Fidelity Emerging Markets Limited annual results impress with a strong performance 

Fidelity Emerging Markets Limited (LON:FEML) has announced its final results for the year ended 30 June 2024.

Financial Highlights:

• During the twelve-month period ended 30 June 2024, Fidelity Emerging Markets Limited reported a Net Asset Value (NAV) return of +18.7% and ordinary share price total return of +22.6%.
• The benchmark index, the MSCI Emerging Markets Index, produced a total return of +13.2% over the same timeframe.
• The company’s extensive ‘toolkit’ contributed positively to performance including mid-cap exposure and the short book.
• Long positions in the financials and information technology sectors also stood out.
• The Board has announced a final dividend of $0.20 Participating Preference Share.

Chairman’s Statement

I am pleased to present your Company’s 35th annual report, covering a year in which Fidelity Emerging Markets Limited performed strongly, both in absolute terms and relative to the Company’s benchmark, the MSCI Emerging Markets Total Return Index (‘the Index’). With the Company’s portfolio now having been managed by Fidelity for approaching three years, it is particularly pleasing to observe that the extended investment toolkit available to the investment management team is having an appreciable impact, and we are beginning to show a clean pair of heels to the competition with this notably differentiated product.

Overview

During the 12-month period to 30 June 2024, the Company’s NAV increased by 18.7% in GBP terms, compared with a gain of 13.2% in the benchmark. The share price advanced by 22.6%, with the discount to NAV narrowing from 14.6% at the beginning of the period to 11.9% at year-end (all performance figures stated on a total return basis). Having underperformed the Index somewhat in NAV terms in the first half of the financial year (with a total return of +3.2% versus +4.4% for the Index), the full-year NAV total return outperformance of 5.5 percentage points speaks to a particularly strong outcome in the second half of the period.

Thus, after a difficult year in 2022, when the Company’s performance was negatively affected by Russia’s invasion of Ukraine, and then a period of consolidation in 2023, it is encouraging to see in 2024 that the investment process – one which has delivered notably positive results since 2011 in the strategy’s open-ended vehicle, the FAST Emerging Markets Fund – is now firing again on all cylinders and driving strong NAV performance.

You will find more detail on the contributors to absolute and relative performance in the Portfolio Managers’ Review on the following pages. However, your Board is pleased to note the positive impact of stock selection – which drove the majority of the outperformance – as well as the significant value delivered by the enhanced investment toolkit. Stock selection – rather than investing by country or sector – is at the heart of your Company’s investment strategy, facilitated by Fidelity’s large and experienced team of portfolio managers and analysts, whose location in the markets they cover gives them a key advantage in terms of information and access to company managements. Their deep understanding of their investment universe is also what drives the ability to identify successful short as well as long positions.

At Board level, your Directors and I continue to work hard to support the share price, both through capital management initiatives and by promoting the Company to current and potential investors. I am pleased to note the proactive efforts of the investment manager in raising the Company’s profile through events, presentations, and meetings with stakeholders, combined with regular advertising and content placement on many of the UK’s leading investment websites and in key printed media to reach the broadest possible audience, both professional and retail. These efforts continue apace and are helping build investor conviction in the investment thesis, as well as contributing towards a positive perception of the Company’s Portfolio Managers as thought leaders in emerging markets.

A key attraction for fee-conscious investors remains our low ongoing charges ratio of 0.81% (FY23: 0.81%), underpinned by a very competitive management fee that your Board believes offers great value for a truly actively managed emerging markets portfolio with a full set of investment tools at the managers’ disposal.

Outlook

Although US financial markets have continued to suck liquidity from the rest of the world, your Portfolio Managers are positive on the outlook for emerging markets in the coming year and well beyond. Emerging market central banks have been ahead of the curve in raising interest rates, inflation is generally well controlled, and they have significant policy headroom as the US Federal Reserve continues to ease, which should be beneficial for emerging market equities. Moreover, while much of the US stock market performance has been driven by multiple expansion, emerging market equities remain very attractively valued on a relative basis.

With artificial intelligence (AI) stocks having dominated the investment headlines from the US, it is important to remember the role that emerging market companies, such as Taiwanese semiconductor makers and Korean memory suppliers, play in the AI value chain. Emerging markets are also among the largest producers of essential commodities such as copper and lithium, all of which are fundamental to the build-out of AI and low-carbon infrastructure.

