Source - RNS
RNS Number : 2369J
Aberdeen Frontier Mkts Inv Co Ltd
07 September 2016
 

7 September 2016

 

ABERDEEN FRONTIER MARKETS INVESTMENT COMPANY LIMITED (FORMERLY ADVANCE FRONTIER MARKETS FUND LIMITED)

 

ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 30 JUNE 2016

 

INVESTMENT OBJECTIVE

The objective of Aberdeen Frontier Markets Investment Company Limited (the "Company") is to generate long-term capital growth for its shareholders.  The Investment Manager invests predominantly in a diversified portfolio of funds and other investment products which derive their value from Frontier Markets.  The proportion of the portfolio invested in each component of Frontier Markets varies according to where the Investment Manager perceives the most attractive investment opportunities to be.  Investee funds may include closed and open-ended funds, exchange traded funds, structured products, limited partnerships and managed accounts.

 

 

PERFORMANCE

 

For the year ended 30 June 2016

 

Net Asset Value ("NAV") per share (in US dollar terms)

-13.6%

Share price (in US dollar terms)

-16.0%

 

As at 30 June 2016

 

NAV per share

$0.8290

 

 

Share price (in GB pounds)

£0.5675

Share price (in US dollars)

$0.7554

Net Assets

$140.5m

 

 

CHAIRMAN'S STATEMENT 

 

On behalf of the Board, I present to you the Annual Report for Aberdeen Frontier Markets Investment Company Limited for the financial year ended 30 June 2016.

 

Markets and Performance

The performance of frontier markets over the year was largely a tale of two halves. The initial 7-month period was particularly weak due to investor concerns over US dollar strength and the anticipated increase in US interest rates as well as weak commodity prices and continued uncertainty over the state of the Chinese economy. An improvement was observed from February onwards as investors looked for attractively-priced opportunities to re-enter frontier markets. However, Nigeria's significant currency devaluation and the aftershocks of the 'Leave' campaign prevailing in the UK's EU Referendum contributed to a volatile end to the Company's financial year.

 

During the year to 30 June 2016 the Company's net asset value per share (NAV) and share price declined by 13.6% and 16.0% respectively compared to a decline of 12.1% in the MSCI Frontier Markets Net Total Return Index (all figures in total return terms).

 

The Investment Manager discusses the performance of the portfolio in greater detail on pages 3 to 6 of the Annual Report but, broadly, while underlying managers largely outperformed their respective benchmarks, this was outweighed by exposure to underperforming African markets including Egypt, Zambia and Zimbabwe which was only partly offset by positive asset allocation in Asia.

 

Discount

The discount to NAV at which the Company's shares trade was 8.9% at 30 June 2016. Whilst this is marginally wider than a year earlier, the level of discount has remained narrower than that associated with the majority of other closed end funds focused on emerging and frontier markets. As at 31 August 2016, the discount to NAV was 5.2%. The Board monitors the discount on a regular basis and, in addition to those measures outlined below, will consider buying back shares if it is considered to be in shareholders' interests to do so.

 

Dividend

The Board considers that the cash-generative nature of many frontier companies, and the dividends into which this often translates, is increasingly an important part of the rationale for investing in the frontier markets asset class. The Board has been monitoring this development over several years and, having also noted evolving market practice elsewhere, believes that initiating the payment of a regular dividend should enhance the marketability of the Company's shares and help to moderate discount volatility. In June 2016 the Company announced the introduction of a semi-annual dividend with the base level of dividend set with reference to the Investment Manager's calculation of the yield on the underlying portfolio on a look through basis, less relevant costs.

 

Given that the policy was only announced towards the end of the financial year the Board is proposing to pay an initial dividend in respect of the second half of the financial year of 1.2 cents per share. The initial dividend will be payable on 19 December 2016, subject to shareholder approval at the forthcoming AGM, with an ex-dividend date of 17 November 2016. The record date will be 18 November 2016. The dividend will be paid in sterling and the sterling dividend rate will be announced in due course.

 

Acquisition of Investment Manager

On 15 September 2015 it was announced that the Company's Investment Manager, Advance Emerging Capital Limited ("AEC") had reached an agreement with Aberdeen Asset Management PLC ("Aberdeen") whereby Aberdeen Asset Management PLC acquired 100% ownership of AEC. The transaction subsequently received regulatory approval from the UK Financial Conduct Authority and completed in December 2015. The Board has closely monitored the integration of the investment team and is satisfied that the benefits to clients which were outlined at the time of the transaction are being achieved. With effect from 1 June 2016, the Company appointed Aberdeen Fund Managers Limited, a subsidiary company of Aberdeen, as its alternative investment fund manager replacing AEC; the terms and notice period of the investment management contract remain unchanged.

 

Change of Company's Name

At an Extraordinary General Meeting held on 14 April 2016, shareholders approved the change of the Company's name to Aberdeen Frontier Markets Investment Company Limited. This change was proposed as a consequence of the acquisition of the Company's Investment Manager by Aberdeen. The Board believes that the Company can benefit from Aberdeen's high profile, good reputation and the additional resources available, notably in attracting additional retail demand for the Company's shares.

 

Aberdeen Plans

Aberdeen has a long history in managing closed-ended funds and provides a wealth of experience in their management and promotion. It is pleasing to report that investors may now access low cost investment in the Company through Aberdeen's Share Plan, Investment Trust ISA and Investment Plan for Children. Further details may be found in the Annual Report or via our new, branded website at: aberdeenfrontiermarkets.co.uk.

 

Board Composition

Further to succession plans developed over the longer term to manage directors' tenure, the Board has undergone significant change in the year under review. Helen Green retired as a director in December 2015 and was succeeded as Chair of the Audit Committee and Management Engagement Committee by David Warr, who joined the Board in September 2015. The Board wishes to thank Helen for her service as well as recognise the technical skills and practical experience which were appreciated by the other directors. David has considerable experience in the investment funds sector and has already proved to be a strong addition to the Board and to the Audit Committee.

