary activities before taxation | 17,269 | 14,014 | 133,415 | (90,745) | 150,684 | (76,731) | |
| Taxation | (2,365) | (1,814) | 1,153 | 602 | (1,212) | (1,212) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Profit/(loss) for the year | 14,904 | 12,200 | 134,568 | (90,143) | 149,472 | (77,943) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Earnings/(loss) per ordinary share (cents) | 7 | 7.09 | 5.05 | 64.06 | (37.32) | 71.15 | (32.27) |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
The total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The Company does not have any other comprehensive income/(loss). The net profit/(loss) for the year disclosed above represents the Company’s total comprehensive income/(loss).
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2021
|
Notes |
Called up share capital US$’000 |
Share premium account US$’000 |
Capital redemption reserve US$’000 |
Special reserve US$’000 |
Capital reserves US$’000 |
Revenue reserve US$’000 |
Total US$’000 | |
| For the year ended 30 September 2021 | ||||||||
| At 30 September 2020 | 2,418 | 165,984 | 5,798 | 230,040 | (108,517) | 10,261 | 305,984 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 134,568 | 14,904 | 149,472 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Cancellation of share premium account1 | 9 | – | (165,984) | – | 165,984 | – | – | – |
| Tender offer | 8 | – | – | – | (86,434) | – | – | (86,434) |
| Tender offer costs | – | – | – | (786) | – | – | (786) | |
| Dividends paid2 | 6 | – | – | – | – | – | (15,458) | (15,458) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 30 September 2021 | 2,418 | – | 5,798 | 308,804 | 26,051 | 9,707 | 352,778 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ||
| For the year ended 30 September 2020 | ||||||||
| At 30 September 2019 | 2,407 | 164,007 | 5,798 | 230,799 | (18,374) | 16,183 | 400,820 | |
| Total comprehensive income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (90,143) | 12,200 | (77,943) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares issued | 11 | 1,987 | – | – | – | – | 1,998 | |
| Ordinary shares purchased into treasury | – | – | – | (754) | – | – | (754) | |
| Share issue costs | – | (10) | – | – | – | – | (10) | |
| Share purchase costs | – | – | – | (5) | – | – | (5) | |
| Dividends paid3 | 6 | – | – | – | – | – | (18,122) | (18,122) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 30 September 2020 | 2,418 | 165,984 | 5,798 | 230,040 | (108,517) | 10,261 | 305,984 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
1 Share premium account was cancelled pursuant to Court approval on 11 March 2021 and US$166.0m was transferred to the special reserve. Please refer to note 9 below for further details.
2 Final dividend of 4.25 cents per share for the year ended 30 September 2020, declared on 11 December 2020 and paid on 12 February 2021 and interim dividend paid in respect of the year ended 30 September 2021 of 2.75 cents per share, declared on 1 June 2021 and paid on 25 June 2021.
3 Final dividend of 4.75 cents per share for the year ended 30 September 2019, declared on 6 December 2019 and paid on 7 February 2020 and interim dividend paid in respect of the year ended 30 September 2020 of 2.75 cents per share, declared on 28 May 2020 and paid on 26 June 2020.
For information on the Company’s distributable reserves please refer to note 9 below.
