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Final Results

Released 16:21 22-Nov-2016

Final Results

BlackRock Frontiers Investment Trust plc

PERFORMANCE RECORD

30 September 2016  30 September 2015 
US Dollar
Net assets (US$’000)1  276,397   242,395 
Net asset value per share (cum income) 168.19   160.93 
Share price3 167.58   157.15 
 ----------   ---------- 
Sterling
Net assets (£’000)1,3  212,777   160,028 
Net asset value per share (cum income)3 129.48   106.25 
Share price 129.00   103.75 
 ----------   ---------- 
Discount 0.4%  2.4% 
 ======   ====== 

   



Performance – total return basis 
Year ended 
30 September 2016 
Year ended 
30 September 2015 
Since 
inception4 
US Dollar
Net asset value per share (with income reinvested) +9.3  -17.9  +31.1 
MSCI Frontier Markets Index (NR)2 +0.9  -24.2  +5.8 
MSCI Emerging Markets Index (NR)2 +16.8  -19.3  -6.0 
Ordinary share price (with income reinvested) +11.6  -22.9  +28.8 
Sterling
Net asset value per share (with income reinvested) +27.4  -12.2  +57.0 
MSCI Frontier Markets Index (NR)2 +17.7  -18.9  +27.0 
MSCI Emerging Markets Index (NR)2 +36.2  -13.6  +12.8 
Ordinary share price (with income reinvested) +30.0  -17.5  +54.0 


1    Change relates to market movements and the proceeds from the C share issue.

2    Net return (NR) indices calculate the reinvestment of dividends net of withholding taxes using the tax rates applicable to non-resident institutional investors.

3    Based on an exchange rate of US$1.2990 to £1 at 30 September 2016 and US$1.5147 to £1 at 30 September 2015.

4    The Company was incorporated on 15 October 2010 and its shares were admitted to trading on the London Stock Exchange on 17 December 2010.

CHAIRMAN’S STATEMENT

Dear Shareholder,

I am pleased to present to you the Annual Report and Financial Statements for the year ended 30 September 2016.

OVERVIEW

During the year to 30 September 2016, your Company’s Net Asset Value per share (NAV) increased by 9.3%, significantly outperforming the benchmark, the MSCI Frontier Markets Index, which rose by 0.9%. The MSCI Emerging Markets Index rose by 16.8% over the same period. Since its inception in 2010, your Company has generated an impressive total return of 31.1%, comparing favourably to an increase of 5.8% for the MSCI Frontiers Markets Index during this time. (All calculations are on a US dollar basis with income reinvested).

The year under review has been challenging for world markets and has been characterised by sustained political and macroeconomic uncertainty. Market volatility remained high throughout the year, reflecting concern around levels of global growth, in particular in China, as it seeks to rebalance its economy and as it has accumulated growing debts to sustain output. The unprecedented and sustained low interest rate environment, the sharp fall and subsequent recovery in the price of oil, the Federal Reserve’s decision on when and to what extent to raise US interest rates and, more recently, concerns over the potential impact of the Republican nominee, Donald Trump’s, unexpected victory in the US Presidential elections ensured market uncertainty persisted. In addition, the UK electorate’s decision to leave the European Union in June of this year resulted in an immediate and sharp fall in global equity markets and a significant devaluation of sterling. However, markets have since recovered and sterling’s fall has boosted returns in the Company for UK-based shareholders.

Frontier Market returns remained predominantly driven by domestic, economic and political forces during the year. Specifically, Pakistan rallied on the MSCI announcement upgrading the country to ‘emerging market’ status with effect from mid 2017, while Vietnam continued to enjoy strong market returns as the new government focused its agenda on increasing GDP growth and attracting foreign multi-national investment. Elsewhere, the Nigerian market fell significantly in US dollar terms after the government finally lifted currency controls, resulting in a greater than 30% devaluation of the local currency. Meanwhile, the Kenyan market declined after the central bank implemented legislation, effectively capping consumer interest rates, in a move to consolidate the banking industry.

The strongest portfolio performer by country was Argentina, which delivered an impressive return of over 50% during the year, driven by the results of 2015’s year-end Presidential elections. The portfolio’s exposure to the Argentinian financial and energy sectors was beneficial, as was its exposure to utilities in Pakistan and Romania. There were a number of standout performers at the stock level, not least the holding of Mobile World, a Vietnamese mobile phone retailer, which increased by 130% as the region saw strong growth in this sector.

Further information on the performance of the portfolio during the year can be found in the Investment Manager's report which follows.

I am also delighted to be able to report to shareholders that the Company was awarded ‘Best Specialist Fund’ at the Investment Adviser 100 Club Awards in October 2016 and I would like to take this opportunity to congratulate the portfolio management team.

REVENUE RETURN AND DIVIDENDS

The Company’s revenue return per share for the year amounted to 6.40 cents (2015: 6.55 cents). The Directors are recommending the payment of a final dividend of 4.00 cents per ordinary share (2015: 4.15 cents) in respect of the year ended 30 September 2016. Together with the interim dividend of 2.60 cents per share (2015: 2.40 cents), this represents a total of 6.60 cents per share (2015: 6.55 cents), an increase of 0.8% over total dividends paid in the previous year. This return has been achieved despite portfolio allocation changes away from countries such as Nigeria, where historically dividend yields have been high. This dividend will be paid on 17 February 2017 to shareholders on the register of members at close of business on 27 January 2017, subject to shareholder approval. The Company does not have a policy of actively seeking income, nevertheless, this return represents a relatively high yield of 3.9%.

As I mentioned in my statement to the Company's half-yearly financial report earlier this year, the Company has historically paid out approximately one third of its revenue via the interim dividend and the balance in the form of the final dividend.  However, the Board has decided that, where deemed to be appropriate, the Company may distribute a greater proportion of its revence at the interim dividend stage to better reflect the timing of the underlying income earned by the Company during the financial year.

TENDER OFFER AND C SHARE ISSUANCE

At the Company’s launch in December 2010, the Board made a commitment to shareholders that before the Company’s fifth annual general meeting, and at every fifth year thereafter, it would offer shareholders the opportunity to realise the value of their Ordinary shares at Net Asset Value per share, less applicable costs. Accordingly, in February of this year shareholders were given the opportunity to participate in a tender offer for up to 100% of the Company’s issued share capital. As a result, 5.9 million ordinary shares were tendered (representing 4% of issued share capital at that time). It was encouraging to see that due to the strength of demand for the Company’s shares, all shares tendered were successfully placed in the secondary market. The Directors intend to offer shareholders further opportunities to realise the value of their ordinary shares at five yearly intervals, with the next opportunity to take place around the time of the Company’s AGM in 2021.

Following the Tender Offer, the Board announced a placing and offer for subscription for up to 65 million C shares. The offer closed on 29 February 2016, resulting in the issue of 15,000,001 C shares at a price of 100 pence per share. All C shares were subsequently converted into 13,711,487 new ordinary shares on 16 March 2016 at a conversion ratio of 0.9141. This enlargement of the Company has created economies of scale, with existing shareholders protected from the costs of the exercise through the establishment of a separate pool of assets until such time as the C shares were converted.

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 balance supply and demand in the market. As at 30 September 2016, the Company had 164,333,108 ordinary shares in issue. There were no shares issued (other than in respect of the conversion of the C shares) or bought back during the year to 30 September 2016 or in the post year period 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 2.0% and were trading at a discount of 2.7% on a cum-income basis at 18 November 2016, the latest practicable date prior to the issue of this report. The Directors have the authority 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) at which time resolutions will be put to shareholders seeking a renewal of these powers. Further information can be found in the Directors' Report in the Annual Report and Financial Statements.

THE BOARD

Following a review of the composition of the Board, a decision was taken to initiate a search for a new director during the year. I am pleased to report that following that exercise the Board has appointed Mr Stephen White as a non-executive director of the Company, with effect from 13 July 2016. Mr White also serves as a member of the Company’s Audit & Management Engagement Committee. He is a Chartered Accountant and is currently Head of European and US equities at British Steel Pension Fund. In accordance with the Company’s Articles of Association, Mr White will stand for election by shareholders at the forthcoming AGM in January 2017. In addition, Mr Zok and I will retire by rotation and will stand for re-election.

Having served on the Board since the Company’s inception in 2010, Ms Ruddick retired from the Board with effect from 22 November 2016. On behalf of the Board, I would like to take this opportunity to thank Lynn for her invaluable contribution to the success of the Company during her tenure. Following Ms Ruddick’s retirement, Mr White was appointed as Chairman of the Company’s Audit & Management Engagement Committee with effect from 22 November 2016.

Further information on the experience and background of the Directors can be found in their biographies on page 23 of the Annual Report and Financial Statements.

OUTLOOK

Frontier Markets look relatively well positioned, offering a combination of some of the world’s fastest growing economies, which in many cases have lower debt burdens and pro-business governments who are implementing structural reforms to encourage and support growth. Valuations also continue to look attractive, both in absolute and relative terms. The underlying economies to which these companies are exposed often exhibit little correlation to the global economies overall, which should provide portfolio diversification benefits. The portfolio managers believe the case for investing in Frontier Markets remains compelling and continue to favour companies which have good growth prospects and sustainable margins, supported by robust balance sheets, low levels of debt and strong cash flows. They also remain flexible, poised to take advantage of opportunities or to reposition the portfolio, both at the stock level, or in anticipation of domestic, economic or political headwinds.

