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BARING EMERGING EUROPE PLC - Half-year Report

PR Newswire

London, May 4

Baring Emerging Europe PLC

Half Year Report

for the six months ended 31 March 2016

Baring Emerging Europe PLC

Contents

Investment objective

The investment objective is to achieve long-term capital growth, principally through investment in securities listed on or traded on an Emerging European securities market or in securities of companies listed or traded elsewhere, whose revenues and/or profits are, or are expected to be, derived from activities in Emerging Europe.

Financial highlights

*See note 2 on page 12.

Performance (total return basis)

# The benchmark is the MSCI EM Europe 10/40 Index.

† Source: AIC using Morningstar.

* Source: Barings.

The Alternative Investment Fund Manager

The Alternative Investment Fund Manager is Baring Fund Managers Limited which is authorised and regulated by the Financial Conduct Authority.

Chairman’s statement

Dear Shareholder,

The first half of our financial year has been full of volatility and surprise. The total return in NAV per share was 18.2%, compared with the benchmark return of 14.3%, returns positively influenced by the use of gearing and by the weakness of sterling. As investors in the Emerging Europe region, you will no doubt be used to the typical rollercoaster ride these markets often provide, but this has been unusually bracing, albeit with a final result to raise a smile. The period up to the end of January was very weak with a parade of terrible news, but this reversed sharply and allowed the lost ground to be more than made up.

We have witnessed falling oil prices, followed by rising oil prices; a weakening Chinese economy, then a strengthening Chinese economy; monetary confusion everywhere; more complicated politics in Eastern Europe; and the unedifying political stew in Turkey – and yet the markets have made substantial progress. It is a reminder that markets are systems of discovery and in the Emerging European region had simply reached levels which discounted the bad news which made headlines around the world. In the Wall Street adage, markets climb walls of worry.

Performance

Returns were good in both absolute and relative terms. Against the peer group, the numbers were also encouraging: over the six month period and the last twelve months, the Company was in the first quartile, ranking 4th out of 45 and 6th out of 44 funds respectively; over the longer run, on which the Board places more weight, the five year numbers show a rank of 8th out of 43 peers. These are very good returns, and are a testament to the helmsmanship of Matthias Siller, the fund manager, in what have been very turbulent times. The disappointment on a five year view is of course that the absolute numbers have been negative, showing a decline of 10% over the period.

Discount Management

Yet again, the Emerging European sector has been out of favour with investors. Trading volumes in our shares are very depressed and the discount has been under continual pressure. At the 31st March, the discount to NAV was 13.8%, having averaged 12.1% for the half year. We have continued to buy stock back and in this half year bought back 893,423 shares for a consideration of just over £4.6 million. We will continue to buy shares back and to endeavour to manage the discount effectively, but the fact is that our market capitalisation is now £88 million, a level at which we have fallen off the radar screens of some investors. We continue to invest in shareholder communications and both the Board and the manager are available to meet and explain our approach, but a robust revival in the scale and trading environment for your Company is going to depend on greater investor interest in our region. I will comment on prospects later, but suffice it to say that we remain convinced there is a worthwhile investment thesis in the region.

Income Account

The first half of the fiscal year does not see a heavy flow of dividends, but this year, as last, we show a modest surplus on the income account of £320,000. The period from March to September will normally see greater action in this area and we are hopeful that dividends from portfolio companies will continue at a respectable level despite the underlying market volatility.

Fees

Your Company has hitherto paid the investment manager a fixed fee and, in certain circumstances, a performance fee based on the outperformance of the benchmark. This performance fee element seems to the Board to be increasingly outdated. As investors, you have the choice of investing in a variety of open ended funds, and while well managed investment trusts can be attractive in their own right, you should have an eye on costs. This has become easier following the greater transparency in the open ended world which has followed the Retail and Distribution Review. As a Company, we need to ensure that our fees are competitive with both open and closed end peers and so we have agreed with Barings that the performance fee will be discontinued from the 31st March this year. Normally, we would only pay any accrued performance fee at the end of the financial year, but the Board felt that it would be fair to settle the outstanding accrual at the half year point. This amounted to £63,000, which has been charged to capital. There is no change to the base investment management fee, which we believe puts your Company’s costs on an attractive footing with respect to other options.