 

In addition, Lynne Duquemin joined as a non-executive director of the Company in February 2016 after attending previous Board meetings as a Board apprentice. Lynne brings over 29 years of investment experience including her background in manager selection and investment manager due diligence which is particularly beneficial as the Company invests into frontier markets via both closed and open-end funds.

 

Grant Wilson, having been a director of the Company since its incorporation in 2007, stepped down as a director and Chairman of the Company with effect from 1 March 2016 and I was privileged to succeed him. The Board is indebted to Grant for his commitment and service as a director since the Company's launch in 2007 and for his leadership as Chairman.

 

Liquidity opportunity

The Board expects to issue to shareholders, in November 2016, a circular for a proposed tender offer (the "tender") which will provide shareholders with the opportunity to fully realise their investment in the Company at the then prevailing NAV less costs, should they wish to do so. The record date for the tender will be 30 September 2016.

 

This liquidity opportunity was announced in December 2012 when the discount to NAV at which the Company's shares were trading was significantly wider than the current discount. The Board believes that this has successfully contributed to a meaningful reduction in the discount since 2012 and that it will continue to support the Company's rating over the coming years.

 

As noted below, and in the Investment Manager's Report, the long-term prospects for frontier markets are compelling, and the Board believes that shareholders will be well served by maintaining their exposure to the Company as the directors intend to do with their own shareholdings. I would also remind shareholders that the directors intend to offer the same liquidity opportunity every 5 years.

 

Outlook

The Board remains convinced of the fundamental investment case for the frontier markets asset class, not least due to the opportunities now available for acquiring frontier assets at low valuations.

 

The strategy employed by the Investment Manager, that of investing in an index-agnostic fashion through well-managed funds in attractive markets (where possible at a discount to NAV), makes eminent sense. This approach has delivered meaningful outperformance against the MSCI Frontier Markets Net Total Return Index since the Company's inception with a significantly lower level of volatility. 

 

Supported by an enlarged infrastructure, with the additional resources and brand recognition of Aberdeen, the Board looks forward to the Company taking advantage of improving market conditions across frontier markets to continue to deliver consistent value for shareholders.

 

John Whittle

7 September 2016

 

INVESTMENT MANAGER'S REPORT

 

Performance review (all performance numbers quoted in this report are in US dollar terms)

During the year to 30 June 2016 the Company's net asset value per share (NAV) and share price declined by 13.6% and 16.0% respectively. As a point of reference, the MSCI Frontier Markets Net Total Return Index declined by 12.1% over the period. The discount to NAV at which the Company's shares trade ended the period at 8.9%, a little wider than the level of 6.3% that prevailed a year earlier.

 

Figure 1: Aberdeen Frontier Markets Investment Company Performance Report


1 Year

3 Years

5 Years

AFMC NAV

-13.6%

-6.2%

AFMC Price

-16.0%

-4.3%

Source: Aberdeen Fund Managers Limited, Bloomberg, all figures in US dollar terms to 30 June 2016.

 

Although the Company does not benchmark itself against the MSCI Frontier Markets Index we conduct performance attribution against that index. In terms of relative performance, manager selection was positive with underlying managers, on aggregate, outperforming their benchmarks. The Company's holdings in Vietnam, Nigeria and Kazakhstan performed notably well in relative terms, as did selected regional funds in Africa including Africa Opportunity Fund and Sustainable Capital Africa Consumer Fund. A small number of holdings underperformed, including the Company's investment in East Africa through PineBridge, Romanian closed end fund Fondul Proprietatea and SCM Africa.

 

Asset allocation negatively impacted relative returns. Exposure to a number of non-index constituent African markets proved detrimental, notably Egypt, Zambia and Zimbabwe which lagged broader African markets. An underweight allocation to Nigeria was positive but was countered by an underweight in Morocco which was the only market on the continent to record a gain. Asset allocation in Asia was more beneficial with the Company's significant weightings in Vietnam and Pakistan adding value. Elsewhere, a significant overweight allocation to Romania was positive while exposure to the Middle East was neutral with the positive contribution from a large underweight in Kuwait offset by a negative contribution from an off-index allocation to Saudi Arabia. In Latin America the Company maintained a significant allocation to Argentina but was still underweight to that market's weighting in the MSCI Frontier Markets Index and this was a negative contributor.

 

Discount movements detracted from relative performance with several of the portfolio's larger closed ended investments suffering from discount widening over the year including Fondul Proprietatea, VinaCapital Vietnam Opportunity Fund and Africa Opportunity Fund. The weighted average discount level on the closed end funds in the portfolio was 27.3% at the end of the period, 4.7% wider than a year earlier.

 

Market environment

The year to the end of June 2016 presented a challenging environment for frontier markets. The first seven months of the financial year were notably weak as investor sentiment continued to focus on the same handful of issues that had dominated thinking prior to the start of the period, namely, US dollar strength, uncertainty over the pace of interest rates hikes in the US, China's economic and financial health and weak commodity prices. As a consequence, the MSCI Frontier Markets Index was down by 21.0% between the start of the financial year and its lowest point in late January. The subsequent months proved better for investors as markets rallied strongly to recoup much of the prior losses with the previous concerns abating to some extent, at least temporarily. June, however, brought further volatility as a consequence of the significant currency devaluation in Nigeria and the surprise result of the UK referendum.