As I mentioned in my statement to shareholders last year, the growth in dividends generated by the Company’s investment portfolio has increased significantly in recent years, to the extent that the Company now generates an increasingly competitive dividend yield. This element of the total return may well become increasingly appealing given the paucity of attractive yields elsewhere.

ANNUAL GENERAL MEETING

The AGM of the Company will be held at BlackRock’s offices at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 31 January 2017 at 12.00 p.m. Details of the business of the meeting are set out in the Notice of Meeting on pages 82 to 85 of the Annual Report and Financial Statements. The portfolio manager will make a presentation to shareholders on the Company’s progress and the outlook for Frontier Markets. This year, for the first time, shareholders who are unable to attend in person will be able to watch the meeting via a live stream. Further details of how to register for this are given on page 78 of the Annual Report and Financial Statements.

My fellow Directors and I look forward to meeting shareholders at this year’s AGM and encourage you to attend.

AUDLEY TWISTON-DAVIES
Chairman

22 November 2016

INVESTMENT MANAGER'S REPORT

PORTFOLIO & MARKET COMMENTARY

In the year to 30 September 2016, the Company outperformed the MSCI Frontier Markets Index (the Company’s benchmark) by 8.4%, returning 9.3% against the benchmark return of 0.9% (on a US dollar basis with net income reinvested).

The MSCI Emerging Markets Index rose by 16.8% over the same period. Since inception the Company has returned 31.1% compared to the return of 5.8% for the benchmark.

The past 12 months have continued to demonstrate the benefits of investing in a wide, diverse asset class. In most countries domestic, economic and political developments have driven market returns.

Local developments helped Argentina to be the strongest performer during the year, returning over 50%. Broader market performance was driven by the results of the Presidential elections at the end of 2015 which saw City of Buenos Aires mayor, Mauricio Macri, defeat ruling party candidate, Daniel Scioli. Although victory for either candidate was expected to put Argentina on a more orthodox footing, the election of President Macri represented a greater shift in economic policy.

Since President Macri took office, his administration has not disappointed investors. He has made good progress in dismantling the protectionist structures of the economy, including eliminating currency controls, cutting export taxes and reducing energy subsidies. Perhaps most significant is the resolution of the dispute with the hold-out creditors, a legacy from the 2001 debt crisis. This should allow Argentina to return to international capital markets for the first time in over a decade.

The portfolio benefitted from increased exposure to Argentina, particularly in the high beta financial sector. Positions in Banco Macro and Grupo Financiero Galicia increased in value by 107% and 75% respectively, contributing to the positive relative performance from Argentina over the year. However, the standout performer for the year was utility company Pampa Energia, which gained 116% over the same time period, rallying after it completed a controlling stake acquisition of Petrobras Argentina in July. Strong performance continued through the third quarter of 2016 as the company announced plans to double production capital expenditure to meet rising power demand and reduce reliance on imports. It was further supported by the recent Supreme Court’s ruling in favour of allowing electricity providers to raise prices, a key victory for President Macri in his fight to cut back on fiscally expensive subsidies.

Stock selection was the main driver of overall performance.  Our position in Pakistani utility company, Hub Power, continued to add value gaining 28%.  Investors remain attracted to the power producer’s ability to utilise effectively both locally sourced and imported coal to cut into the country’s power deficit, while also benefitting from the Company’s US dollar return profile in a low interest rate environment.  More broadly, Pakistan rallied on the MSCI announcement, upgrading the country to “emerging market” status with effect as of mid-2017, sparking increased interest in a market with one of the lowest price-to-earnings ratios in Asia.

Similarly, our position in Vietnamese consumer discretionary name, Mobile World, surged by 130% over the period as Vietnam sees strong smart phone adoption and growth. The broader Vietnamese market experienced strong market returns as the new government focused its agenda on increasing GDP growth and attracting foreign multi-national investment, showing continued commitment to reforming foreign ownership rules and improving the investment environment domestically. Romanian utility, Electrica, also performed well, gaining 23% during the period on the back of better supply performance and lower losses from its maintenance division.

On a relative basis, our long standing underweight to Nigeria continued to benefit the portfolio significantly, as the market sold off -40% over the year as the country officially lifted currency controls in mid-June which led to the subsequent c. 30% devaluation of the Nigerian Naira. Until policy makers come to terms with the need for a more flexible exchange rate that can slowly help improve foreign exchange shortages, we will remain underweight Nigeria but continue to be invested in cash generative, local franchises such as Zenith Bank and Nigerian Breweries. Similarly, our underweight to Kuwait also contributed positively on a relative basis as the Gulf States have yet to see a currency adjustment on the back of lower oil prices. The portfolio remains approximately 20% underweight to the Middle East region versus the benchmark. This is in contrast to our overweight positioning within oil sensitive Kazakhstan, which saw a full devaluation of the Tenge in 2015.  Within Kazakhstan, performance was driven by KazMunaiGas EP which gained 28% over the period. Halyk Savings Bank also contributed positively following the delivery of strong earnings.

Broad exposure across the energy sector weighed on returns as the fall in the oil price significantly impacted corporate revenues and export earnings. The Iraqi name, DNO, was one of the largest individual detractors falling by 52% over the year. Despite very low internal lifting costs, the significant impact on the Kurdistan Regional Government budget from lower oil prices restricted their ability to make payments to the international oil companies, putting additional strain on their balance sheets. Kenyan financial, Equity Group, was also among the largest detractors falling by 27% in August alone, following suggested legislation that would cap the interest rates of new loans at 400 basis points above the base rate set by the Central Bank of Kenya. Despite this, the stock rebounded by 12% in September as the bank is likely to be a longer-term beneficiary of the subsequent industry consolidation.

From a positioning standpoint, over the past 12 months we continued to decrease our exposure to the Middle East and North Africa (MENA) region, as lower energy prices remain a primary concern for the underlying economies.  Most notably, we reduced exposure to Kuwait (to 3.8%) and Oman (0.0%), which in conjunction with Nigeria (3.2%), make up our three largest underweight positions at the country level.  All three countries have non-freely floating currencies which means that the local economies may continue to experience significant challenges in a low oil price environment.   Roughly 10% of assets are currently invested in the Middle East.  This is the Company’s lowest exposure to the MENA region since our inception six years ago.  We would expect this percentage to rise when either economic fundamentals change or when valuations reflect this new reality. 

This capital has been predominantly redistributed to the Asian and Latin American regions, which have more robust and underpenetrated consumer-based economies.  We have specifically been adding to opportunities within Argentina and Vietnam. We also added exposure to Romania (11.2%) and Kazakhstan (9.2%), making them our largest overweights in the portfolio by country.  In Romania, we initiated positions in utility, Electrica, and bank, Banca Transilvania, and in Kazakhstan, we initiated a position in telecom company KCell.

OUTLOOK

Frontier Markets continue to exhibit the characteristics that were present when we launched the Company in 2010 and represent a compelling opportunity for long term investors. The combination of the countries with the fastest growing GDP, the best demographic profiles, the lowest government debt, a substantial commodity endowment and where it is possible to invest in companies with strong cash flow and high dividend yields, on some of the lowest valuations in the world, provides an unrivalled investment opportunity. In 2016 the Company’s investment mandate was broadened to include Colombia, Egypt, Peru and the Philippines.  While our exposure to these countries is small today, we think at the right currency and market valuation, all four offer significant long term opportunities for capital appreciation.

Despite the global ramifications of the ‘Leave’ vote in the UK referendum in June, and the outcome of the US presidential elections in November, Frontier Markets, given their lower correlations to the developed world, should show a degree of resiliency during this period of increased uncertainty. Broadly, Frontier Market economies remain relatively ‘closed-off’, having limited economic linkages to the rest of the world. We retain our preference for Frontier Markets that are experiencing improved macroeconomic conditions, better political governance, cash flow growth and cheap valuations. Our preferred countries remain Argentina, Bangladesh, Kazakhstan, Pakistan and Romania.

SAM VECHT & EMILY FLETCHER
BlackRock Investment Management (UK) Limited

22 November 2016

TEN LARGEST INVESTMENTS1 AS AT 30 SEPTEMBER 2016

MCB Bank (Pakistan, Financials, 4.8% (2015: 1.7%)) MCB is one of the leading private banks in Pakistan. The bank has a customer base of approximately 4 million and a nationwide distribution network of over 1,100 branches.

Banco Macro (Argentina, Financials, 4.0% (2015: 2.5%)) was formed through the combination of a number of regional banks. The bank is dominant in the interior of the country where 79% of its branches are based. It has the leading market share in personal loans in the country with 15% market share.

KazMunaiGas Exploration Production (Kazakhstan, Energy, 3.7% (2015: 1.6%)) is the largest onshore oil producer in Kazakhstan, with c.250 kbpd annual production.