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2021
|
Notes |
2021 US$’000 |
2020 US$’000 | |
| Non current assets | |||
| Investments held at fair value through profit or loss | 354,075 | 305,097 | |
| Current assets | |||
| Current tax asset | 418 | 77 | |
| Other receivables | 3,878 | 4,000 | |
| Derivative financial assets held at fair value through profit or loss – contracts for difference | 7,725 | 1,664 | |
| Derivative financial assets held at fair value through profit or loss – forward currency contracts | 346 | – | |
| Cash and cash equivalents | 5,717 | 1,678 | |
| Cash collateral pledged with brokers | 330 | 488 | |
| --------------- | --------------- | ||
| Total current assets | 18,414 | 7,907 | |
| --------------- | --------------- | ||
| Total assets | 372,489 | 313,004 | |
| ========= | ========= | ||
| Current liabilities | |||
| Bank overdraft | – | (209) | |
| Current tax liability | – | (13) | |
| Other payables | (11,597) | (2,365) | |
| Derivative financial liabilities held at fair value through profit or loss – contracts for difference | (1,908) | (1,674) | |
| Liability for cash collateral received | (6,187) | (2,740) | |
| --------------- | --------------- | ||
| Total current liabilities | (19,692) | (7,001) | |
| --------------- | --------------- | ||
| Total assets less current liabilities | 352,797 | 306,003 | |
| ========= | ========= | ||
| Non current liabilities | |||
| Management shares of £1.00 each (one quarter paid) | (19) | (19) | |
| --------------- | --------------- | ||
| Net assets | 352,778 | 305,984 | |
| ========= | ========= | ||
| Equity attributable to equity holders | |||
| Called up share capital | 8 | 2,418 | 2,418 |
| Share premium account | 9 | – | 165,984 |
| Capital redemption reserve | 9 | 5,798 | 5,798 |
| Special reserve | 9 | 308,804 | 230,040 |
| Capital reserves | 9 | 26,051 | (108,517) |
| Revenue reserve | 9 | 9,707 | 10,261 |
| --------------- | --------------- | ||
| Total equity | 352,778 | 305,984 | |
| ========= | ========= | ||
| Net asset value per ordinary share (cents) | 7 | 186.33 | 126.85 |
| ========= | ========= |
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2021
|
2021 US$’000 |
2020 US$’000 | |
| Operating activities | ||
| Net profit/(loss) on ordinary activities before taxation | 150,684 | (76,731) |
| Add back finance costs | 10 | 19 |
| Net (profit)/loss on investments and contracts for difference held at fair value through profit or loss (including transaction costs) | (142,733) | 86,049 |
| Net loss on foreign exchange | 1,399 | 101 |
| Sales of investments held at fair value through profit or loss | 253,543 | 190,673 |
| Purchases of investments held at fair value through profit or loss | (182,331) | (190,331) |
| Sales of Cash Fund1 | 176,807 | 185,584 |
| Purchases of Cash Fund1 | (208,621) | (178,840) |
| Amounts paid for losses on closure of derivatives | (22,372) | (56,588) |
| Amounts received on gains on closure of derivatives | 70,902 | 54,305 |
| Increase in other receivables | (661) | (480) |
| Increase/(decrease) in other payables | 3,780 | (941) |
| Decrease in amounts due from brokers | 437 | 4,163 |
| Increase/(decrease) in amounts due to brokers | 5,452 | (1,905) |
| Net cash collateral received/(pledged) | 3,605 | (1,418) |
| Taxation paid | (1,566) | (1,198) |
| --------------- | --------------- | |
| Net cash inflow from operating activities | 108,335 | 12,462 |
| ========= | ========= | |
| Financing activities | ||
| Interest paid | (10) | (19) |
| Cash proceeds from ordinary share issues | – | 1,998 |
| Ordinary shares purchased into treasury | – | (754) |
| Ordinary share issue costs paid | – | (10) |
| Ordinary share purchase costs paid | – | (5) |
| Tender offer | (86,434) | – |
| Tender costs paid | (786) | – |
| Dividends paid | (15,458) | (18,122) |
| --------------- | --------------- | |
| Net cash outflow from financing activities | (102,688) | (16,912) |
| ========= | ========= | |
| Increase/(decrease) in cash and cash equivalents | 5,647 | (4,450) |
| Effect of foreign exchange rate changes | (1,399) | (101) |
| --------------- | --------------- | |
| Change in cash and cash equivalents | 4,248 | (4,551) |
| Cash and cash equivalents at the start of the year | 1,469 | 6,020 |
| --------------- | --------------- | |
| Cash and cash equivalents at the end of the year | 5,717 | 1,469 |
| ========= | ========= | |
| Comprised of: | ||
| Cash at bank | 5,717 | 1,678 |
| Bank overdraft | – | (209) |
| --------------- | --------------- | |
| 5,717 | 1,469 | |
| ========= | ========= |
1 Cash Fund represents funds held on deposit with BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 SEPTEMBER 2021
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of Section 1158 of the Corporation Tax Act 2010. The Company was incorporated on 15 October 2010, and this is the eleventh Annual Report.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company have been applied consistently, other than where new policies have been adopted and are set out below.
(a) Basis of preparation
The financial statements have been prepared under the historic cost convention modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 (IASs). All of the Company’s operations are of a continuing nature.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts issued by the Association of Investment Companies (AIC) in October 2019, is compatible with international accounting standards in conformity with the requirements of the Companies Act 2006, the financial statements have been prepared in accordance with the guidance set out in the SORP.