 

Figure 2: Performance of MSCI Frontier Markets Index compared with Emerging and Developed Markets over year to 30 June 2016

 

See Annual Report for chart

 

The performance of individual frontier markets during the period is shown in Figure 3. The usual wide dispersion of returns between markets was in evidence with Zambia recording a loss of 41.2% while Estonia gained 26.3%. Broadly speaking, the regions that fared worst were those seen as being heavily reliant upon commodity or energy exports or having weak government finances. Thus, African, Central Asian and Middle Eastern markets struggled for much of the period while Asia and parts of Eastern Europe generally fared better.

 

In Africa, the Nigerian market fell by 36.4% with much of the decline a result of a long overdue devaluation of the naira by the Central Bank of Nigeria in mid-June. When the devaluation occurred, the naira weakened by just over 30% against the US dollar, helping to clear a backlog of foreign exchange transactions and prompting a significant uptick in trading volumes on the Nigerian Stock Exchange, with foreigners being material buyers as they strove to reduce large underweight positions (despite the devaluation, Nigeria accounted for 13.4% of the MSCI Frontier Markets Index at the end of June). We view the devaluation as a cathartic event for the Nigerian market in as much as it removes a great deal of short term uncertainty. We anticipate that with this hurdle crossed, investors will increasingly focus on the longer term opportunity presented by low valuations, depressed earnings, compelling demographics and the positive changes being implemented by the Buhari administration.

 

Elsewhere in Africa, Moroccan stocks gained 5.1% as it remained a bastion of economic and political stability in the region and continued to benefit from a Euro peg and trapped domestic liquidity. The Kenyan market fell by 11.0% but was still amongst the better performing African markets and, despite security and political concerns, continues to cement its position as East Africa's commercial and industrial hub. Egyptian equities lost 23.8% with investor confidence eroding and a 12% currency depreciation detracting from returns. In Zimbabwe, an economically paralysing liquidity crisis contributed to a 31.9% loss. Zambia's market also performed poorly, dropping 41.2% with the country's economic fundamentals remaining in a precarious state and its currency weakening sharply.

 

In the Middle East, all major markets declined, with lower energy prices impacting on government finances and increasing the focus on structural reforms.

 

In Eastern Europe, Romania rose by 2.2% supported by foreign inflows attracted to the market by reasonable valuations and solid macroeconomic fundamentals. The Ukrainian market suffered a decline of 31.6% as the consequences of an ongoing recession, weak currency, political instability and fragile peace with Russia contributed to poor sentiment.

 

Asia was a relative bright spot but still saw markets decline. Pakistan fared best, losing just 2.1% as economic fundamentals improved and reasonable valuations continued to attract foreign inflows. Index provider, MSCI, reflected the Pakistan's progress by announcing that it would be upgraded to emerging market status from May 2017. In Vietnam, the economy continued to gain momentum and significant steps were taken to improve foreign access to the stock market. Nonetheless, the market lost 7.1%. Sri Lanka was the worst performing Asian frontier market, losing 19.3% as the country suffered from weak investor sentiment amid unclear policy direction and challenging government finances.

 

In Kazakhstan, the commodity price bust forced the authorities to depreciate the currency by over 40%.  This led to the stock market losing 34.0% in US dollar terms despite making a small gain in local currency terms.

 

In Latin America, Mauricio Macri's victory in Argentina's presidential elections in November 2015 marked a turning point for a country viewed as an economic and political pariah on the world stage for much of the past decade. The new government's reforms proved market friendly; allowing the peso to float, liberalising trade, lowering tariffs and reducing subsidies. The long running stand-off with debt holdouts from a previous sovereign default was swiftly addressed and allowed Argentina to return to international capital markets in April. Over the year the Argentine marked gained 7.3%.

 

Figure 3: Market returns over the year to 30 June 2016 in US dollar terms

 

See Annual Report for chart

 

Portfolio

The Company's asset allocation at the end of the period is shown in the Annual Report. The portfolio is shown in the Annual Report, being composed of 34 holdings, with the top 20 investments representing 92.1% of NAV. At year end, the Company was 70.0% invested through open ended funds, 26.5% through closed end funds, 5.3% through individual equities while running 1.8% leverage. The average discount to NAV at which closed end investments within the portfolio trade was 27.3% at period end having widened somewhat from 22.6% a year before.

 

The period saw a rotation in the Company's asset allocation away from Africa and the Middle East towards Asia and Eastern Europe as we strove to position the portfolio towards markets with healthy economic growth, sound government finances and sensible policy making. At the end of the period, Africa accounted for 23.1% of net assets compared with 35.1% a year before. We made a number of full exits during the year including Tugela African Resources and Africa Emerging Markets Fund.

 

The Middle Eastern allocation stood at just 7.6% at the end of the financial year compared with 14.0% at the start. Saudi Arabia saw the bulk of that reduction and represented 1.2% of net assets at year end as we chose to drastically reduce the position in EFG Hermes Saudi Arabia Equity Fund between November 2015 and January 2016 on asset allocation grounds.

 

In Asia, we continued to favour Vietnam and Pakistan. Maintaining both at close to 15% at period end, the maximum permitted in a single country. In Vietnam we were heartened by the progress made on addressing the issue of foreign ownership limits on individual stocks. Pakistan, meanwhile, is home to many well managed companies which can be purchased at reasonable valuations. The market was buoyed by the news that index provider MSCI plans to upgrade Pakistan to emerging market status in May 2017.

 

In Eastern Europe, we initiated a holding in East Capital Balkan Fund which invests across a range of markets including Slovenia, Romania, Serbia and Croatia. This decision reflected both an improved view on the investment potential of the Balkans, which offers an attractive mix of low valuations and healthy economic growth, and our belief that this was the most appropriate vehicle to express this view through. In our opinion, East Capital Asset Management is one of the best resourced, experienced and respected managers in the region and one we have known for many years. At the end of the period, the holding was the largest in the portfolio, accounting for 8.1% of NAV.