Halyk Savings Bank2 (Kazakhstan, Financials, 3.4% (2015: 2.9%)) is one of Kazakhstan’s leading financial services groups and a leading retail bank with the largest customer base and distribution network in Kazakhstan. Halyk’s branch network consists of 566 outlets across the country, with 1,913 ATMs.

Grupo Financiero Galicia (Argentina, Financials, 3.4% (2015: 2.4%)) is one of the largest private sector banks in Argentina, with a deposit market share of 9%. Through its various subsidiaries, Galicia is the largest credit card issuer in Argentina having issued over 9.5 million credit cards.

Square Pharmaceuticals2 (Bangladesh, Health Care, 3.3% (2015: 3.3%)) is the largest pharmaceutical company in Bangladesh, with a market share of 16%.

BRD Groupe Société Générale2 (Romania, Financials, 3.2% (2015: 3.3%)) is the second largest Romanian Bank, with over 2 million clients and 900 branches.

MHP (Ukraine, Consumer Staples, 3.1% (2015: 4.3%)) is a food processor, specialising in poultry exports. From hatching through to finished poultry products, the production process is 100% owned. MHP also owns 11 distribution centres and a refrigerated delivery vehicle fleet which enables the company to distribute products directly to customers.

Societatea Energetica Electrica (Romania, Utilities, 3.1% (2015: Nil)) is a Romanian state-owned power supply and distribution company that conducts its activity nationally, through three regionally focused subsidiaries.

S.N.G.N. Romgaz2 (Romania, Energy, 2.9% (2015: 2.9%)) is the largest natural gas producer in Romania, supplying c. 5.6 bcm of gas per year. The company’s main production comes from the Transylvanian basin; the company also engages in exploration projects in the Black Sea.

1 Gross market exposure as a % of net assets. Percentages in brackets represent the portfolio holding at 30 September 2015.
2 Includes exposure gained via both contracts for difference and equity holdings.

PORTFOLIO ANALYSIS

COUNTRY ALLOCATION: ABSOLUTE WEIGHTS (% OF GROSS MARKET EXPOSURE)

%
Argentina 13.8
Pakistan 11.8
Romania 11.2
Bangladesh 9.2
Kazakhstan 9.1
Vietnam 7.3
Sri Lanka 6.8
Morocco 5.9
Ukraine 5.6
Kenya 5.5
Kuwait 3.8
Nigeria 3.2
Eurasia 2.3
Slovenia 2.1
Estonia 2.1
Caribbean 1.9
Philippines 1.5
Egypt 0.8
Saudi Arabia 0.1

Source: BlackRock and Datastream.

COUNTRY ALLOCATION RELATIVE TO THE MSCI FRONTIER MARKETS INDEX (%)

%
Romania 7.6
Kazakhstan 7.3
Bangladesh 6.6
Ukraine 5.6
Sri Lanka 4.9
Argentina 4.6
Vietnam 3.4
Pakistan 2.9
Eurasia 2.3
Caribbean 1.9
Estonia 1.6
Philippines 1.5
Egypt 0.8
Saudi Arabia 0.1
Kenya 0.1
Bulgaria -0.1
Slovenia -0.2
Lithuania -0.2
Serbia -0.2
Tunisia -0.7
Jordan -0.8
Mauritius -1.2
Bahrain -1.2
Morocco -1.3
Croatia -1.4
Lebanon -3.6
Oman -5.6
Nigeria -12.4
Kuwait -18.3

Source: BlackRock and Datastream.

SECTOR ALLOCATION: ABSOLUTE WEIGHTS (% OF GROSS MARKET EXPOSURE)

%
Financials 35.2
Consumer Staples 17.7
Telecommunications 11.3
Utilities 7.9
Energy 6.6
Health Care 6.2
Materials 5.3
Information Technology 5.3
Industrials 5.2
Real Estate 2.0
Consumer Discretionary 1.3

Source: BlackRock and Datastream.

SECTOR ALLOCATION RELATIVE TO THE MSCI FRONTIER MARKETS INDEX (%)

Consumer Staples 8.7
Utilities 6.7
Information Technology 5.3
Health Care 3.1
Industrials 2.1
Consumer Discretionary 0.9
Materials -2.2
Energy -2.5
Real Estate -2.5
Telecommunications -2.5
Financials -13.1

Source: BlackRock and Datastream.

INVESTMENTS AS AT 30 SEPTEMBER 2016



Company 

Principal country 
of operation 


Sector 
Fair value and 
market exposure1 
US$’000 
Gross market 
exposure as a % 
of net assets3 
Equity portfolio
Banco Macro  Argentina  Financials  11,130  4.0 
Grupo Financiero Galicia  Argentina  Financials  9,488  3.4 
Pampa Energia  Argentina  Utilities  6,601  2.4 
Irsa Inversiones GDR  Argentina  Real Estate  5,560  2.0 
Globant  Argentina  Information Technology  5,472  2.0 
 --------   -------- 
38,251  13.8 
 --------   -------- 
MCB Bank  Pakistan  Financials  13,138  4.8 
Hub Power  Pakistan  Utilities  6,646  2.4 
D.G. Khan Cement  Pakistan  Materials  4,963  1.8 
Millat Tractors  Pakistan  Industrials  3,849  1.4 
United Bank  Pakistan  Financials  3,611  1.3 
 --------   -------- 
32,207  11.7 
 --------   -------- 
BRD Groupe Société Générale  Romania  Financials  8,056  2.9 
Societatea Energetica Electrica  Romania  Utilities  7,759  2.8 
S.N.G.N. Romgaz  Romania  Energy  7,587  2.7 
Banca Transilvania  Romania  Financials  5,521  2.0 
 --------   -------- 
28,923  10.4 
 --------   -------- 
KazMunaiGas Exploration Production  Kazakhstan  Energy  10,332  3.7 
Halyk Savings Bank  Kazakhstan  Financials  9,189  3.3 
Kcell Joint Stock Company  Kazakhstan  Telecommunication  5,385  2.0 
 --------   -------- 
24,906  9.0 
 --------   -------- 
MHP  Ukraine  Consumer Staples  8,676  3.1 
Luxoft  Ukraine  Information Technology  6,895  2.5 
 --------   -------- 
15,571  5.6 
 --------   -------- 
Safaricom  Kenya  Telecommunication  7,467  2.7 
Equity Group  Kenya  Financials  7,111  2.6 
 --------   -------- 
14,578  5.3 
 --------   -------- 
Distilleries Company of Sri Lanka  Sri Lanka  Consumer Staples  5,080  1.8 
Chevron Lubricants  Sri Lanka  Materials  5,046  1.8 
Hatton National Bank  Sri Lanka  Financials  3,287  1.2 
 --------   -------- 
13,413  4.8 
 --------   -------- 
Mobile Telecommunications  Kuwait  Telecommunication  5,434  2.0 
Mezzan Holdings  Kuwait  Consumer Staples  4,807  1.7 
National Gulf Holding  Kuwait  Consumer Discretionary  211  0.1 
 --------   -------- 
10,452  3.8 
 --------   -------- 
Grameenphone  Bangladesh  Telecommunication  4,084  1.5 
Olympic Industries  Bangladesh  Consumer Staples  3,969  1.4 
Square Pharmaceuticals  Bangladesh  Health Care  2,277  0.8 
 --------   -------- 
10,330  3.7 
 --------   -------- 
Zenith Bank  Nigeria  Financials  3,009  1.1 
United Bank for Africa  Nigeria  Financials  2,915  1.1 
Guaranty Trust Bank  Nigeria  Financials  1,738  0.6 
Nigerian Breweries  Nigeria  Consumer Staples  1,130  0.4 
 --------   -------- 
8,792  3.2 
 --------   -------- 
Attijariwafa Bank  Morocco  Financials  7,049  2.6 
 --------   -------- 
7,049  2.6 
 --------   -------- 
KRKA  Slovenia  Health Care  5,570  2.0 
 --------   -------- 
5,570  2.0 
 --------   -------- 
Tallink  Estonia  Industrials  5,472  2.0 
 --------   -------- 
5,472  2.0 
 --------   -------- 
Pricesmart  Caribbean  Consumer Staples  5,115  1.9 
 --------   -------- 
5,115  1.9 
 --------   -------- 
LT Group  Philippines  Industrials  3,973  1.5 
 --------   -------- 
3,973  1.5 
 --------   -------- 
Integrated Diagnostics  Egypt  Health Care  13  0.0 
 --------   -------- 
13  0.0 
 --------   -------- 
Equity Investments 224,615  81.3 
 --------   -------- 
BlackRock's Institutional Cash Series plc - US Dollar Liquidity Fund 42,625  15.4 
 --------   -------- 
Total equity investments (including BlackRock's Institutional Cash Series plc - US Dollar Liquidity Fund) 267,240  96.7 
 --------   -------- 
P-Notes
United International  Saudi Arabia  Industrials  373  0.1 
Fawaz Abdulaziz Alhokair & Co  Saudi Arabia  Consumer Discretionary  71  0.0 
 --------   -------- 
Total P-Notes 444  0.1 
 --------   -------- 
Total investments excluding CFDs 267,684  96.8 
 ========   ======== 