Substantially, all of the assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for the period to 30 September 2023, being a period of at least one year from the date of approval of the financial statements and therefore consider the going concern assumption to be appropriate. The Directors have considered any potential impact of the COVID-19 pandemic, its potential longer-term effects on the global economy and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience on the going concern of the Company. The Directors have reviewed the income and expense projections and the liquidity of the investment portfolio in making their assessment.
The Company’s financial statements are presented in US Dollars, which is the functional currency of the Company and the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand dollars (US$’000) except where otherwise indicated.
Adoption of new and amended standards and interpretations:
Amendments to IFRS 3 – Definition of a business (effective 1 January 2020). This amendment revised the definition of a business. According to feedback received by the International Accounting Standards Board, application of the current guidance is commonly thought to be too complex and it results in too many transactions qualifying as business combinations. The adoption of this standard has had no impact on the financial statements of the Company.
Amendments to IAS 1 and IAS 8 – Definition of material (effective 1 January 2020). The amendments to IAS 1, ‘Presentation of Financial Statements’, and IAS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’, and consequential amendments to other IASs require companies to:
(i) use a consistent definition of materiality throughout IASs and the Conceptual Framework for Financial Reporting;
(ii) clarify the explanation of the definition of material; and
(iii) incorporate some of the guidance of IAS 1 about immaterial information.
The adoption of this standard has had no impact on the financial statements of the Company.
Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform (effective 1 January 2020). These amendments provide certain reliefs in connection with the interest rate benchmark reform (excluding phase 2 reforms). These reliefs relate to hedge accounting and have the effect that the Inter Bank Offer Rate (IBOR) reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving IBOR based contracts, the reliefs will affect companies in all industries.
The adoption of this standard has had no impact on the financial statements of the Company.
Relevant IAS standards that have yet to be adopted:
IFRS 17 – Insurance contracts (effective 1 January 2023). This standard replaces IFRS 4, which currently permits a wide variety of practices in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features. The standard has not been endorsed by the UK. This standard is unlikely to have any impact on the Company as it has no insurance contracts.
(b) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and a capital nature has been presented alongside the Statement of Comprehensive Income.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not expected to be received. Special dividends, if any, are treated as a capital or a revenue receipt depending on the facts or circumstances of each dividend. The return on a debt security is recognised on a time apportionment basis so as to reflect the effective yield on the debt security.
Deposit interest receivable is accounted for on an accruals basis. Interest income from the Cash Fund is accounted for on an accruals basis.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend is recognised as revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.
(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue column of the Statement of Comprehensive Income, except as follows:
· expenses which are incidental to the acquisition or sale of an investment are charged to the capital column of the Statement of Comprehensive Income. Details of transaction costs on the purchases and sales of investments are disclosed within note 10 to the financial statements in the Company’s Annual Report for the year ended 30 September 2021;
· expenses are treated as capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated;
· the investment management fee and finance costs have been allocated 80% to the capital column and 20% to the revenue column of the Statement of Comprehensive Income in line with the Board’s expected long term split of returns, in the form of capital gains and income, respectively, from the investment portfolio; and
· performance fees are allocated 100% to the capital column of the Statement of Comprehensive Income as fees are generated in connection with enhancing the value of the investment portfolio.
(f) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.
Where expenses are allocated between capital and revenue, any tax relief in respect of the expenses is allocated between capital and revenue returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to pay less taxation in the future have occurred at the financial reporting date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise.
(g) Investments held at fair value through profit or loss
In accordance with IFRS 9, the Company classifies its investments at initial recognition as held at fair value through profit or loss and are managed and evaluated on a fair value basis in accordance with its investment strategy and business model.
All investments are measured initially and subsequently at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales of investments are recognised at the trade date of the disposal.
The fair value of the financial investments is based on their quoted bid price at the financial reporting date, without deduction for the estimated selling costs. This policy applies to all current and non current asset investments held by the Company. The fair value of the P-Notes are, when held, based on the quoted bid price of the underlying equity to which they relate.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as “Net gains/losses on investments held at fair value through profit or loss”. Also included within the heading are transaction costs in relation to the purchase or sale of investments.