 

Argentina accounted for 10.4% of NAV at year end. We were pleased to see positive political change and a return to rational policy making from the new Macri administration with the stock market responding positively. Our core holding in the market, Advance Copernico Argentina Equity Fund performed admirably during the period, gaining 13.8% compared with 7.3% from MSCI Argentina.

 

Direct equity positions accounted for 5.3% of NAV at year end. We added several positions to the portfolio, utilising the flexibility to invest directly where the market is inaccessible through funds. Thus, an allocation was made to Sri Lanka through holding company John Keells, which offers diversified exposure to the key growth segments of the Sri Lankan economy (leisure, retail, food, financial services and gaming). It is the largest stock on the Colombo exchange with high quality management, strong corporate governance and a high level of transparency. In a similar vein, positions in Morocco and Lebanon were initiated through Maroc Telecom in the former and Blom Bank in the latter. We believe both companies possess attractive long term growth potential and operate in markets that benefit from strong fundamentals but are difficult to access through third party funds.

 

Market outlook

The rationale for investing in frontier markets today is little changed from when the Company was launched almost a decade ago. Premium economic growth continues to be driven by long term trends in demographics and consumption. Markets remain uncorrelated to each other and the asset class is therefore likely to continue delivering returns that are less volatile than investors expect. Frontier equity markets remain woefully underrepresented in global indices relative to their economic significance, being home to 31% of the world's population and accounting for 9% of global GDP but with a weighting that is equivalent to just 0.2% of the MSCI World Index (Source: Renaissance Capital, June 2016). Off such a low base, we believe there is scope for the asset class to grow significantly over the long term. For now though, it remains an inefficient and somewhat overlooked asset class, providing opportunities for active stock pickers to identify mispriced companies.

 

One tenet of the rationale that has changed materially is valuation. Frontier market equities have suffered a material de-rating from a trailing price to earnings ratio of 19.0x in 2009 to just 10.6x at present (Source: Bloomberg). Accompanying the low valuation is an attractive dividend yield that talks to the unlevered and cash generative nature of many frontier corporates. This has been a consistent feature of the asset class over time. Such inexpensive valuations have been reached through a combination of resilient earnings and uninspiring market performance. In a world where both growth (in GDP or corporate earnings) and yield are scarce, we believe investors will, in the years to come, be willing to pay higher valuations for frontier assets than they are today.

 

Your portfolio has changed materially over the years, reflecting the active way in which we invest. At present we believe it to be extremely well positioned, concentrated in well-structured funds managed by talented stock pickers in attractive markets, often at a discount to net asset value. We believe this simple strategy, executed well, will deliver attractive risk adjusted returns for investors over the coming years from an asset class that is brimming with potential.

 

Aberdeen Fund Managers Limited

 

7 September 2016

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

Together with the issues discussed in the Chairman's Statement and the Investment Manager's Report, the Board considers that the main risks and uncertainties faced by the Company fall into the following categories:

 

(i) General market risks associated with the Company's investments

Changes in economic conditions, interest rates, foreign exchange rates and inflationary pressures, industry conditions, competition, political and diplomatic events, tax, environmental and other laws and other factors can substantially and either adversely or favourably affect the value of the securities in which the Company invests and, therefore, the Company's performance and prospects.

 

The Company's investments are subject to normal market fluctuations and the risks inherent in the purchase, holding or selling of securities, and there can be no assurance that appreciation in the value of those investments will occur. There can be no guarantee that any realisation of an investment will be on a basis which necessarily reflects the Company's valuation of that investment for the purposes of calculating the net asset value.

 

(ii) Risks associated with Frontier Markets

The Company invests in Frontier Markets which involves certain risks and special considerations not typically associated with investing in other more established economies or securities markets. Such risks may include (a) the risk of nationalisation or expropriation of assets or confiscatory taxation; (b) social, economic and political uncertainty including war and revolution; (c) dependence on exports and the corresponding importance of international trade and commodities prices; (d) less liquidity of securities markets; (e) currency exchange rate fluctuations; (f) potentially higher rates of inflation (including hyper-inflation); (g) controls on foreign investment and limitations on repatriation of invested capital and a fund manager's ability to exchange local currencies for US dollars; (h) a higher degree of governmental involvement and control over the economies; (i) government decisions to discontinue support for economic reform programmes and imposition of centrally planned economies; (j) differences in auditing and financial reporting standards which may result in the unavailability of material information about economics and issuers; (k) less extensive regulatory oversight of securities markets; (l) longer settlement periods for securities transactions; (m) less stringent laws regarding the fiduciary duties of officers and directors and protection of investors; and (n) certain consequences regarding the maintenance of portfolio securities and cash with sub-custodians and securities depositories in frontier markets.

 

(iii) Liquidity of the portfolio

The underlying investee funds selected by the Investment Manager may have significant investments in smaller to medium sized companies of a less seasoned nature whose securities are traded in an "over-the-counter" market. These "secondary" securities often involve significantly greater risks than the securities of larger, better-known companies, due to shorter operating histories, potentially lower credit ratings and, if they are not listed companies, a potential lack of liquidity in their securities. As a result of lower liquidity and greater share price volatility of these "secondary" securities, there may be a disproportionate effect on the value of the investee funds and, indirectly, on the value of the Company's portfolio.

 

The fact that the Company may invest in funds that are not traded on investment exchanges or do not permit frequent redemptions including funds that may have "lock-up" periods or "gates", or otherwise do not permit redemptions for significant periods of time, means that an investment in the Ordinary shares of the Company may be a relatively illiquid investment.

 

As a result of liquidation or redemption of a holding in a fund, limited partnership or other investment vehicle, or due to the creation of an illiquid investment or receipt of an illiquid asset in lieu of an existing holding, the Company's portfolio may contain illiquid assets.