   



Company 

Principal country 
of operation 


Sector 

Fair value1 
US$’000 
Gross market 
exposure2 
US$’000 
Gross market 
exposure as a % 
of net assets
CFD portfolio
Long positions
Masan  Vietnam  Consumer Staples  6,099  2.2 
Petrovietnam Fertilizer & Chemicals  Vietnam  Materials  4,287  1.6 
Saigon Securities  Vietnam  Financials  4,195  1.5 
Mobile World  Vietnam  Consumer Discretionary  3,410  1.2 
FPT  Vietnam  Information Technology  2,292  0.8 
 --------   -------- 
20,283  7.3 
 --------   -------- 
Square Pharmaceuticals  Bangladesh  Health Care  6,899  2.5 
British American Tobacco  Bangladesh  Consumer Staples  5,912  2.1 
United Commercial Bank  Bangladesh  Financials  1,915  0.7 
Olympic Industries  Bangladesh  Consumer Staples  392  0.2 
 --------   -------- 
15,118  5.5 
 --------   -------- 
Maroc Telecom  Morocco  Telecommunication  8,149  3.0 
Attijariwafa Bank  Morocco  Financials  665  0.3 
 --------   -------- 
8,814  3.3 
 --------   -------- 
Coca Cola Icecek  Eurasia  Consumer Staples  6,257  2.3 
 --------   -------- 
6,257  2.3 
 --------   -------- 
Hatton National Bank  Sri Lanka  Financials  3,695  1.3 
Distilleries Company of Sri Lanka  Sri Lanka  Consumer Staples  1,636  0.6 
Chevron Lubricants  Sri Lanka  Materials  208  0.1 
 --------   -------- 
5,539  2.0 
 --------   -------- 
Cleopatra Hospital  Egypt  Health Care  2,307  0.8 
 --------   -------- 
2,307  0.8 
 --------   -------- 
BRD Groupe Société Générale  Romania  Financials  767  0.3 
Societatea Energetica Electrica  Romania  Utilities  737  0.3 
S.N.G.N. Romgaz  Romania  Energy  660  0.2 
 --------   -------- 
2,164  0.8 
 --------   -------- 
Safaricom  Kenya  Telecommunication  316  0.1 
Equity Group  Kenya  Financials  239  0.1 
 --------   -------- 
555  0.2 
 --------   -------- 
Halyk Savings Bank  Kazakhstan  Financials  385  0.1 
 --------   -------- 
385  0.1 
 --------   -------- 
Millat Tractors  Pakistan  Industrials  238  0.1 
Engro Foods  Pakistan  Consumer Staples  129  0.0 
D.G. Khan Cement  Pakistan  Materials  –  0.0 
Hub Power  Pakistan  Utilities  –  0.0 
 --------   -------- 
367  0.1 
 --------   -------- 
Tallink  Estonia  Industrials  240  0.1 
 --------   -------- 
240  0.1 
 --------   -------- 
KRKA  Slovenia  Health Care  233  0.1 
 --------   -------- 
233  0.1 
 --------   -------- 
Mobile Telecommunications  Kuwait  Telecommunication  97  0.0 
National Gulf Holding  Kuwait  Consumer Discretionary  0.0 
 --------   -------- 
99  0.0 
 --------   --------   -------- 
Total long CFD positions 307  62,361  22.6 
 --------   --------   -------- 
Equity investments (excluding BlackRock's Institutional Cash Series plc – US Dollar Liquidity Fund) and P-Notes 225,059  225,059  81.4 
 ======   ======   ==== 
BlackRock's Institutional Cash Series plc – US Dollar Liquidity Fund4 42,625  42,625  15.4 
 ======   ======   ==== 
Total Investments 267,991  330,045  119.4 
 ======   ======   ==== 
Cash and cash equivalents4 9,012  (53,042) (19.2)
 ======   ======   ==== 
Net current liabilities (606) (606) (0.2)
 ======   ======   ==== 
Net assets 276,397  276,397  100.0 
 ======   ======   ==== 

1    Fair value is determined as follows:
 –  Listed/Fixed interest and AIM quoted investments are valued at bid prices where available, otherwise at published price quotations.
 –  The sum of the fair value column for the CFD contracts totalling US$307,000 represents the fair valuation of all the CFD contracts, which is determined based on the difference between the purchase price and value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed positions). The cost of purchasing the securities held through long CFD positions directly in the market would have amounted to US$62,054,000 at the time of purchase, and subsequent market rises in prices have resulted in unrealised gains on the CFD contracts of US$307,000, resulting in the value of the total market exposure to the underlying securities rising to US$62,361,000 as at 30 September 2016.
 –  P-Notes are valued based on the quoted bid price of the underlying security to which they relate.
2    Market exposure in the case of equity and P-Note investments is the same as fair value. In the case of CFDs it is the market value of the underlying shares to which the portfolio is exposed via the contract.
3    % based on the total market exposure.
4    The gross market exposure for cash and cash equivalents has been adjusted to assume the Company purchased direct holdings rather than exposure being gained through CFDs.

STRATEGIC REPORT

The Directors present the Strategic Report of the Company for the year ended 30 September 2016.

PRINCIPAL ACTIVITY

The Company carries on business as an investment trust and its principal activity is portfolio investment.

CHANGES TO THE INVESTMENT OBJECTIVE AND POLICY

The Board proposed various amendments to the Company’s investment objective and policy during the previous year and these changes were subsequently approved by shareholders at the AGM held on 10 February 2016. These included a revised definition of Frontier Markets and an amendment of the investment policy in order that up to 20% of the gross value of the portfolio (on an ongoing basis) may be invested in Colombia, Egypt, Peru or the Philippines. Following shareholder approval, the amended investment objective and policy came into force on 10 February 2016. The Company’s current investment objective and investment policy are set out below.

INVESTMENT OBJECTIVE

The Company’s investment objective is to achieve long-term capital growth from investment in companies operating in Frontier Markets or whose stocks are listed on the stock markets of such 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, Frontier Markets. Investment may also be made in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, more developed markets but with significant business operations in Frontier Markets.

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 (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) Ltd (BIM (UK)) (‘the Investment Manager’). The contractual arrangements with, and assessment of, the Manager are summarised on pages 29 and 30 of the Annual Report and Financial Statements. 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, BNY Mellon Trust & Depositary (UK) Limited, the Fund Accountant, Bank of New York Mellon (International) Limited, 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.

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, Frontier Markets. A Frontier Market is defined as:

1)   any country that was not a constituent of the MSCI Emerging Markets Index or the MSCI Developed Markets Index as at 1 December 2015 (save for those countries specified in 2 below); or

2)   any of Colombia, Egypt, Peru or The Philippines, each of which was a member of the MSCI Emerging Markets Index as at 1 December 2015, but which share similar characteristics to those of less developed markets (such as low per capita GDP, high growth potential and less developed capital markets).

Investment in the securities of companies domiciled or listed in, or exercising the predominant part of their economic activity in, those countries specified in 2 above will be limited to a maximum of 20% of the gross value of the portfolio on an ongoing basis.

The Company will exit any investment as soon as reasonably practicable following that market becoming a constituent of the MSCI Developed Markets Index.

In order to achieve the Company’s investment objective, the Investment Manager selects stocks by fundamental analysis of countries, sectors and companies, looking for long-term appreciation from mispriced value or growth. The Investment Manager employs both a top-down and bottom-up approach to investing. Risk is spread through investing in a number of holdings and, typically, it is expected that the Company will invest in between 35 to 65 holdings.

Where possible, investment will generally be made directly in the stock markets of Frontier Markets. Where the Investment Manager determines it appropriate, investment may be made in Frontier Markets through collective investment schemes, although such investment is not likely to be substantial. Investment in other closed-ended investment funds admitted to the Official List will not exceed more than 10%, 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 convertibles or fixed-interest securities where there are perceived advantages in doing so. The Investment Manager may invest 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 of the Company’s target Frontier Markets, the Company may temporarily, or, on an ongoing basis, be unable to invest (whether directly or through nominees) in certain of its target Frontier Markets or, in the opinion of the Company and/or the Investment Manager, it may not be advisable to do so. In such circumstances, the Company intends to gain economic exposure to such target Frontier Markets by investing indirectly through derivatives (including contracts for difference) and/or structured financial instruments, for example P-Notes. Save as provided below, there is no restriction on the Company investing in derivatives and/or structured financial instruments in such circumstances.

If the Company invests in derivatives and/or structured financial instruments for investment purposes (other than to gain access to a target Frontier Market as described above) and/or for efficient portfolio management purposes it shall only hold up to, in aggregate, 20% of its Gross Assets in derivatives and/or structured financial instruments for such purposes. The Company may take both long and short positions. The Company may short up to a limit of 10% of Gross Assets. For shorting purposes the Company may use indices or individual stocks.