For all financial instruments not traded in an active market, the fair value is determined by using various valuation techniques. Valuation techniques include market approach (i.e., using recent arm’s length market transactions adjusted as necessary and reference to the current market value of another instrument that is substantially the same) and the income approach (e.g., discounted cash flow analysis and option pricing models making use of available and supportable market data where possible).
(h) Derivatives
The Company can hold long and short positions in contracts for difference (CFDs) which are held at fair value based on the bid prices of the underlying securities in respect of long positions, and the offer prices of the underlying securities in respect of short positions.
Profits and losses on derivative transactions are recognised in the Statement of Comprehensive Income. They are shown in the capital column of the Statement of Comprehensive Income if they are of a capital nature and are shown in the revenue column of the Statement of Comprehensive Income if they are of a revenue nature. To the extent that any profits or losses are of a mixed revenue and capital nature, they are apportioned between revenue and capital accordingly.
(i) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short-term in nature and are accordingly stated on an amortised cost basis.
(j) Dividends payable
Under IASs, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the financial reporting date. Interim dividends should not be accrued in the financial statements unless they have been paid.
Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity.
(k) Foreign currency translation
Transactions involving foreign currencies are converted at the rate ruling at the date of the transaction. Foreign currency monetary assets and liabilities and non-monetary assets held at fair value are translated into US Dollars at the rate ruling on the financial reporting date. Foreign exchange differences arising on translation are recognised in the Statement of Comprehensive Income as a revenue or capital item depending on the income or expense to which they relate. For investment transactions and investments held at the year end, denominated in a foreign currency, the resulting gains or losses are included in the profit/(loss) on investments held at fair value through profit or loss in the Statement of Comprehensive Income.
(l) Cash and cash equivalents
Cash comprises cash in hand, bank overdrafts and on demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
The Company’s investment in the Cash Fund is managed as part of the Company’s investment policy and, accordingly, this investment along with purchases and sales of this investment has been classified in the Statement of Financial Position as an investment and not as a cash equivalent as defined under IAS 7.
(m) Bank borrowings
Bank overdrafts and loans are recorded as the proceeds received. Finance charges, including any premium payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income.
(n) Share repurchases/tendered and share reissues
Shares repurchased and subsequently cancelled – share capital is reduced by the nominal value of the shares repurchased, and the capital redemption reserve is correspondingly increased in accordance with Section 733 of the Companies Act 2006. The full cost of the repurchase is charged to the special reserve.
Shares repurchased/tendered and held in treasury – the full cost of the repurchase is charged to the special reserve.
Where treasury shares are subsequently re-issued:
· amounts received to the extent of the repurchase/tender price are credited to the special reserve; and
· any surplus received in excess of the repurchase/tender price is taken to the share premium account.
(o) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Directors do not believe that any accounting judgements or estimates have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
3. INCOME
|
2021 US$’000 |
2020 US$’000 | |
| Investment income: | ||
| UK dividends | 166 | 59 |
| Overseas dividends | 9,344 | 9,541 |
| Overseas special dividends | 1,340 | 1,253 |
| Interest from Cash Fund | 123 | 809 |
| Less provision for doubtful debts | – | (139) |
| --------------- | --------------- | |
| Total investment income | 10,973 | 11,523 |
| ========= | ========= | |
| Net income from contracts for difference | 7,966 | 4,057 |
| Deposit interest | – | 51 |
| --------------- | --------------- | |
| Total income | 18,939 | 15,631 |
| ========= | ========= |
Dividends and interest received in cash during the year amounted to US$11,549,000 and US$129,000 (2020: US$12,566,000 and US$846,000).
No special dividends have been recognised in capital (2020: US$nil).
4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES
| 2021 | 2020 | |||||
|
Revenue US$’000 |
Capital US$’000 |
Total US$’000 |
Revenue US$’000 |
Capital US$’000 |
Total US$’000 | |
| Investment management fee | 777 | 3,107 | 3,884 | 748 | 2,990 | 3,738 |
| Performance fee | – | 3,815 | 3,815 | – | – | – |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| Total | 777 | 6,922 | 7,699 | 748 | 2,990 | 3,738 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
An investment management fee equivalent to 1.10% per annum of the Company’s gross assets (defined as the aggregate net assets of the long equity and CFD portfolios of the Company) is payable to the Manager. In addition, the Manager is entitled to receive a performance fee at a rate of 10% of any increase in the NAV at the end of a performance period over and above what would have been achieved had the NAV since launch increased in line with the Benchmark Index, which, since 1 April 2018, is a composite of the MSCI Emerging Markets Index ex Selected Countries + MSCI Frontier Markets Index + MSCI Saudi Arabia Index.