Often the best investment opportunities can be found in smaller and medium-sized companies with a longer runway for growth. However, in far-flung emerging markets, these can be very hard for individual investors to identify. Your Board and I believe that one of the Company’s major advantages is having a large team with ‘boots on the ground’, employing huge amounts of time and effort in finding the best mid-sized and smaller companies that can contribute to performance over many years. The permanent capital structure of the Company provides the freedom to invest for the long term in stocks that may not yet be widely known.

Board composition

As reported at the half-year stage, Julian Healy, Chairman of the Audit and Risk Committee, stepped down from the Board for personal reasons following the AGM in December. On 17 January we announced the appointment of Mark Little. Mark – a qualified Chartered Accountant with extensive financial services experience and a successful track record as an investment company director – has replaced Julian both as a Director and as Chairman of the Audit and Risk Committee, and will stand for election at the next AGM in December 2024. There have been no further Board changes in the period under review, and with none of the Directors yet approaching nine years’ tenure, we do not foresee any in the immediate future. We thank Julian for his service, and with Mark’s appointment we feel the board continues to have a strong diversity of background, specialist knowledge and competency.

Due diligence trip

In September 2023, the Board was fortunate to have the opportunity to visit Fidelity’s team in the Middle East. We travelled to Saudi Arabia, Abu Dhabi and Dubai, following an investment team led schedule and observing the team at work, which was very helpful to our understanding of the investment opportunities in the region. The Middle East is not currently a large part of the portfolio, but it has contributed positively to performance, notably Saudi Arabian water utility Alkhorayef Water & Power Technologies was amongst the top ten contributors to performance this year and the region has the potential to play a greater role in the future.

Discount management

As noted above, during the year the discount to NAV narrowed somewhat, from 14.6% to 11.9% in what was a challenging year for the broader London listed closed end fund sector. The Company completed a tender offer in March 2024, which saw 13,531,881 shares (14.99% of the shares in issue) repurchased at a 2% discount to NAV, and we also bought back shares in the market, with an additional 2.9m shares repurchased (FY23: nil). Since year-end, we have repurchased an additional 2.8m shares (3.7% of shares in issue), and at 2 October 2024 (the latest practicable date), the discount to NAV stood at 12.2%. At the AGM in December 2024 we will seek to renew the existing annual authority to repurchase up to 14.99% of our Participating Preference Shares.

I would also remind readers that the Company has committed to undertake a further tender for up to 25% of its then shares in issue (excluding any shares held in treasury) should its NAV total return fail to exceed the benchmark over the five years ending on 30 September 2026.

While buybacks are NAV-accretive for existing shareholders, share repurchases on their own do not narrow discounts, and as such we continue to work to ensure that potential and existing investors fully understand the Company’s story and the enhanced investment toolkit available to the managers, whose performance is beginning to speak for itself.

Dividend

Your Board does not task the Portfolio Managers with finding yield. However, some dividend income naturally arises, and after accounting for costs charged to the revenue account, the majority of this is paid out to our shareholders in the form of dividends.

A resolution to declare a final dividend of $0.20 per share (2023: $0.19) will be proposed at the AGM of the shareholders of the Company that will be held on 10 December 2024. Subject to shareholder approval, the final dividend will be paid on 13 December 2024 to shareholders on the Register of Members on 15 November 2024. The ex-dividend date is 14 November 2024.

AGM

This year’s AGM will be held on Tuesday, 10 December 2024 at 11.00 a.m. at the registered office of the Company, Level 3, Mill Court La Charroterie, St Peter Port, Guernsey GY1 1EJ. Notice of the AGM, containing full details of the business to be conducted at the meeting, is set out in the Annual Report. Your attention is also drawn to the Corporate Governance section of the Directors’ Report in the Annual Report where resolutions relating to special business are explained.

Electronic proxy voting is now available and shareholders are encouraged to submit voting instructions using the web based voting facility at www.eproxyappointment.com and for institutional shareholders via the CREST system, CREST messages must be received by the issuer’s agent (ID number 3RA50) not later than 11.00 a.m. on 8 December 2024. In order to use electronic proxy voting, shareholders will require their shareholder registration number, control number and pin. If you do not have access to these details please contact the Company’s Registrar, Computershare, their contact details can be found in the Annual Report.