The maximum exposure the Company may have to derivatives and/or structured financial instruments for investment purposes (including gaining access to target Frontier Markets) and efficient portfolio management purposes, in aggregate, shall be 100% of the Company’s portfolio. When investing via derivatives and/or structured financial instruments (whether for investment purposes (including gaining access to target Frontier Markets) and/or for efficient portfolio management purposes), 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 whom shall, at the time of entering into such derivatives and/or structured financial instruments, have a Standard & Poors credit rating of at least A- long-term senior unsecured. When investing via derivatives and/or structured financial instruments, the Company could have exposure to between 35 to 65 underlying companies.

The Investment Manager will invest directly in securities only in countries where it is satisfied that acceptable custodial and other arrangements are in place to safeguard the Company’s investments. The Company’s portfolio may frequently be overweight or underweight relative to the benchmark Index.

The Company may invest up to 5% 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% of its Gross Assets in any one stock or derivative position at the time of investment (excluding cash management activities).

The Company may use borrowings for settlement of transactions, to facilitate share repurchases (where applicable) and to meet on-going expenses and may be geared through borrowings and/or by entering into derivative transactions that have the effect of gearing the Company’s portfolio to enhance performance. The aggregate of gearing through borrowing and the use of derivatives will not exceed 40% of the Gross Assets. It is anticipated that the aggregate of such gearing will not exceed 20% of the Gross Assets at the time of drawdown of the relevant borrowings or entering into the relevant transaction, as appropriate.

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 on pages 10 to 15 of the Annual Report and Financial Statements.

PERFORMANCE

Details of the Company’s performance for the year are given in the Chairman’s Statement. The Investment Manager’s Report 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. The total profit for the year, after taxation, was US$23,168,000 (2015: loss of US$54,097,000) of which the revenue return amounted to US$10,113,000 (2015: US$9,870,000) and the capital profit amounted to US$13,055,000 (2015: loss of US$63,967,000).

The Directors are recommending the payment of a final dividend of 4.00 cents per ordinary share in respect of the year ended 30 September 2016 (2015: 4.15 cents) as set out in the Chairman’s Statement.

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

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 on page 3 of the Annual Report and Financial Statements.

SHARE RATING

The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount 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 has formulated and submitted 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 applicable NAV per share less costs.

For the year under review the Company’s shares have traded at an average discount to the cum-income NAV of 2.0% during the year, and were trading at a discount of 2.7% on a cum-income basis at 18 November 2016. The Directors have the authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares). This authority, which has not so far been utilised, expires at the 2017 AGM, when a resolution will be put to shareholders to renew it. The Directors also have the authority 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 and will seek shareholder authority to renew this power at the AGM.

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.

The table below sets out the key KPIs for the Company.

Year ended 
30 September 20161 
£% 
Year ended 
30 September 20161 
US$% 
Year ended 
30 September 2015
£% 
Year ended 
30 September 2015
US$% 
Change in net asset value2 +27.4  +9.3  -12.2  -17.9 
Change in share price3 +30.0  +11.6  -17.5  -22.9 
Change in benchmark index4 +17.7  +0.9  -18.9  -24.2 
Discount to cum income NAV 0.4  2.4 
Ongoing charges5 1.4  1.5 
Ongoing charges plus taxation and performance fees 2.4  1.6 


1. Based on an exchange rate of US$1.2990 to £1 at 30 September 2016 and US$1.5147 to £1 as at 30 September 2015.
2. Calculated in accordance with AIC guidelines.
3. Calculated on a mid to mid basis.
4. MSCI Frontier Markets Index, (Net Return).
5. Calculated as a percentage of average net assets and using expenses, excluding performance fees, VAT refunded, finance costs and taxation.

The Board also 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 Markets open and closed-ended funds.

PRINCIPAL RISKS

The Board has in place a robust process to identify, assess and monitor the principal risks of the Company, including those that they consider would threaten its business model, future performance, solvency or liquidity. 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 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 Audit & 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 & 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, Bank of New York Mellon.

In relation to the 2016 update to the UK Corporate Governance Code, the Board is comfortable that the procedures that the Company has in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout 2016.

The current risk register includes a range of risks spread between investment performance risk, income/dividend risk, legal & 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 as follows.

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 stategy adopted.

An inappropriate policy or stategy 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 these risks 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;
- receive 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.
 
INCOME/DIVIDEND RISK

The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. 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.


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. The Company also has a revenue reserve and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required.
LEGAL & REGULATORY RISK

The Company has been accepted 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 and the UK Listing Rules and Disclosure & 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, BNY Mellon Trust & Depositary (UK) Limited (the Depositary) and the Bank of New York Mellon (International) Limited (the Fund Accountant), which maintains the Company’s accounting records.

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 cyber-attack 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 Investment Manager and receives reports on the business continuity arrangements for the Company’s key service providers. The Board also receives regular reports from BlackRock’s internal audit function.
 
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 Frontier Markets 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 a limited number of 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 Frontier Markets 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 also gains exposure to Frontier Markets by investing indirectly through Promissory 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 also regularly reports to the Board on relative market risks associated with investment in such regions. Further information is provided under ‘Political Risk’.
POLITICAL RISK

Investments in Frontier Markets may include a higher element of risk compared to more developed markets due to greater political instability. Political and diplomatic events in Frontier Markets 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 18 to the financial statements, together with a summary of the policies for managing these risks.

VIABILITY STATEMENT

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines. The Board conducted this review for the period up to the AGM in 2021, which is the second deadline (following the tender offer in 2016) by which the Board will formulate and submit to shareholders proposals (which may constitute a tender offer and/or other method of distribution) to provide an opportunity to realise the value of their investment in the Company at NAV less applicable costs.

In making this assessment the Board has considered the following factors:

The Board has also considered a number of financial metrics, including:

The Company is an investment company with a relatively liquid portfolio (as at 30 September 2016, 81% of the portfolio was capable of being liquidated in 20-40 days) and largely fixed overheads (excluding performance fees) which comprise a very small percentage of net assets (1.4%). In addition, any performance fees are capped at 1% of NAV in years where the NAV per share has fallen or 2.5% 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, a significant decrease in size due to substantial share buy-back activity, 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 current and potential future impact on the Company of the UK’s decision to leave the European Union following the referendum held in June of this year. It has concluded that the Company’s business model and strategy are not threatened by this event and therefore it does not believe that it represents a principal risk to the Company. In reaching this conclusion the Board considered whether this event has, or would be likely to have, a significant impact on the Company’s activities and whether or not the Investment Managers would be impeded in achieving its investment objectives as a result of the impact of the leave vote. The Board also considered the impact of potential changes in law, regulation and taxation and the matter of foreign exchange risk, noting that the devaluation of sterling following the vote is likely to have been beneficial for the Company’s UK investors. However, due to the complexity and general lack of information available at present, it is challenging to accurately assess the future impact of UK’s exit from the European Union. Therefore, the Board intends to closely monitor the situation as it develops and will regularly reappraise its position.

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.

FUTURE PROSPECTS

The Board’s main focus is 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.

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 on page 27 of the Annual Report and Financial Statements.

MODERN SLAVERY ACT

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 2016, all of whom – with the exception of Mr White – held office throughout the year, are set out in the Directors’ biographies on page 23 of the Annual Report and Financial Statements. As at the date of this report, the Board consists of five men.  Ms Ruddick retired from the Board with effect from 22 November 2016. The Company does not have any employees.

By order of the Board
BlackRock Investment Management (UK) Limited
Corporate Company Secretary

22 November 2016

RELATED PARTY TRANSACTIONS

BlackRock Fund Managers Limited (“BFM”) was appointed as the Company’s AIFM with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BIM (UK).

Details of the fees payable to BFM are set out in note 4 on page 55 of the Annual Report and Financial Statements. Transaction and relationship details are set out in the Directors' Report on pages 29 and 30 of the Annual Report and Financial Statements.

The investment management fee for the year was US$2,470,000 (2015: US$2,997,000) as disclosed in note 4. In addition, a performance fee of US$2,581,000 was payable (2015: US$234,000). At the year end, an amount of US$1,151,000 was outstanding in respect of management fees (2015: US$1,471,000) and US$2,581,000 (2015: US$234,000) was outstanding in respect of performance fees.

In addition to the above services, BlackRock provides the Company with marketing services. The total fees paid or payable for these services for the year ended 30 September 2016 amounted to US$58,000 excluding VAT (2015: US$73,000) of which US$40,000 excluding VAT (2015: US$145,000) was outstanding at 30 September 2016.

The Company has an investment in BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund of US$42,625,000 (2015: US$52,924,000) at the year end.

At the date of this report, the Board consists of five non-executive Directors, all of whom are considered to be independent of the Manager by the Board. Ms Ruddick,  who had served on the board up until the date of this report, was not considered to be independent as she also served as a director of another BlackRock managed investment trust.  However, Ms Ruddick has retired from the Board with effect from 22 November 2016.  Mr Stephen White, who will take over from Ms Ruddick as Chairman of the Audit & Management Engagement Committee, joined the Board on 13 July 2016 and is wholly independent. 