For the purposes of the calculation of the performance fee, the performance of the Net Asset Value total return was measured against the performance of the Benchmark Index on a blended basis.
For the year ended 30 September 2021, the Company’s NAV outperformed the Benchmark Index by 25.7% (2020: underperformed the Benchmark Index by 20.0%) on a US Dollar basis and as a result a performance fee of US$3,815,000 (2020: US$nil) has been accrued at 30 September 2021. The performance fee payable in any year is capped at an amount equal to 2.5% or 1.0% of the gross assets if there is any increase or decrease in the NAV per share at the end of the relevant performance period, respectively. Any capped excess outperformance for a period may be carried forward to the next two performance periods, subject to the then applicable annual cap. The performance fee is also subject to a high watermark such that any performance fee is only payable to the extent that the cumulative relative outperformance of the NAV is greater than what would have been achieved had the NAV increased in line with the Benchmark Index since the last date in relation to which a performance fee had been paid.
There is no additional fee for company secretarial and administration services.
5. OTHER OPERATING EXPENSES
|
2021 US$’000 |
2020 US$’000 | |
| Allocated to revenue: | ||
| Custody fee | 212 | 274 |
| Auditor’s remuneration: | ||
| – audit services1 | 72 | 50 |
| – other assurance services2 | 9 | 12 |
| Registrar’s fee | 45 | 39 |
| Directors’ emoluments3 | 183 | 212 |
| Broker fees | 40 | 39 |
| Depositary fees4 | 32 | 29 |
| Marketing fees | 101 | 116 |
| AIC fees | 19 | 28 |
| FCA fees | 17 | 19 |
| Printing and postage fees | 57 | 47 |
| Employer NI contributions | 17 | 22 |
| Stock exchange listings | 12 | 14 |
| Legal and professional fees | 18 | 13 |
| Write back of prior year expenses5 | (4) | (99) |
| Other administrative costs | 61 | 50 |
| --------------- | --------------- | |
| 891 | 865 | |
| ========= | ========= | |
| Allocated to capital: | ||
| Custody transaction charges | 60 | 77 |
| --------------- | --------------- | |
| 951 | 942 | |
| ========= | ========= | |
| The Company’s ongoing charges6, calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding performance fees, finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items, were: | 1.36% | 1.36% |
| The Company’s ongoing charges6, calculated as a percentage of average daily net assets and using the management fee and all other operating expenses and including performance fees but excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items, were: | 2.44% | 1.36% |
| ========= | ========= |
1 Fees for audit services excludes £10,000 (US$14,000) (2020: £nil) (excluding VAT) paid in respect of the work on the Company’s tender offer. These fees are included within tender offer costs in the Company’s Statement of Changes in Equity (2020: £nil (US$nil)).
2 Fees for other assurance services relate to £6,500 (US$9,000) (2020: £9,500 (US$12,000)) relating to the review of the interim financial statements.
3 Further information on Directors’ emoluments can be found in the Directors’ Remuneration Report in the Company’s Annual Report for the year ended 30 September 2021. The Company has no employees.
4 All expenses other than depositary fees are paid in British Pound Sterling and are therefore subject to exchange rate fluctuations.
5 Relates to current year accrual for AIC fees being written back and prior year accrual for Directors’ expenses written back during the year.
6 Alternative Performance Measures, see Glossary in the Company’s Annual Report for the year ended 30 September 2021.
For the year ended 30 September 2021, expenses of US$59,000 (2020: US$77,000) were charged to the capital column of the Statement of Comprehensive Income. These relate to transaction costs charged by the custodian on sale and purchase trades.
No fees were payable in 2021 or 2020 in relation to investing in new markets.