 

(iv) Foreign exchange risks

The Company is exposed to foreign exchange risks which affect both the performance of its investee funds and also the value of the Company's holdings against the Company's base currency, the US dollar.  Currency exposures are not hedged by the Company.

 

Management or mitigation of the above risks

 

Risk

Management or mitigation of risk

General market risks associated with the Company's investments

 

These risks are largely a consequence of the Company's investment strategy but the Investment Manager attempts to mitigate such risks by maintaining an appropriately diversified portfolio by number of holdings, fund structure, geographic focus, investment style and market capitalisation focus.

 

Liquidity, risk and exposure measures are produced on a monthly basis and monitored against internal limits. 

Frontier Markets

 

Liquidity of the portfolio

 

Foreign exchange risks

 

 

The investment management of the Company has been delegated to the Company's Investment Manager.  The Investment Manager's investment process takes into account the material risks associated with the Company's portfolio and the markets and holdings in which the Company is invested.  The Board monitors the portfolio and the performance of the Investment Manager at regular Board meetings.

 

(v) Internal risks 

Poor allocation of the Company's assets to both markets and investee funds by the Investment Manager, poor governance, compliance or administration, could result in shareholders not making acceptable returns on their investment in the Company.

 

Management or mitigation of internal risks

 

The Board monitors the performance of the Investment Manager and the other key service providers at regular Board meetings.  The Investment Manager provides reports to the Board on compliance matters and the Administrator provides reports to the Board on compliance and other administrative matters.  The Board has established various committees to ensure that relevant governance matters are addressed by the Board.

 

The management or mitigation of internal risks is described in further detail in the corporate governance statement in the Annual Report.

 

The Directors are aware that there is now an additional uncertainty to those outlined above. The United Kingdom decision in the EU referendum held on 23 June 2016 to leave the EU may introduce potentially significant new uncertainties and instability in financial markets as the United Kingdom negotiates the terms of its exit from the EU.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors are responsible for preparing financial statements for each financial year which give a true and fair view of the state of affairs of the Company as at the end of the year and of the profit or loss for the year and are in accordance with The Companies (Guernsey) Law, 2008. In preparing these accounts, the directors are required to:

 

·     Select suitable accounting policies and then apply them consistently;

·     Make judgements and estimates which are reasonable and prudent;

·     State whether applicable International Financial Reporting Standards ("IFRS") as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; 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 ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the accounts have been properly prepared in accordance with The Companies (Guernsey) Law, 2008. 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.

 

In accordance with The Companies (Guernsey) Law, 2008, there is no relevant audit information of which the Company's auditor is unaware.  The directors also confirm that they have taken all steps they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

 

The financial statements are published on the Company's website (website address: www.aberdeenfrontiermarkets.co.uk) and on the Investment Manager's website (website address: www.aberdeen-asset.com). The maintenance and integrity of the Investment Manager's website, so far as it relates to the Company, is the responsibility of the Investment Manager. The work carried out by the auditor does not involve consideration of the maintenance and integrity of these websites and accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on these websites. Visitors to the websites need to be aware that legislation in Guernsey governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdiction.

 

The directors confirm that to the best of their knowledge and belief the annual report and accounts taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Company's position and performance, business model and strategy.

 

 

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 2016

 

 

 





2016



2015





Revenue

Capital

Total

Revenue

Capital

Total



$'000

$'000

$'000

$'000

$'000

$'000











Losses on investments


-  

(20,189)

(20,189)

-

(19,811)

(19,811)


Capital losses on currency movements


-  

(38)

(38)

-

(76)

(76)


Net investment losses


-  

(20,227)

(20,227)

 -  

(19,887)

(19,887)


Investment income


915

-  

915

2,797

-

2,797


Total income/(loss)


915

(20,227)

(19,312)

2,797

(19,887)

(17,090)


Investment management fees


(554)

(1,107)  

(1,661)

(669)

(1,363)

(2,032)


Other expenses


(771)

-  

(771)

(816)

-

(816)


Net (loss)/profit from operations before finance costs and taxation


    

(410)

 

(21,334)

 

(21,744)

 

 1,312

 

(21,250)

 

(19,938)


Finance costs


(119)

(227)

(346)

(136)

(268)

(404)


Net (loss)/profit before taxation


(529)

(21,561)

(22,090)

1,176

(21,518)

(20,342)


Taxation


(61)

   -  

(61)

(237)

-

(237)


Net (loss)/profit after taxation


(590)

(21,561)

(22,151)

 939

(21,518)

(20,579)











(Loss)/earnings per ordinary share


(0.35c)

(12.72c)

(13.07c)

0.55c

(12.70c)

(12.14c)

 

 

The total column of this statement represents the Company's Statement of Comprehensive Income, prepared under IFRS as adopted by the European Union.  The revenue and capital columns, including the revenue and capital earnings per share data, are supplementary information prepared under guidance published by the Association of Investment Companies. The Company does not have any income or expenses that are not included in the profit/(loss) for the year and therefore the "Net Profit/(loss) after taxation" is also the total comprehensive income for the year, as defined by IAS 1 (revised).