None of the Directors has a service contract with the Company. For the year ended 30 September 2016, the Chairman received an annual fee of £34,000, the Chairman of the Audit & Management Engagement Committee receives an annual fee of £28,000 and each of the other Directors received an annual fee of £24,000. With effect from 1 October 2016, the Chairman will receive an annual fee of £36,000, the Chairman of the Audit & Management Engagement Committee will receive an annual fee of £30,000 and each of the other Directors will receive an annual fee of £26,000.

As at 30 September 2016, an amount of US$17,000 (£13,000) was payable to Directors in respect of their annual fees (2015: US$17,000 (£11,000).

All  members of the Board hold ordinary shares in the Company. Audley Twiston-Davies holds 128,935 ordinary shares, John Murray holds 121,967 ordinary shares, Nick Pitts-Tucker holds 110,148 ordinary shares, Lynn Ruddick holds 185,940 ordinary shares (which includes a related party holding of 59,915 shares held through an ISA by her husband, Mr Dewar) Sarmad Zok holds 38,787 ordinary shares and Stephen White holds 30,000 ordinary shares.

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 IFRS as adopted by the European Union. 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 IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

- provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the European Union 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 and the Corporate Governance Statement and the Report of the Audit & Management Engagement Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure 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, whose names are listed on page 23 of the Annual Report and Financial Statements, confirms to the best of their knowledge that:

- the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and net return 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 2014 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 & Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements fulfils these requirements. The process by which the Committee has reached these conclusions is set out in the Audit & Management Engagement Committee’s report on pages 38 to 42 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report for the year ended 30 September 2016, 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

22 November 2016


STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2016
 



Notes 
Revenue 
2016 
US$’000 
Capital 
2016 
US$’000 
Total 
2016 
US$’000 
Revenue 
2015 
US$’000 
Capital 
2015 
US$’000 
Total 
2015 
US$’000 
Income from investments held at fair value through profit or loss 11,041   –  11,041  9,704  –  9,704 
Net income from contracts for difference 1,954   –  1,954  3,171   –  3,171 
Other income  –   – 
    --------   --------   --------   --------   --------   -------- 
Total revenue 12,999   –  12,999  12,876  –  12,876 
    --------   --------   --------   --------   --------   -------- 
Profit/(loss) on investments held at fair value through profit or loss  –  15,625  15,625   –  (53,524) (53,524)
Profit on foreign exchange  –  1,973  1,973   –  272  272 
Net profit/(loss) from contracts for difference  –  915  915   –  (8,446) (8,446)
 --------   --------   --------   --------   --------   -------- 
Total 12,999  18,513  31,512  12,876  (61,698) (48,822)
 --------   --------   --------   --------   --------   -------- 
Expenses
Investment management and performance fees (494) (4,557) (5,051) (598) (2,633) (3,231)
Other operating expenses (1,005) (70) (1,075) (1,094) (49) (1,143)
    --------   --------   --------   --------   --------   -------- 
Total operating expenses (1,499) (4,627) (6,126) (1,692) (2,682) (4,374)
    --------   --------   --------   --------   --------   -------- 
Net profit/(loss) before finance costs and taxation 11,500  13,886  25,386  11,184  (64,380) (53,196)
Finance costs (277) (1,106) (1,383) (1) (6) (7)
    --------   --------   --------   --------   --------   -------- 
Net profit/(loss) on ordinary activities before taxation 11,223  12,780  24,003  11,183  (64,386) (53,203)
Taxation (1,110)  275  (835) (1,313) 419  (894)
    --------   --------   --------   --------   --------   -------- 
Profit/(loss) for the year 10,113  13,055  23,168  9,870  (63,967) (54,097)
    --------   --------   --------   --------   --------   -------- 
Earnings/(loss) per ordinary share (cents) 6.40  8.26  14.66  6.55  (42.47) (35.92)
    =====   =====   =====   =====   =====   ===== 

The total column of this statement represents the Company’s Statement of Comprehensive Income, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). 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 disposed of during the year. All income is attributable to the equity holders of the Company.

The Company does not have any other comprehensive income. The net profit for the year disclosed above represents the Company’s total comprehensive income.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2016




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 2016
At 30 September 2015 1,506  –  5,798  231,030  (4,251) 8,312  242,395 
Total comprehensive income:
Net profit for the year  –   –   –   –  13,055  10,113  23,168 
Transactions with owners, recorded directly to equity:
Share issues – conversion of C shares 8/9  137  21,456   –   –   –   –  21,593 
Cash exit tender offer costs  –   –   –  (236)  –   –  (236)
Dividend paid*  –   –   –   –  –  (10,523) (10,523)
    --------   --------   --------   ----------   --------   --------   ----------- 
At 30 September 2016 1,643  21,456  5,798  230,794  8,804  7,902  276,397 
    --------   --------   --------   ----------   --------   --------   ----------- 
For the year ended
30 September 2015
At 30 September 2014 1,506   –   5,798  231,030  59,716  8,082  306,132 
Total comprehensive income:
Net (loss)/profit for the year  –   –   –   –  (63,967) 9,870  (54,097)
Transactions with owners, recorded directly to equity:
Dividend paid**  –   –   –   –   –  (9,640) (9,640)
    --------   --------   --------   ----------   --------   --------   ---------- 
At 30 September 2015 1,506   –  5,798  231,030  (4,251) 8,312  242,395 
    ====   ====   =====   ======   =====   =====   ====== 

* Final dividend of 4.15 cents per share for the year ended 30 September 2015, declared on 17 December 2015 and paid on 19 February 2016 and interim dividend paid in respect of the year ended 30 September 2016 of 2.60 cents per share, declared on 16 May 2016 and paid on 1 July 2016.

** Final dividend of 4.00 cents per share for the year ended 30 September 2014, declared on 1 December 2014 and paid on 20 February 2015 and interim dividend paid in respect of the year ended 30 September 2015 of 2.40 cents per share, declared on 18 May 2015 and paid on 3 July 2015.

STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2016


Notes 
30 September 2016 
US$’000 
30 September 2015 
US$’000 
Non current assets
Investments held at fair value through profit or loss 267,684  239,446 
 -----------   ----------- 
Current assets
Other receivables 5,118  5,371 
Derivative financial assets held at fair value through profit or loss 884  1,828 
Cash held on margin deposit with brokers 450  1,145 
Cash and cash equivalents 8,729  5,635 
 -----------   ----------- 
15,181  13,979 
 -----------   ----------- 
Total assets 282,865  253,425 
 -----------   ----------- 
Current liabilities
Other payables (5,705) (9,904)
Collateral held in respect of contracts for difference (167) (260)
Derivative financial liabilities held at fair value through profit or loss (577) (847)
    -----------   ----------- 
(6,449) (11,011)
    -----------   ----------- 
Total assets less current liabilities 276,416  242,414 
    -----------   ----------- 
Non current liabilities
Management shares of £1.00 each (one quarter paid) (19) (19)
 -----------   ----------- 
Net assets 276,397  242,395 
 -----------   ----------- 
Equity attributable to equity holders
Called up share capital 1,643  1,506 
Share premium account 21,456  – 
Capital redemption reserve 5,798  5,798 
Special reserve 230,794  231,030 
Capital reserves 8,804  (4,251)
Revenue reserve 7,902  8,312 
    -----------   ----------- 
Total equity 276,397  242,395 
    -----------   ----------- 
Net asset value per share (US cents) 168.19  160.93 
    ======   ====== 

CASH FLOW STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2016

30 September 2016 
US$’000 
30 September 2015 
US$’000 
Operating activities
Net profit/(loss) before taxation* 24,003  (53,203)
Add back finance costs 1,383 
(Profit)/loss on investments and CFDs held at fair value through profit or loss (including transaction costs) (17,094) 61,368 
Net profit on foreign exchange (1,973) (272)
Sale of investments held at fair value through profit or loss 247,220  198,588 
Purchase of investments held at fair value through profit or loss (259,833) (199,240)
Realised losses on closure of CFD contracts (19,917) (40,864)
Realised gains on closure of CFD contracts 22,060  43,635 
(Increase)/decrease in other receivables (47) 496 
Increase in other payables 1,653  416 
Decrease/(increase) in amounts due from brokers 300  (3,725)
Net movement in cash held on margin deposit with brokers 695  (1,055)
(Decrease)/increase in amounts due to brokers (5,852) 6,647 
Collateral repaid in respect of contracts for difference (93) (11,664)
 --------   -------- 
Net cash (outflow)/inflow from operating activities before interest and taxation (7,495) 1,134 
 --------   -------- 
Interest paid (3) (7)
Taxation paid (835) (894)
 --------   -------- 
Net cash (outflow)/inflow from operating activities before financing activities (8,333) 233 
 --------   -------- 
Financing activities
Tender costs paid (236)  – 
Share issue costs paid (691)  – 
Proceeds from issue of C shares 20,904   – 
Dividends paid (10,523) (9,640)
 --------   -------- 
Net cash inflow/(outflow) from financing activities 9,454  (9,640)
 --------   -------- 
Decrease in cash and cash equivalents 1,121  (9,407)
Effect of foreign exchange rate changes 1,973  272 
 --------   -------- 
Change in cash and cash equivalents 3,094  (9,135)
Cash and cash equivalents at start of year 5,635  14,770 
 --------   -------- 
Cash and cash equivalents at end of year 8,729  5,635 
 =====   ===== 
Comprised of:
Cash at bank 8,729  5,635 
 --------   -------- 
8,729  5,635 
 =====   ===== 
* Includes dividends and interest received during the year of US$13,165,000 and US$4,000 (2015: US$13,027,000 and US$2,000).