6. DIVIDENDS
Dividends paid on equity shares |
Record date |
Payment date |
2021 US$’000 |
2020 US$’000 |
| 2020 final of 4.25 cents (2019: 4.75 cents) per ordinary share | 4 January 2021 | 12 February 2021 | 10,251 | 11,472 |
| 2021 interim of 2.75 cents (2020: 2.75 cents) per ordinary share | 11 June 2021 | 25 June 2021 | 5,207 | 6,650 |
| --------------- | --------------- | |||
| 15,458 | 18,122 | |||
| ========= | ========= |
The total dividends payable in respect of the year ended 30 September 2021 which form the basis of Section 1158 of the Corporation Tax Act 2010 and Section 833 of the Companies Act 2006, and the amounts proposed, meet the relevant requirements as set out in this legislation.
Dividends paid, proposed or declared on equity shares |
2021 US$’000 |
2020 US$’000 |
| Interim dividend of 2.75 cents per ordinary share (2020: 2.75 cents) | 5,207 | 6,650 |
| Final proposed dividend of 4.25 cents per ordinary share (2020: 4.25 cents)1 | 8,046 | 10,251 |
| --------------- | --------------- | |
| 13,253 | 16,901 | |
| ========= | ========= |
1 Based on 189,325,748 ordinary shares in issue on 1 December 2021.
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Total revenue, capital return/(loss) and net asset value per ordinary share are shown below and have been calculated using the following:
|
Year ended 30 September 2021 |
Year ended 30 September 2020 | |
| Net revenue profit attributable to ordinary shareholders (US$’000) | 14,904 | 12,200 |
| Net capital profit/(loss) attributable to ordinary shareholders (US$’000) | 134,568 | (90,143) |
| --------------- | --------------- | |
| Total profit/(loss) attributable to ordinary shareholders (US$’000) | 149,472 | (77,943) |
| ========= | ========= | |
| Equity shareholders’ funds (US$’000) | 352,778 | 305,984 |
| ========= | ========= | |
| The weighted average number of ordinary shares in issue during the year, on which the return per ordinary share was calculated was: | 210,079,656 | 241,513,563 |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated was: | 189,325,748 | 241,210,518 |
| Return per ordinary share | ||
| Revenue earnings per share (cents) – basic and diluted | 7.09 | 5.05 |
| Capital earnings/(loss) per share (cents) – basic and diluted | 64.06 | (37.32) |
| --------------- | --------------- | |
| Total earnings/(loss) per share (cents) – basic and diluted | 71.15 | (32.27) |
| ========= | ========= |
|
As at 30 September 2021 |
As at 30 September 2020 | |
| Net asset value per ordinary share (cents) | 186.33 | 126.85 |
| Ordinary share price (cents)1 | 165.18 | 120.62 |
| Net asset value per ordinary share (pence)2 | 138.19 | 98.12 |
| Ordinary share price (pence) | 122.50 | 93.30 |
| ========= | ========= |
1 The Company’s share price is quoted in British Pound Sterling and the above represents the US Dollar equivalent based on an exchange rate of $1.3484 to £1 as at 30 September 2021 (30 September 2020: $1.2928 to £1).
2 Based on an exchange rate of US$1.3484 to £1 at 30 September 2021 and US$1.2928 to £1 at 30 September 2020.
8. CALLED UP SHARE CAPITAL
|
Ordinary shares in issue number |
Treasury shares number |
Total shares number |
Nominal value US$’000 | |
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 1 cent each: | ||||
| At 30 September 2020 | 241,210,518 | 612,283 | 241,822,801 | 2,418 |
| Shares bought back into treasury pursuant to tender offer1 | (51,884,770) | 51,884,770 | – | – |
| --------------- | --------------- | --------------- | --------------- | |
| At 30 September 2021 | 189,325,748 | 52,497,053 | 241,822,801 | 2,418 |
| ========= | ========= | ========= | ========= |
1 A total of 51,884,770 ordinary shares of 1 cent each, representing 21.5 per cent of the ordinary shares in issue (excluding ordinary shares held in treasury), were validly tendered under the Tender Offer. After the close of business on 23 February 2021, the Company’s assets and liabilities were allocated into a continuing pool and a tender pool as outlined in the Circular. Following realisation of all of the assets contained in the tender pool and settlement of all liabilities to be borne by the tender pool, the Company completed the repurchase of all ordinary shares tendered on 31 March 2021 in accordance with the Tender Offer. All of the 51,884,770 ordinary shares tendered have been transferred into and are being held in treasury until further notice. Further information in relation to the Tender Offer can be found in the Chairman’s Statement.