Heather Manners

Chairman

8 October 2024

Portfolio Managers’ Review

Question

How has Fidelity Emerging Markets Limited performed in the financial year to 30 June 2024?

Answer

The twelve months to the end of June was a period of strong performance for the Company. Markets were volatile as they reacted to developments in China and signals from the Federal Reserve about the pace of interest rate cuts. Another key driver for markets was the incredibly strong performance of AI-related stocks, not only in the US, but across the emerging market universe, too. Against this backdrop, emerging markets rallied over the period but underperformed developed markets such as the US. Over the year, the portfolio gained on an absolute basis and the Company delivered an NAV total return of 18.7% in sterling terms, outperforming the benchmark, which returned 13.2%.

Question

What were the main contributors to the outperformance during the year and why?

Answer

The Company’s extensive ‘toolkit’ added significant value over the year. When managing the portfolio, we draw on a broad range of ‘tools’, namely the ability to adjust the level of gross exposure via gearing, to invest in mid-cap companies, take out short positions, and use options. It is pleasing to see that many of these tools, including the mid-cap exposure and the short book, added substantial value over the past year. While yield enhancement (or the options book) detracted, this is a function of it being a hedging tool, which means it detracts when performance is strong.

The short book in particular generated very positive performance. We take out short positions in businesses that are in structural or cyclical decline, and that have a number of red flags around aspects like their balance sheet structure, cash conversion, or related party/management conflicts of interest. Over the year there were two short positions in the top ten contributors to relative returns, a notable achievement given that we limit the size of short positions to c.100bps. The top performer in the short book was a declining Asian utility that is unsuccessfully pivoting into unrelated business areas, and which saw its share price halve during June, following poor earnings and after the major shareholder faced margin calls.

Looking to the rest of the portfolio, several holdings in the financials sector stand out. These included high-conviction positions like Brazilian digital challenger bank Nu Holdings, and Kazakhstan’s e-commerce and payments platform Kaspi. Another contributor was Russia’s TCS Group¹, a provider of online financial services, which we disposed of after identifying a liquidity opportunity. The Company’s holdings in Russian securities have been fair valued at nil since the first quarter of 2022. Within information technology, Taiwanese semiconductor foundry business TSMC performed well given the growing tailwind from AI-related demand.

The Chinese consumer names held in the portfolio were the main headwind to performance. The portfolio had a marginal underweight exposure to China and Hong Kong combined at the end of June, but the Hong Kong listed names held such as sportwear company Li Ning and insurance company AIA lagged the domestic A-share market. A feature of 2023 was the significant underperformance of Hong Kong listed H-shares as foreign investors exited the market, although this started to reverse over the first half of 2024 as sentiment began to improve.

Overall, it was a strong period for the Company, which benefited from broad-based performance drivers and where the extensive toolkit added notable value.

Question

The Company is unique in its peer group given its ability to use both long and short positions. How did you exploit that flexibility over the past year?

Answer

One of the additional tools the Company has at its disposal is the ability to take out short positions. This allows us to profit not only from the winning businesses in each industry, but also from the losers.

An example of a now-closed short position that worked well for us is Microvast, a battery maker using antiquated, obsolete technology. We thought that Microvast also had a questionable order book and a stretched balance sheet. The company’s share price fell significantly, and we exited the position at a profit earlier this year.

Other high-conviction short positions include several current holdings in Chinese EV makers (disclosure rules mean we are unable to name open short positions). These companies operate in an industry that suffers from high competitive intensity and overcapacity, while at a fundamental level these businesses also have undifferentiated products, high cash burn, and significant debt on their balance sheets.

Top 5 Positions

As at 30June 2024	Country	Sector	Portfolio(%)	IndexWeight(%)	Relative(%)
Taiwan Semiconductor Manufacturing	Taiwan	Information Technology	11.6	9.7	1.8
Naspers	South Africa	Consumer Discretionary	5.4	0.5	5.0
Kaspi.KZ	Kazakhstan	Financials	5.4	0.0	5.4
Samsung Electronics	South Korea	Information Technology	5.1	4.2	0.8
Nu Holdings	Brazil	Financials	4.6	0.0	4.6

1 Fidelity investment, trading and operational teams actively monitor developments, which can result in the identification of liquidity opportunities. Importantly, any pre-trade assessment ensures that activities do not contravene international sanctions. Prudent assessment of counterparties and all aspects of trade settlement arrangements are scrutinised and carefully managed in the best interests of clients. The decision to trade TCS was based on our assessment that a fair exit multiple was achievable.