NOTES TO THE FINANCIAL STATEMENTS

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 sixth Annual Report.

2. ACCOUNTING POLICIES

The principal accounting policies adopted by the Company are set out below.

(a) Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. All of the Company’s operations are of a continuing nature. The Company’s financial statements are presented in US Dollars, which is 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.

Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts issued by the AIC, revised in November 2014, is compatible with IFRS, the financial statements have been prepared in accordance with the guidance set out in the SORP.

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2016 and have not been applied in preparing these financial statements (major changes and new standards issued are detailed below). None of these is expected to have a significant effect on the measurement of the amounts recognised in the financial statements of the Company.

IFRS 9 – Financial Instruments (2014) replaces IAS 39 and deals with a package of improvements including principally a revised model for classification and measurement of financial instruments, a forward looking expected loss impairment model and a revised framework for hedge accounting. In terms of classification and measurement the revised standard is principles based depending on the business model and nature of cash flows. Under this approach instruments are measured at either amortised cost or fair value. Under IFRS 9 equity and derivative investments will be held at fair value because they fail the ‘solely payments of principal and interest’ test and debt investments will be held at fair value because the business model is to manage them on a fair value basis. The scope of the fair value option is reduced within IFRS 9. The standard is effective from 1 January 2018 with earlier application permitted but has not yet been endorsed by the European Commission. The Company does not plan to early adopt this standard.

Amendments to IAS 1 (effective 1 January 2016) require changes to the presentation of financial instruments. The amendments are not expected to have a significant effect on the measurement of amounts recognised in the financial statements of the Company.

Amendments to IAS 7 – Disclosure initiative Statement of Cash Flows (effective 1 January 2017). The amendments are not expected to have a significant effect on the presentation of the Statement of Cash Flows within the financial statements of the Company.

Amendments to IAS 12 – Recognition of deferred tax assets for unrealised losses (effective 1 January 2017). The amendment is not expected to have a significant effect on the measurement of amounts recognised in the financial statements of the Company.

IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018) specifies how and when an entity should recognise revenue and enhances the nature of revenue disclosures. Given the nature of the Company’s revenue streams from financial instruments the provisions of this standard are not expected to be applicable.

(b) Presentation of the Statement of Comprehensive Income

In order to reflect better 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 particular case. The return on a debt security is recognised on a time apportionment basis so as to reflect the effective yield on the debt security.

Interest income and expenses are accounted for on an accruals basis.

(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:

(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 period. Taxable profit differs from net profit as reported in the Statements 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 tax in the future or right to pay less tax 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

All investments are initially and subsequently measured at fair value through profit or loss.

The Company’s investments are classified as held at fair value through profit or loss in accordance with IAS 39 – “Financial Instruments: Recognition and Measurement” and are managed and evaluated on a fair value basis in accordance with its investment strategy.

All investments are initially recognised as held at fair value through profit or loss and subsequently at fair value. Purchases of investments are recognised on a trade date basis. The sale of investments are recognised at the trade date of the disposal. Proceeds are measured at fair value, which is regarded as the proceeds of sale less any transaction costs.

The fair value of the financial investments is based on their quoted bid price, or as otherwise stated at the financial reporting date, without deduction for the estimated future selling costs. This policy applies to all current and non current asset investments held by the Company. The fair value of the P-Note is based on the quoted bid price of the underlying equity to which it relates.

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 “Profits or 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.

Fair values for unquoted investments, or investments for which the market is inactive, are established by using various valuation techniques. These may include recent arm’s length market transactions or the current fair value of another instrument which is substantially the same. Where no reliable fair value can be estimated for such instruments, they are carried at cost subject to any provision for impairment. The Company held no unquoted investments at 30 September 2016.

(h) Derivatives

The Company holds long and short positions in contracts for difference (CFD) 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.

Derivatives 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, which the Company is exposed to through the use of contracts for difference (CFD). Profits and losses on derivative transactions are recognised in the Statement of Comprehensive Income. They are recognised as capital and are shown in the capital column of the Statement of Comprehensive Income if they are of a capital nature and are recognised as revenue and 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 at their nominal value.

(j) Dividends payable

Under IFRS interim dividends are recognised when paid to shareholders. Final dividends, if any, are only recognised after they have been approved by shareholders.

(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 through profit or loss 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.

(l) Cash and cash equivalents

Cash comprises cash in hand 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 BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund of £42,625,000 (2015: £52,924,000) 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) C share liability

C shares are recognised on issue at fair value less directly attributable transaction costs. After initial recognition, C shares are subsequently measured at amortised cost using the effective interest method. Amortisation is credited or charged to finance income or finance costs in the Statement of Comprehensive Income. Transaction costs are amortised to the earliest conversion period.

The C shares issued represented contracts for conversion into a variable number of ordinary shares and therefore the C shares are classified as liabilities under IAS 32. The classification resulted in the issue costs and the return on the C shares being presented as finance costs in the Company’s Statement of Comprehensive Income. The return on the C shares represented an increase in the assets attributable to the C shares over and above the proceeds raised from their issue.

At the time that it arose, the Directors considered whether the C share liability should be valued at fair value or stated at amortised cost.

The C shares were traded on the London Stock Exchange. The amortised cost value of the C share pool equated to the net asset value of the C shares, which the Directors considered was the most appropriate way to value the liability. The liability was extinguished on 15 March 2016 when the C shares were converted to ordinary shares.

3. INCOME

2016 
US$’000 
2015 
US$’000 
Investment Income:
UK listed dividends  –  207 
Overseas listed dividends 11,041  9,495 
Fixed interest income  – 
 --------   -------- 
11,041  9,704 
Income from contracts for difference 1,954  3,171 
 --------   -------- 
12,995  12,875 
Interest receivable and other income:
Deposit interest
 --------   -------- 
Total income 12,999  12,876 
 =====   ===== 

4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES

2016
Revenue 
US$’000 
2016
Capital 
US$’000 
2016
Total 
US$’000 
2015
Revenue 
US$’000 
2015
Capital 
US$’000 
2015
Total 
US$’000 
Investment management fee 494  1,976  2,470  598  2,399  2,997 
Performance fee  –   2,581   2,581  –  234  234 
 -------   --------   --------   ------   --------   -------- 
Total 494  4,557  5,051  598  2,633  3,231 
 ====   =====   =====   ====   =====   ===== 

An investment management fee equivalent to 1.10% per annum of the Company’s gross assets (defined as the aggregate value of the total assets of the Company) is payable to the Manager. In addition, the Manager is also 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 MSCI Frontiers Markets Index (‘the Reference Index’). The performance fee payable in any year is capped at an amount equal to 2.5% or 1% 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 Reference Index since the last date in relation to which a performance fee had been paid. The management and performance fees are payable to BFM.

For the year ended 30 September 2016, the Company’s NAV had outperformed the MSCI Frontiers Markets Index by 8.4% (2015: 6.5%) on a US dollar basis and as a result a performance fee of US$2,581,000 (2015: US$234,000) has been accrued at 30 September 2016.

Under the terms of the C share issue in February 2016, BlackRock had agreed to waive the management fees payable by the Company up to the value of issue expenses that exceeded the capped amount of 1.75% of the gross proceeds from the issue of C shares. As the issue expenses exceeded the capped amount, the excess issue expenses of US$325,000 have been offset against the investment management fee payable by the Company during the year ended 30 September 2016.

5. OTHER OPERATING EXPENSES

2016 
US$’000 
2015 
US$’000 
Allocated to revenue:
Custody fee 342  336 
Auditor’s remuneration:1
– audit services 41  39 
– other non-audit services2 23  10 
Registrar’s fee 32  25 
Directors’ emoluments1 171  223 
Broker fees 40  44 
Depositary fees 29  31 
Marketing fees 58  73 
Other administrative costs 269  313 
 --------   -------- 
1,005  1,094 
 --------   -------- 
Allocated to capital:
Transaction charges 70  49 
 --------   -------- 
1,075  1,143 
 ====   ===== 

1.   Custody fees, directors’ fees and audit fees are paid in sterling and are therefore subject to exchange rate fluctuations.

2.   Fees for non audit services relate to the following services provided by the Auditor:

-        US$ 9,000 (2015: US$10,100) relating to the review of the interim financial statements.
-        £24,500 (US$35,300) (excluding VAT) in respect of the work on the Company’s C share issue and cash exit tender offer. These fees were charged to the share premium and special reserves as part of the share issue costs and tender offer costs and were not debited to the Company’s Statement of Comprehensive Income.
-  US$14,170 (2015: US$ nil) relating to the provision of tax services.

The Company’s ongoing charges, calculated as a percentage of average net assets and using expenses, excluding performance fees, VAT refunded, finance costs and taxation were 1.4% (2015: 1.5%). Inclusive of performance fees the ongoing charges for 2016 were 2.4% (2015: 1.6%).