The Company also has in issue 50,000 management shares which carry the right to a fixed cumulative preferred dividend. Additional information is given in note 14 to the financial statements in the Company’s Annual Report for the year ended 30 September 2021.
During the year the Company did not issue any ordinary shares. However, there was a tender offer during the year and 51,884,770 ordinary shares were transferred into treasury for a total consideration of US$87,220,000. The Company did not buy back any ordinary shares subsequent to the tender offer. In the prior period, the Company issued 1,150,000 ordinary shares for a total gross consideration of US$1,998,000 and bought back 612,283 shares for a total gross consideration of US$759,000.
9. RESERVES
| Distributable reserves | ||||||
|
Share premium account US$’000 |
Capital redemption reserve US$’000 |
Special reserve US$’000 |
Capital reserve arising on investments sold US$’000 |
Capital reserve arising on revaluation of investments held US$’000 | Revenue reserve US$’000 | |
| At 30 September 2020 | 165,984 | 5,798 | 230,040 | (56,612) | (51,905) | 10,261 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net profit for the year | – | – | – | 69,571 | 64,997 | – |
| Revenue return for the year | – | – | – | – | – | 14,904 |
| Transactions with owners, recorded directly to equity: | ||||||
| Cancellation of share premium account | (165,984) | – | 165,984 | – | – | – |
| Tender offer | – | – | (86,434) | – | – | – |
| Tender offer costs | – | – | (786) | – | – | – |
| Dividends paid | – | – | – | – | – | (15,458) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| At 30 September 2021 | – | 5,798 | 308,804 | 12,959 | 13,092 | 9,707 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
| Distributable reserves | ||||||
|
Share premium account US$’000 |
Capital redemption reserve US$’000 |
Special reserve US$’000 |
Capital reserve arising on investments sold US$’000 |
Capital reserve arising on revaluation of investments held US$’000 |
Revenue reserve US$’000 | |
| At 30 September 2019 | 164,007 | 5,798 | 230,799 | 17,434 | (35,808) | 16,183 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net loss for the year | – | – | – | (74,046) | (16,097) | – |
| Revenue return for the year | – | – | – | – | – | 12,200 |
| Transactions with owners, recorded directly to equity: | ||||||
| Ordinary shares issued | 1,987 | – | – | – | – | – |
| Ordinary shares purchased into treasury | – | – | (754) | – | – | – |
| Share issue costs | (10) | – | – | – | – | – |
| Share purchase costs | – | – | (5) | – | – | – |
| Dividends paid | – | – | – | – | – | (18,122) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| At 30 September 2020 | 165,984 | 5,798 | 230,040 | (56,612) | (51,905) | 10,261 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. In accordance with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the Companies Act 2006, the special reserve and capital reserve may be used as distributable profits for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments as dividends. In accordance with the Company’s Articles of Association, special reserves, capital reserves and revenue reserves may be distributed by way of dividend. The capital reserve arising on the revaluation of investments of £13,092,000 (2020: loss of US$51,905,000) is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The investments are subject to financial risks, as such capital reserves (arising on investments sold) and revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
The Company’s share premium account was cancelled pursuant to shareholders’ approval of a special resolution at the Company’s Annual General Meeting on 2 February 2021 and Court approval on 11 March 2021. The share premium account which totalled US$165,984,000 (2020: US$ nil) was transferred to a special reserve. This action was taken, in part, to ensure that the Company had sufficient distributable reserves in the event that the distributable reserves proved insufficient to effect the tender.
10. VALUATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value (investments and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2(g) to the financial statements above.
Categorisation within the hierarchy has been determined on the basis of the lowest level of input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less than active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
As at the year end the CFDs were valued using the underlying equity bid price and the inputs to the valuation were the exchange rates used to convert the CFD valuation from the relevant local currency in which the underlying equity was priced to US Dollars at the year end date. There have been no changes to the valuation technique since the previous year or as at the date of this report.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager.