 

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

 

 

STATEMENT OF FINANCIAL POSITION

AT 30 JUNE 2016









2016

$'000

 

 


2015

$'000

 

 


Non-current assets






Investments designated as fair value through profit or loss


 142,990


 164,982








Current assets






Other receivables


 758


 1,388


Cash and cash equivalents


 1,524


 5,573




 2,282


 6,961








Total assets


 145,272


 171,943








Current liabilities






Loans payable


 4,500


 9,000


Other payables


 298


 318




 4,798


 9,318














Total assets less current liabilities


 140,474


 162,625








Capital and reserves attributable to equity holders






Share premium account


 88,788


 88,788


Share purchase reserve


 -  


 82,319


Capital reserve


 50,854


 (9,904)


Revenue reserve


 832


 1,422








Total Equity


 140,474


 162,625








Net assets per ordinary share (US cents)


 82.90c


 95.97c


Exchange rate GBP/USD (mid market)


 0.7512


 0.6368


Net assets per ordinary share (pence)


 62.27p


 61.11p


 

 

 

 

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2016












Share premium account

Share

purchase reserve

Capital

reserve

Revenue reserve

Total




$'000

$'000

$'000

$'000

$'000









Opening equity



88,788

82,319

(9,904)

1,422

162,625

Transfer between reserves



-

(82,319)

82,319

-

-

Loss for the year



-

-

(21,561)

(590)

(22,151)









Closing equity



88,788

-

50,854

832

140,474









FOR THE YEAR ENDED 30 JUNE 2015












Share premium account

Share

purchase reserve

Capital

reserve

Revenue reserve

Total




$'000

$'000

$'000

$'000

$'000









Opening equity



88,788

82,319

11,614

483

183,204

(Loss)/profit for the year



-

-

(21,518)

939

(20,579)









Closing equity



88,788

82,319

(9,904)

1,422

162,625









STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2016

 








2016

$'000


2015

$'000






Operating activities





Cash inflow from investment income and bank interest


953


2,648

Cash outflow from management expenses


(2,437)


(4,881)

Cash inflow from disposal of investments


40,807


53,001

Cash outflow from purchase of investments


(38,433)


(49,965)

Cash outflow from foreign exchange costs


(37)


(76)

Cash outflow from taxation


(61)


(237)

Net cash flow provided by operating activities


792


490






Financing activities





Proceeds from bank borrowings


-


2,500

Repayments of bank borrowings


(4,500)


-

Finance charges and interest paid


(341)


(271)

Net cash flow (used in)/from financing activities


(4,841)


2,229






Net (decrease)/increase in cash and cash equivalents


(4,049)


2,719











Cash and cash equivalents opening balance


5,573


2,854

Cash (outflow)/inflow


(4,049)


2,719

Cash and cash equivalents balance at 30 June


1,524


5,573











                               

NOTES

 

1.     ACCOUNTING POLICIES

 

Basis of Preparation

The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS), approved by the International Accounting Standards Board and as adopted by the European Union. 

 

The financial statements give a true and fair view of the state of affairs of the Company as at the end of the year and of the profit or loss for the year and are in accordance with The Companies (Guernsey) Law, 2008.

 

Under IFRS, the Statement of Recommended Practice (SORP) issued by the Association of Investment Companies has no formal status, but the Company has taken the guidance of the SORP into account to the extent that it is deemed appropriate and compatible with IFRS and the Company's circumstances. 

The particular accounting policies adopted are described below:

(a)           Accounting Convention

The accounts are prepared under the historical cost convention, except for the measurement at fair value of investments.

 

(b)           Investments

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, financial assets are designated as fair value through profit or loss on initial recognition in accordance with International Accounting Standard (IAS) 39.  These investments are recognised on the trade date of their acquisition.  At this time, fair value is the cost of investment. 

 

After initial recognition such investments are valued at fair value which is determined by reference to:

 

(i)      market bid price for investments quoted on recognised stock exchanges;

(ii)     net asset value per individual investee funds' administrators for unquoted open-ended funds; and

(iii)    by using other valuation techniques to establish fair value for any other unquoted investments.

 

Investments are derecognised on the trade date of their disposal.  Gains or losses are recognised in the capital column of the Statement of Comprehensive Income.  

 

(c)            Income from Investments

Dividend income from ordinary shares and units in open-ended funds deemed equivalent to ordinary shares is accounted for on the basis of ex-dividend dates.  Income from fixed interest shares and securities is accounted for on an accruals basis using the effective interest method. Special dividends are assessed on their individual merits and are credited to the capital column of the Statement of Comprehensive Income if the substance of the payment is a return of capital; with this exception all other investment income is taken to the revenue column of the Statement of Comprehensive Income.   Bank interest receivable is accounted for on a time apportionment basis.

 

(d)           Capital Reserves

Profits and losses on disposals of investments and gains and losses on revaluation of investments held are allocated to the capital reserve via the capital column of the Statement of Comprehensive Income.

 

(e)            Revenue Reserves

The balance of all items allocated to the revenue column of the Statement of Comprehensive Income in each year is transferred to the Company's revenue reserves.  Any dividends paid by the Company would also be allocated against the revenue reserves of the Company.

 

(f)            Investment Management Fees

Two thirds of the basic investment management fee is allocated to the capital column of the Statement of Comprehensive Income. The entirety of any performance fee is allocated to the capital column of the Statement of Comprehensive Income. Fees allocated to the capital column are taken to the capital reserve.   

 

(g)          Foreign Currency

The Company's shares were issued in US dollars and the majority of the Company's investments are priced in US dollars and this is considered to be the functional currency of the Company.  Therefore, it is the Company's policy to present the accounts in US dollars. The Company's shares are traded in Sterling on AIM.

 

Assets and liabilities held in currencies other than US dollars are translated into US dollars at the market rates of exchange prevailing at the reporting date.  Currency gains and losses arising on retranslating investments are allocated to the capital column of the Statement of Comprehensive Income.  All other currency gains and losses are allocated to the capital or revenue columns of the Statement of Comprehensive Income depending on the nature of the transaction.

 

(h)           Finance costs

Finance costs include interest payable and direct loan costs.  In line with the Company's policy for investment management fees, two thirds of finance costs are allocated to the capital column of the Statement of Comprehensive Income. Fees allocated to the capital column are taken to the capital reserve. Loan arrangement costs are amortised over the term of the loan on an effective interest rate basis. 