For the year ended 30 September 2016, expenses of US$70,000 (2015: US$49,000) were charged to the capital column of the Statement of Comprehensive Income, these relate to transaction costs. No fees were payable in 2016 or 2015 in relation to investing in new markets.

Details of the Directors’ emoluments are given in the Directors’ Remuneration Report on page 36 of the Annual Report and Financial Statements.

6. DIVIDENDS


Dividends paid on equity shares: 

Record date 

Payment date 
2016 
US$’000 
2015 
US$’000 
2015 final of 4.15 cents (2014: 4.00 cents) per ordinary share 29 January 2016  19 February 2016   6,251  6,025 
2016 interim of 2.60 cents (2015: 2.40 cents) per ordinary share 3 June 2016  1 July 2016   4,272  3,615 
 --------  ------- 
 10,523  9,640 
 =====   ==== 

The Directors have proposed a final dividend of 4.00 cents per share (2015: 4.15 cents). The dividend will be paid on 17 February 2017, subject to shareholder approval on 31January 2017, to shareholders on the Company’s register on 27 January 2017. Under IFRS the proposed final dividend has not been recognised as a liability in the financial statements as final dividends are only recognised in the financial statements when they have been approved by shareholders, and special and interim dividends are not recognised until they are paid. They are also debited directly to revenue reserves.

The total dividends payable in respect of the period ended 30 September 2016 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 or proposed on equity shares:  2016 
US$’000 
2015 
US$’000 
Interim dividend of 2.60 cents per ordinary share (2015: 2.40 cents) 4,272  3,615 
Final proposed dividend of 4.00 cents per ordinary share (2015: 4.15 cents)* 6,573   6,251 
 --------   -------- 
10,845   9,866 
 =====   ===== 
* based on 164,333,108 ordinary shares in issue on 22 November 2016.

7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE

2016  2015 
Net revenue profit attributable to ordinary shareholders (US$’000) 10,113  9,870 
Net capital profit/(loss) attributable to ordinary shareholders (US$’000) 13,055  (63,967)
 ----------   ----------- 
Total profit/(loss) attributable to ordinary shareholders (US$’000) 23,168  (54,097)
 ----------   ----------- 
Total equity attributable to shareholders (US$’000) 276,397  242,395 
 -----------------   ---------------- 
The weighted average number of ordinary shares in issue during the year on which the return per ordinary share was calculated was: 158,076,774  150,621,621 
 -----------------   ---------------- 
The actual number of ordinary shares in issue at the end of each year on which the net asset value per ordinary share was calculated was: 164,333,108  150,621,621 
 ----------------   ---------------- 
Earnings per share
Revenue earnings per share - (US cents) 6.40  6.55 
Capital profit/(loss) per share - (US cents) 8.26  (42.47)
 --------   -------- 
Total earnings/(losses) per share - (US cents) 14.66  (35.92)
 --------   -------- 
Net asset value per share - (US cents) 168.19  160.93 
 --------   -------- 
Share price* (US cents) 167.58  157.15 
 --------   -------- 
Net asset value per share - (pence) 129.48  106.25 
 --------   -------- 
Share price (pence) 129.00  103.75 
 =====   ===== 

* The Company’s share price is quoted in sterling and the above represents the US dollar equivalent based on an exchange rate of $1.2990 to £1 as at 30 September 2016 (30 September 2015: $1.5147 to £1).

8. CALLED UP SHARE CAPITAL

Number 
of ordinary 
shares in issue 
Nominal 
value 
US$’000 
Allotted, called up and fully paid share capital comprised:
Ordinary shares of 1 cent each:
 ----------------   -------- 
At 30 September 2015 150,621,621  1,506 
 ----------------   -------- 
Conversion of C shares into ordinary shares 13,711,487  137 
 ----------------   -------- 
At 30 September 2016 164,333,108  1,643 
 =========   ===== 

The Company also has in issue 50,000 management shares which carry the right to a fixed cumulative preferred dividend. Additional information can be found in note 14 of the Annual Report and Financial Statements.

9. RESERVES


Share 
premium 
account 
US$’000 

Capital 
redemption 
reserve 
US$’000 


Special 
reserve 
US$’000 

Capital 
reserve arising on 
investments sold 
US$’000 
Capital 
reserve arising 
on revaluation 
of investments 
US$’000 


Revenue 
reserve 
US$’000 
At 30 September 2015  –   5,798   231,030   29,737  (33,988)  8,312 
Movement during the year:
Total Comprehensive Income:
Loss on realisation of investments  –  –  –  (12,994) –  – 
Changes in investment holding gains  –  –  –  –  28,619  – 
Profit/(loss) on foreign currency transactions  –  –  –  2,010  (37) – 
Profit/(loss) on contracts for differences  –  –  –  1,589  (674) – 
Expenses charged to capital after taxation  –  –  –  (5,458) –  – 
Share issues – conversion of C share  21,456   –   –   –   –  – 
Cash exit tender offer costs  –   –  (236)  –   –   – 
Revenue return for the year  –  –  –  –  –   10,113 
Dividends paid  –  –  –  –  –  (10,523)
 --------   --------   ----------   --------   --------   -------- 
At 30 September 2016 21,456  5,798   230,794  14,884  (6,080)  7,902 
 =====   ====   ======   =====   =====   ===== 

The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. The special reserve may be used as distributable profits for all purposes and in particular for the repurchase by the Company of its ordinary shares and for payment as dividends. At the AGM on 10 February 2016 the Board received shareholder approval to amend the Company’s Articles to permit the Company to pay out accumulated realised capital profits in the form of dividends.

10. RISK MANAGEMENT POLICIES AND PROCEDURES

VALUATION OF FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair values (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) on pages 53 and 54 of the Annual Report and Financial Statements.

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 in an active market for identical instrument. A financial instrument is regarded as quoted in an active market if the quoted prices are readily and regularly 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.

Level 2 – valuation techniques used to price securities based on observable inputs. Valuation techniques used for non-standard 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.

As at the year end the P-Notes were valued using the underlying equity bid price and the inputs to the valuation were the exchange rates used to convert the P-Note valuation from the relevant local currency to US dollars at the year end date. There have been no changes to the valuation technique since the prior period.

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 other than quoted prices within level 1. This category includes all instruments where the valuation technique includes inputs not based on observable market data and unobservable 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 unobservable adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The level in the fair value hierarchy within 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 in its entirety.

For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 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 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.

Contracts for difference and P-Notes 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 to which these contracts expose the Company.

The table below sets out fair value measurements using IFRS 13 fair value hierarchy.

Financial assets/liabilities as at fair value through profit or loss at 30 September 2016  Level 1 
US$’000 
Level 2 
US$’000 
Level 3 
US$’000 
Total 
US$’000 
Assets:
Equity investments  215,612   8,792  211   224,615 
P-Notes  –   444   –   444 
BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund  42,625   –   –   42,625 
Contracts for difference (gross exposure)  –   62,359   2   62,361 
 ----------   --------   --------   ----------- 
 258,237   71,597  213   330,045 
 ======   =====   ====   ====== 

   

Financial assets/liabilities) as at fair value through profit or loss at 30 September 2015  Level 1 
US$’000 
Level 2 
US$’000 
Level 3 
US$’000 
Total 
US$’000 
Assets:
Equity investments 184,837  –  –  184,837 
P-Notes –  1,685  –  1,685 
BlackRock’s Institutional Cash Series plc – US Dollar Liquidity Fund 52,924  –  –  52,924 
Contracts for difference (gross exposure)  –  59,488  –  59,488 
Liabilities:
Contracts for difference (gross exposure) –  (2,533) –  (2,533)
 ----------   --------   --------   ----------- 
237,761  58,640  –  296,401 
 ======   =====   ====   ====== 

For the year ended 30 September 2016, transfers of financial assets from fair value hierarchy Level 1 to Level 2 amounted to £8,792,000. These arose primarily in relation to the Nigerian equity securities held in the investment portfolio where the 3 month non deliverable US$-Nigerian Naira forward exchange rate was used in place of the spot exchange rates following the devaluation of the Nigerian Naira.

Level 3 Financial assets at fair value through profit or loss at 30 September  2016 
£’000 
2015 
£’000 
Opening fair value –  – 
Investment acquired – corporate action spin off received 213  – 
Total gains or losses included in gains/(losses) on investments in the Statement of Comprehensive Income
– assets held at the end of the year –  – 
 -------   -------- 
Closing balance 213  – 
 ====   ===== 

11. CONTINGENT LIABILITIES

There were no contingent liabilities at 30 September 2016 (2015: nil).

12. 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 2016 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 2016 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 2015, 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 22 November 2016.

13. 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. 

14. ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 31 January 2017 at midday.

ENDS

The Annual Report will also be available on the BlackRock website at blackrock.co.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 5284

Press enquiries:
Lucy Horne, Lansons Communications – Tel:  020 7294 3689
E-mail:  lucyh@lansons.com

22 November 2016

12 Throgmorton Avenue
London EC2N 2DL

END


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