Contracts for difference and forward currency contracts have all been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the market prices of the underlying quoted securities and exchange rates to which these contracts expose the Company.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using IFRS 13 fair value hierarchy.
|
Financial assets/(liabilities) at fair value through profit or loss at 30 September 2021 |
Level 1 US$’000 |
Level 2 US$’000 |
Level 3 US$’000 |
Total US$’000 |
| Assets: | ||||
| Equity investments | 257,806 | – | – | 257,806 |
| Cash Fund | 96,269 | – | – | 96,269 |
| Contracts for difference (fair value) | – | 7,725 | – | 7,725 |
| Forward currency contracts (fair value) | – | 346 | – | 346 |
| Liabilities: | ||||
| Contracts for difference (fair value) | – | (1,908) | – | (1,908) |
| --------------- | --------------- | --------------- | --------------- | |
| 354,075 | 6,163 | – | 360,238 | |
| ========= | ========= | ========= | ========= |
|
Financial assets/(liabilities) at fair value through profit or loss at 30 September 2020 |
Level 1 US$’000 |
Level 2 US$’000 |
Level 3 US$’000 |
Total US$’000 |
| Assets: | ||||
| Equity investments | 240,632 | – | – | 240,632 |
| Cash Fund | 64,465 | – | – | 64,465 |
| Contracts for difference (fair value) | – | 1,661 | 3 | 1,664 |
| Liabilities: | ||||
| Contracts for difference (fair value) | – | (1,674) | – | (1,674) |
| --------------- | --------------- | --------------- | --------------- | |
| 305,097 | (13) | 3 | 305,087 | |
| ========= | ========= | ========= | ========= |
There were no transfers between levels of financial assets and financial liabilities during the year recorded at fair value as at 30 September 2021. The Company held one Level 3 long CFD security during the year ended 30 September 2021 which was disposed of prior to the year end. The Company held one Level 3 long CFD security during the year ended 30 September 2020.
A reconciliation of fair value measurement in Level 3 is set out below.
Level 3 Financial assets at fair value through profit or loss at 30 September |
2021 US$’000 |
2020 US$’000 |
| Opening fair value | 3 | 3 |
| Disposal of contract for difference (fair value)1 | (3) | – |
| --------------- | --------------- | |
| Closing fair value | – | 3 |
| ========= | ========= |
1 During the year the Company disposed of a contract for difference in Kuwait Food (Americana).
11. RELATED PARTY DISCLOSURE
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report in the Company’s Annual Report for the year ended 30 September 2021. At 30 September 2021, US$15,000 (£11,000) (2020: US$17,000 (£13,000)) was outstanding in respect of Directors’ fees.
12. TRANSACTIONS WITH INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report in the Company’s Annual Report for the year ended 30 September 2021.
The investment management fee due for the year ended 30 September 2021 amounted to US$3,884,000 (2020: US$3,738,000). In addition, a performance fee of US$3,815,000 (2020: US$nil) is payable for the year. At the year end, US$1,867,000 was outstanding in respect of management fees (2020: US$1,740,000) and US$3,815,000 (2020: US$nil) was outstanding in respect of performance fees.
In addition to the above services, BlackRock has provided marketing services. The total fees paid or payable for these services for the year ended 30 September 2021 amounted to US$101,000 excluding VAT (2020: US$116,000) of which marketing fees of US$64,000 excluding VAT (2020: US$71,000) were outstanding as at year end.
The Company has an investment in the BlackRock Institutional Cash Series plc – US Dollar Liquid Environmentally Aware Fund of US$96,269,000 (2020: US$64,465,000) at the year end, which is a fund managed by a company within the BlackRock Group.
The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc., a company incorporated in Delaware USA.
13. CONTINGENT LIABILITIES
There were no contingent liabilities at 30 September 2021 (2020: nil).
14. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The 2021 Annual Report and Financial Statements will be filed with the Registrar of Companies shortly.
The report of the Auditor for the year ended 30 September 2021 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock Frontiers Investment Trust plc for the year ended 30 September 2020, which have been filed with the Registrar of Companies. The report of the Auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act.
This announcement was approved by the Board of Directors on 1 December 2021
15. ANNUAL REPORT
Copies of the annual report will be sent to members shortly and will be available from the registered office, c/o The Company Secretary, BlackRock Frontiers Investment Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
16. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 8 February 2022 at 12:00 p.m.
The Annual Report will also be available on the BlackRock website at blackrock.com/uk/brfi. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
FOR FURTHER INFORMATION, PLEASE CONTACT:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 3000
Press enquiries:
Lansons Communications
Email: BlackRockInvestmentTrusts@lansons.com
Tel: 020 7490 8828
1 December 2021
12 Throgmorton Avenue
London EC2N 2DL
END