 

(i)            Financial liabilities

The Company's financial liabilities include borrowings and other payables. Financial liabilities are recognised when the Company becomes a party to the contractual provisions of the financial instrument, and are measured initially at fair value adjusted for transaction costs. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Financial liabilities are measured subsequently at amortised cost using the effective interest method.

 

(j)          Cash and Cash Equivalents

Cash and Cash Equivalents in the Statement of Cash Flows comprise cash held at the bank or by the custodian.

 

(k)          Operating segments

IFRS 8, 'Operating segments' requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Board, as a whole, has been determined as constituting the chief operating decision maker of the Company. The Board has considered the requirements of the standard and is of the view that the Company is engaged in a single segment of business, which is to generate long-term capital growth for its shareholders by investing in a diversified portfolio of funds and other investment products which derive their value from frontier markets.

 

The Board of directors is responsible for ensuring that the Company's investment objective is followed.  The day-to-day implementation of this has been delegated to the Investment Manager but the Board retains responsibility for the overall direction of the Company.  The Board reviews the investment decisions of the Investment Manager at regular Board meetings.  The Investment Manager has been given full authority to make investment decisions on behalf of the Company in accordance with the investment objective.

 

(l)            Unconsolidated structured entities

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes; (a) restricted activities, (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors, (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks.

 

The Company holds shares, units or partnership interests in the funds or investment products held in the Company's portfolio.  The Company does not consider its investments in listed funds to be structured entities but does consider its investments in unlisted funds to be investments in structured entities because the voting rights in such entities are limited to administrative tasks and are not the dominant factor in deciding who controls those entities.

 

Changes in fair value of investments, including structured entities, are included in the Statement of Comprehensive Income.

 

(m)          New standards, Interpretations and amendments

There are no new standards, interpretations or amendments which became effective during the year.

 

At the date of approval of these financial statements, the following standard, which has not been applied in these financial statements, was in issue but not yet effective:

 

• IFRS 9, 'Financial instruments', effective for annual periods beginning on or after 1 January 2018, specifies how an entity should classify and measure financial assets and liabilities, including some hybrid contracts. The standard improves and simplifies the approach for classification and measurement of financial assets compared with the requirements of IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged. The standard applies a consistent approach to classifying financial assets and replaces the numerous categories of financial assets in IAS 39, each of which had its own classification criteria.

 

The Board is currently considering the impact of the above standard.

 

(n) Critical accounting estimates and judgements in applying accounting policies

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from such estimates. These financial statements have been prepared on a going concern basis which the directors of the Company believe to be appropriate.

 

The most critical judgements and estimates that management has made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements are the functional currency of the Company (see note 1(g)) and the fair value estimation of financial assets designated as at fair value through profit or loss (see notes 1(b) and 18).

 

(o) Going concern

As described in the Directors' Report in the Annual Report, the directors have adopted the going-concern basis in preparing the financial statements.

 

2.

INVESTMENT INCOME






 

Income from investments:

2016

$'000

 


2015

$'000

 



Dividends from investments

915


2,797



Total investment income

915


2,797


                                                                                                                     

 

3.

INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES


2016



2015




Revenue

Capital

Total

Revenue

Capital

Total



$'000

$'000

$'000

$'000

$'000

$'000


Investment management fees - basic                                              

554

1,107

1,661

669

1,337

2,006


Performance fee*

-

-

-

-

26

26


Total Investment management fees

554

1,107

1,661

669

1,363

2,032


Administration fees

164

-

164

221

-

221


Directors' fees

177

-

177

170

-

170


Depository and custody fees

129

-

129

126

-

126


Legal fees

42

-

42

67

-

67


Broker fees

37

-

37

40

-

40


Registrar's fees

39

-

39

34

-

34


Auditor's fees

28

-

28

32

-

32


Nominated Adviser fees

30

-

30

32

-

32


Promotion

14

-

14

-

-

-


Other expenses

111

-

111

94

-

94


Total other expenses

771

-

771

816

-

816


Total expenses

1,325

1,107

2,432

1,485

1,363

2,848

        

 

Further details on the management agreement are provided in the directors' report in the Annual Report.  The Company has agreed to pay a fee to Aberdeen Asset Managers Limited for the provision of promotional activities with the first such fee covering the period from April 2016 to March 2017.  The total fees payable in respect of the period from 1 April 2016 to 30 June 2016 were $14,000 (2015: nil) all of which was outstanding at the year end.

 

The Company's ongoing charges for the year ended 30 June 2016 calculated in accordance with the AIC methodology were 1.67% (2015: 1.64%).  The ongoing charges figure does not include performance fees or finance costs.

 

*There was no performance fee payable in respect of the year ended 30 June 2016 (2015: nil). The charge of $26,000 for the year ended 30 June 2015 relates to the performance fee payable for the year ended 30 June 2014.

 

4.        FINANCE COSTS

In accordance with directors' expectations of the split of future returns being mostly of a capital nature, two thirds of finance costs are charged as capital items in the Statement of Comprehensive Income.

               



2016



2015



Revenue

Capital

Total

Revenue

Capital

Total


$'000

$'000

$'000

$'000

$'000

$'000

Facility costs and arrangement fees

97

44

141

49

98

147

Interest charges

22

 

182

204

87

 

170

257

Total finance costs

119

226

345

136

268

404

 

 

5.      DIRECTORS' FEES

The fees paid or accrued were $176,868 (2015: $169,191). There were no other emoluments.  Full details of the fees of each director are given in the Directors' Remuneration Report in the Annual Report.  

 

6.     TAXATION

The Company is resident for tax purposes in Guernsey.

 

The Company is exempt from Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinances 1989 and 1992 and was charged an annual exemption fee of £1,200 (2015: £1,200) during the year.