Gearing

The Company has a borrowing facility of $17 million on attractive terms. During the first half of the financial year, that gearing has been deployed and at the end of March, was drawn to the extent of $11 million. That means that the gearing ratio was 105%, with a possible gearing should the facility be fully drawn, of 108%. The Board believes that this level of gearing is appropriate for the Company and reflects our views that the investment landscape is sufficiently attractive to warrant borrowing.

Outlook

Globally, it seems likely that the unorthodox monetary policies which have characterised the era since the financial crisis are set to continue. This provides a relatively benign environment for risky assets, although as we saw earlier this year, it is still possible for investors to take fright. Indeed, in our region, commodity dependence, poor governance and geopolitical risks play an important role. In the past couple of years these have been a consistent negative. Now they are closer to neutral, although by no means a benign force. Experienced managers like Matthias are used to this, and a combination of focusing on good businesses and not overpaying for their shares seems the most prudent strategy for what remain tough times.

Steven Bates

Chairman

4 May 2016

Report of the Alternative Investment Fund Manager

for the half year ended 31 March 2016

Performance

Against the backdrop of very volatile markets, your Company posted a return of +18.2% in the NAV in Sterling terms against a benchmark performance of +14.3%.

This was a period when the global commodity complex capitulated in early January in the face of weak economic growth data from China and a perceived world-wide oil glut that drove oil prices to multi-year lows. Only then did the market start to pay more attention to the solid underlying operational performance of many companies. Aided by indications that global central banks would be slow to raise interest rates, the mood swiftly became much more positive.

This also marked a sea change in global asset price momentum. Strategies which had done well in previous years, such as those which emphasised growth stocks, developed markets or the US dollar, became pronounced underperformers. Instead, the recovery was led by emerging market equities, emerging market currencies and more “inexpensive” areas of the market such as the telecommunications, utilities, energy and metals & mining sectors.

Encouragingly, your Company’s did well in this environment, and benefited from the sudden shift in leadership on global markets. This is due to the diversified nature of the portfolio holdings and robust stock selection by management.

[Graphic removed] Baring Emerging Europe PLC NAV per share; share price; % discount

[Graphic removed] Fund, Benchmark and Country Returns (£) 30 September 2015 to 31 March 2016

The individual countries in Emerging Europe delivered very different investment results during the period. This is due, in part, to the fact that the economic cycle is at different stages across the region. We have highlighted the diversity of the asset class before, and it continued to set the tone for the period under review.

One can also, however, identify a broader trend of improving domestic demand and investment activity across the region, reflecting a broad diversity of factors.

The Central European states such as Hungary, the Czech Republic and Poland have continued to benefit from solid export performance, improving domestic consumption and investment in infrastructure projects.

Russia, while slowly emerging from a protracted recession, has navigated economic sanctions stemming from the annexation of Crimea and a sharp fall in the price of oil better than originally feared. Helped by the Russian Rouble’s free float regime, the country’s domestic production remained competitive and foreign exchange reserves weren’t squandered to defend an overvalued currency. In the absence of foreign goods on the shelves, Russian citizens started to buy home-grown products, lending support to the domestic economy when it was needed most. It speaks volumes that the agricultural sector, long plagued by underinvestment and low productivity, is currently the strongest growing component of the Russian economy.

Economic growth in Turkey has accelerated for the last couple of quarters, helped by the fact that the country is one of the world’s largest beneficiaries of lower energy prices. As the import bill for oil keeps falling and the current account deficit shrinks, we see potential for lower inflation expectations thanks to the effective leadership of the Central Bank and continued progress towards economic reform. The political reality in Turkey, however, also means that some of this future gain may need to be sacrificed to stimulate growth in the short term. While unwelcome, we do not think investors should be unduly concerned.

Activity

Rusagro, a long-term portfolio holding and key beneficiary of the demand for domestic goods in the Russian agricultural sector, was sold after substantial outperformance which took the stock beyond our price target. Similarly, our position in Kernel, a leading Ukrainian agriculture producer, was sold as markets fully acknowledged the firm’s export potential and balance sheet strength. Shares in The Moscow Stock Exchange were added to the portfolio on the back of the Company’s key position in Russia’s developing financial infrastructure.

In Central Europe, we sold Polish companies Uniwheels (automotive industry) and Eurocash (consumer staples) as they strongly outperformed and reached price targets. We participated in the initial public offering of the Czech water and soft drink producer Kofola as we believe in its potential to grow across the region. We added to existing positions in low-cost airline Wizz Air, shoe retailer CCC and Cyfrowy Polsat, the largest Polish media, telecoms and internet operator.

The Polish financial sector underperformed substantially as the newly elected government increased the tax burden on banks and insurance companies. We took this tactical opportunity to increase our position in Alior Bank, as we believe in the potential for consolidation in the banking sector.

[Graphic removed] Geographical exposure of portfolio (% Fund and % Benchmark) at 31 March 2016

In Turkey, one of the best performing markets globally over the period, the substantial weighting in banks was reduced as valuations moved closer to fair value. At the same time, we added Dogus Holding, the Volkswagen car dealer and one of the main beneficiaries of solid domestic demand, to the portfolio.

The portfolio’s exposure to Greece remains very limited. We invested in the National Bank of Greece when the Greek banking sector was recapitalised in December. The recent sale of the lender’s Turkish subsidiary, Finansbank, at more than book value, provided the National Bank of Greece with additional equity.

Overall, portfolio turnover was slightly lower during the reporting period compared to the previous six months.

Outlook

After a challenging few years in emerging market equities, Emerging European markets have seen a dramatic shift in investor attitude, accompanied by substantial inflows to the asset class.

The region’s stock markets stand out on valuation measures, and the growth and operational performance of companies has been impressively resilient in face of often challenging economic, regulatory or political developments.

A key negative in the recent past has been the gradual deterioration of the political climate and of democratic standards overall. While this is a worrying trend, it highlights the importance of multinational organisations such as the EU in promoting democratic values and institutions across the region alongside its support for growth in trade and economic activity. To a certain extent, one could interpret the ongoing political reforms in Ukraine as a rare proof that measures are being taken to support democratic development across the region.

At the company level, it is encouraging to see corporate governance levels improve steadily. This is a key contributor, in our view, to increasing investor demand in the region.

As we look forward from here, it is our belief that Emerging European equities offer an attractive combination of deeply discounted share price valuations, healthy growth prospects and attractive investment opportunities. Together, we believe these should attract growing interest in the asset class as well as providing potential for long-term investment gains in the future.

Baring Fund Managers Limited

15 April 2016

Investment Portfolio

The Company’s investment portfolio at 31 March 2016, is set out in the following table:

Income statement

(incorporating the Revenue Account*) for the six months to 31 March 2016

\* The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period.

The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

There is no other comprehensive income.

Statement of Financial Position

as at 31 March 2016

Statement of Changes in Equity

Distributable reserves comprise: the revenue reserve; and capital reserves attributable to realised profits.

All investments are held at fair value through profit or loss. When the Company revalues the investments still held during the period, any gains or losses arising are credited/charged to the capital reserve.

Notes to the half year report

1. Accounting policies

A summary of the principal accounting policies is set out below:

(a) Basis of accounting

The financial statements have been prepared in accordance with the applicable UK Accounting Standards, being FRS102 – The Financial Reporting Standard – and with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (issued in November 2014). The half-year accounts are prepared in accordance with Financial Reporting Standard 104 – Interim Financial Reporting.

Previously, the financial statements were prepared in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”). The transition to FRS did not result in any significant changes to the accounting policies.

The financial information for the year ended 30 September 2015 included in this report, has been taken from the Company’s full accounts, as restated to comply with FRS from the transition date 1 October 2015. Restatement of opening balances relating to equity values, assets and liabilities and profits and losses of the Company between UK GAAP as previously reported and under FRS as restated have not been presented as there have been no required changes to the reported amounts. Therefore restatement tables have not been prepared for any of the primary statements.

They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis.

2. Dividend

No dividend is payable in respect of the six months to 31 March 2016.

Consideration will be given to an annual dividend in respect of the year ended 30 September 2016 at a Board meeting to be held in November 2016. An announcement will be made shortly after that meeting.

3. Comparative information

The figures and financial information for the year ended 30 September 2015 are an extract from the latest published accounts and do not constitute statutory accounts. Full accounts for that period have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

The half year report for the six months ended 31 March 2016 and for the six months ended 31 March 2015 have been neither audited nor reviewed by the auditors.