 

During the year, the Company suffered foreign withholding tax on income from investments totalling in aggregate $61,271 (2015: $237,451).

 

7.      LOSS PER ORDINARY SHARE

Loss per share is based on the net loss of $22,150,000 (2015: loss of $20,579,000) attributable to the weighted average of 169,460,000 (2015: 169,460,000) ordinary shares of no par value in issue during the year to 30 June 2016.

 

Supplementary information is provided as follows: revenue per share is based on the net revenue loss of $590,000 (2015: profit of $939,000) and capital loss per share is based on the net capital loss of $21,560,000 (2015: net capital loss of $21,518,000) attributable to the above ordinary shares.

 

8.

LOANS PAYABLE

Since 8 April 2016, the Company has had in place a US$6 million revolving loan facility with Investec Bank plc.  Under the terms of the facility the Company may draw down loans of, in aggregate, up to US$6 million (2015:US$9 million).  The rate of interest on each loan is calculated at LIBOR plus a margin of 3.25% per annum.  An arrangement fee was payable at the commencement of the facility and a commitment fee calculated at the rate of 1.20% per annum is payable on any undrawn amounts.  The loan is secured through a charge on the Company's assets (including its investments). The loan expires on 8 April 2017 unless renewed.  Prior to 8 April 2016, the Company had a US$9 million facility on materially the same terms as the current facility. At 30 June 2016, the Company has borrowings of US$4.5 million from the loan facility with US$1.5million unutilised.

 

9.             SHARE PURCHASE RESERVE

 


2016


2015


$'000


$'000





Opening balance

82,319


82,319

Transfer to capital reserve

(82,319)


-

Balance at 30 June

-


82,319

 

During the period following the Board's decision to initiate the regular payment of dividends, the balance on the share purchase reserve has been transferred to the Company's capital reserve to simplify the presentation of the Company's distributable reserves.

 

10.           CAPITAL RESERVE

 

Disposal of investments                                                                                      


2016


2015


$'000


$'000





Opening balance

(19,280)


(23,561)

(Losses)/gains from disposal of investments

(5,408)


4,844

Realised gains on capital distributions

717


1,163

Other capital receipts/(charges)

396


(19)

Investment management fees charged to capital

(1,107)


(1,363)

Finance charge to capital

(227)


(268)

Foreign exchange losses

(37)


(76)

Balance at 30 June

(24,946)


(19,280)

 

Investments held                                                                                                 


2016


2015


$'000


$'000





Opening balance

9,376


35,175

Movement on valuation of investments held

(15,894)


(25,799)

Balance at 30 June

(6,518)


9,376





Capital reserve





2016


2015


$'000


$'000





Opening balance

(9,904)


11,614

Loss for the year

(21,561)


(21,518)

Transfer from share purchase reserve

82,319


-

Capital reserve balance at 30 June

50,854


(9,904)

 

Losses on investments (per statement of comprehensive income)                                                


2016


2015


$'000


$'000





(Losses)/gains on disposal of investments

(4,295)


5,988

Movement on valuation of investments held

(15,894)


(25,799)


(20,189)


(19,811)





11.        NET ASSETS PER ORDINARY SHARE

Net assets per ordinary share of $0.8290 (2015: $0.9597) is based on net assets of $140,474,000 (2015: $162,625,000) divided by 169,460,000 (2015: 169,460,000) ordinary shares in issue at the Statement of Financial Position date.

 

12.        RELATED PARTY TRANSACTIONS   

Details of the management contract can be found in the Directors' Report in the Annual Report.  Fees payable to the Investment Manager are detailed in note 3.  Other payables include accruals of basic management fees of $136,707 (2015: $162,630) and a performance fee provision of $nil (2015: $nil).  

 

The directors' fees are disclosed in note 5 and the Directors' Remuneration Report in the Annual Report.

 

13.        DIVIDEND

In June 2016 the Company announced the introduction of a dividend with the base level of dividend set with reference to the Investment Manager's calculation of the yield on the underlying portfolio, less relevant costs.

 

The Board is proposing to pay an initial dividend in respect of the second half of the financial year of 1.2 cents per share. Subject to shareholder approval at the forthcoming AGM the initial dividend will be payable on 19 December 2016 to shareholders on the register at the close of business on 18 November 2016. The dividend will be paid in sterling and the sterling dividend rate will be announced in due course.

 

The dividend will be paid from the Company's distributable reserves

 

14.        POST BALANCE SHEET EVENTS

There have been no post balance sheet events other than as disclosed in the Annual Report.

 

15.     FINANCIAL INFORMATION

The financial information in this announcement is derived from the audited financial statements for the year ended 30 June 2016.

 

The Annual Report for the year ended 30 June 2016 was approved by the Board of directors on 7 September 2016.  It is available on the Company's website www.aberdeenfrontiermarkets.co.uk and will be posted to shareholders. It will also be available from the registered office of the Company.

 

16.   ANNUAL GENERAL MEETING

The Annual General Meeting of Aberdeen Frontier Markets Investment Company Limited will be held at 11 New Street, St Peter Port, Guernsey at 3:00 p.m. on 12 December 2016.

 

 

Registered office

11 New Street

St Peter Port

Guernsey

GY1 2PF

 

 

Enquiries:

 

Aberdeen Fund Managers Limited (Investment Manager to Aberdeen Frontier Markets Investment Company Limited)

Andrew Lister / Bernard Moody       Tel: +44 (0)20 7618 1440                     

 

Grant Thornton UK LLP (Nominated Adviser)

Philip Secrett                         Tel: +44 (0)20 7383 5100

 

Numis Securities Limited (Nominated Broker)

David Benda                Tel: +44 (0) 20 7260 1275

 

END       

 


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