4. Shares in issue

As at 31 March 2016 there were 16,858,301 ordinary shares of 10p each in issue (30 September 2015: 17,751,724 and 31 March 2015: 18,358,543) which excludes 3,318,207 ordinary shares held in treasury (30 September 2015: 3,318,207 and 31 March 2015: 3,318,207) and treated as not being in issue when calculating the net asset value per share. Shares held in treasury are non-voting and not eligible for receipt of dividends. During the period 893,423 ordinary shares were bought back to be cancelled at a cost of £4,617,000. A further 7,520 ordinary shares were bought back to be cancelled during the period 1 April 2016 to 3 May 2016 at a cost of £40,000.

5. Taxation

The taxation charge of £47,000 (30 September 2015: £218,000 taxation charge; and 31 March 2015: £5,000 taxation credit) relates to overseas taxation.

6. Return per ordinary share

The total return per ordinary share is based on the return on ordinary activities after taxation of £15,318,000 (six months ended 31 March 2015: £(13,810,000); and year ended 30 September 2015: £(27,007,000)) and on a weighted average of 17,098,777 ordinary shares in issue during the six months ended 31 March 2016 (six months ended 31 March 2015: weighted average of 18,652,032 ordinary shares in issue; and year ended 30 September 2015: weighted average of 18,395,544 ordinary shares in issue).

Interim management report

Going concern

The Directors believe that, having considered the Company’s investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, the Company has adequate resources and an appropriate financial structure in place to continue in operational existence for the foreseeable future. The assets of the Company consist mainly of securities which are readily realisable. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Principal risks and uncertainties

The Board believes that the principal risks and uncertainties faced by the Company continue to fall under the following broad categories:

Investment and strategy.

Accounting, legal and regulatory.

Loss of investment team or Alternative Investment Fund Manager.

Discount.

Corporate governance and shareholder relations.

Operational.

Financial.

Future developments.

Information of each of these is given in the Report of the Directors in the Annual Report for the year ended 30 September 2015.

Related party transactions

The Alternative Investment Fund Manager is regarded as a related party and details of the management fee payable during the six months ended 31 March 2016 is shown in the Income Statement on pages 8 and 9. There have been no other related party transactions during the six months ended 31 March 2016. The Directors’ current level of remuneration is £25,000 per annum for each Director with the Chairman of the Audit Committee receiving an additional fee of £2,500 per annum. The Chairman’s fee is £33,000 per annum.

Directors’ responsibility statement

The Directors are responsible for preparing the interim report, in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge:

The condensed set of financial statements within the interim report has been prepared in accordance with FRS 104 issued by the Accounting Standards board on “Half-Yearly Financial Reports”;

The Interim Management Report includes a fair review of the information required by 4.2.7R (indication of important events during the first six months of the year, their impact on the condensed set of financial statements, and a description of the principal risks and perceived uncertainties for the remaining six months of the financial year); and

The Interim Management Report includes a fair review of the information concerning related parties transactions as required by Disclosure and Transparency Rule 4.2.8R.

For and on behalf of the Board

Steven BatesChairman4 May 2016Directors and officersDirectorsSteven Bates, ChairmanIvo CoulsonFrances DaleyNadya WellsJonathan WoollettSaul Estrin (retired 13 January 2016)SecretaryM. J. Nokes, F.C.A.Registered office155 BishopsgateLondon EC2M 3XYCompany number4560726Alternative Investment Fund ManagerBaring Fund Managers Limited155 BishopsgateLondon EC2M 3XYTelephone: 020 7628 6000Facsimile: 020 7638 7928AuditorKPMG LLP15 Canada SquareLondon E14 5GLCustodian & DepositaryState Street Bank & Trust Company Limited20 Churchill PlaceCanary WharfLondon E14 5HJAdministratorNorthern Trust Global Services Limited50 Bank StreetCanary WharfLondon E14 5NTTelephone: 0207 982 2000Registrars and transfer officeCapita Asset ServicesThe Registry34 Beckenham RoadBeckenhamKent BR3 4TUTelephone: 0871 664 0300(calls cost 10 pence per minute plus network extras)Overseas: +44 208 639 3399Email: ssd@capitaregistrars.comWebsitewww.bee-plc.comBaring Asset Management Limited155 BishopsgateLondon EC2M 3XYTelephone: 020 7628 6000(Authorised and regulated by the Financial Conduct Authority)www.barings.comRegistered in England and Wales no: 02915887Registered office as above.