Question

What were some of the major changes you made to the portfolio during the year and what drove those?

Answer

Over the  twelve months to the end of June we focused on adjusting the portfolio’s China/Hong Kong exposure. Something we pay very close attention to is the extent of negative sentiment towards China and the potential for a rebound, which we did indeed see following the end of the review period, when China announced meaningful stimulus measures in September. While the Chinese market faces structural issues, we think it is important to hedge the portfolio’s underweight exposure. We also saw a number of very high-quality businesses that had disproportionately derated, offering attractive entry points.

One of the ways we looked to add exposure towards the end of the period was through the options book, initiating a long position in an out-of-the-money Hang Seng China Enterprises Index call option, which we funded by selling out-of-the-money put options. Given that implied volatility is at decade lows for emerging markets, utilising the options book is a cost-effective way to take out insurance against a rally in Chinese equities (which we saw during April and May and subsequent to the end of the review period in September). We also added a number of long positions in Chinese stocks during the review period, including high-quality consumer and internet businesses that now trade on very attractive valuations, including premium sportwear company Anta Sports and leading online travel agent Trip.com.

We also made changes within the portfolio’s information technology holdings. The semiconductor industry has performed extremely well and index heavyweight TSMC, the Taiwanese foundry business, now makes up about a tenth of the emerging market index. We have a very constructive outlook for TSMC, which is a vital part of the AI supply chain, and the company remains a core position in the portfolio. However, we have looked to diversify exposure to other AI supply chain beneficiaries, with recent additions including Elite Material, a Taiwanese manufacturer of copper clad laminate, a vital input for printed circuit boards, and another beneficiary of AI-driven demand.

Question

What opportunities are you particularly excited about – are there any stand-out markets, sectors or themes you’d highlight?

Answer

We have a particularly constructive outlook for copper miners. Electrification and datacentres alone could add an incremental 4% per annum to demand over the rest of the decade, while the backdrop for supply is very muted, with few copper mines currently in operation, and little supply expected to come online given it takes around 10 years to bring a greenfield copper discovery into production. This creates a buoyant environment for copper prices.

The largest position we have is in Grupo Mexico, which is the holding company for Southern Copper, one of the lowest cost copper producers in the world. Given the Company’s closed-ended nature we also have positions in mid-cap copper miners, for example Minsur, a Peruvian miner of copper and tin which has good assets, and a healthy cash balance that it has signalled it intends to pay out to investors.

We continue to see opportunities in the financials sector. While interest rates have likely peaked, the Company’s financials exposure is not rate sensitive. Examples of companies we own are Indian private sector banks, companies in the fintech space and banks in Eastern Europe that are beneficiaries of falling rates.

Indian private sector banks HDFC Bank, ICICI Bank, and Axis Bank remain core holdings. These companies all stand to benefit from the underpenetration of financial services in India, and growing demand for credit cards and mortgage products. Unlike the Indian market in aggregate, these stocks trade at reasonable valuations. We have seen in recent years a significant shift in business towards these private banks at the expense of the state-owned banks and think that going forward they stand to benefit from strong GDP and credit growth in the Indian market.

High conviction holdings in fintech include Brazil’s digital challenger bank Nu Holdings, which is rapidly taking market share from incumbents. Five years ago, the incumbent banks in Brazil were levying very high fees and rates on consumers, using that revenue to finance a bloated bricks-and-mortar cost base. This created a fantastic backdrop for a challenger bank like Nu to offer a great value proposition with no fees and lower interest rates, all at much better unit economics. As a result, it has been able to rapidly grow its customer base to 100m customers and start to expand into other markets like Mexico.

We also have exposure to beneficiaries of falling rates, for example, banks in countries such as Hungary, which are liability sensitive. This means that their liabilities reprice more quickly than their assets, so when rates come down, margins expand rather than contract. One of the stocks we hold is Hungary’s OTP Bank, which has a dominant position in Eastern Europe and is set to benefit from net interest margin expansion as rates continue to come down.

Question

Another aspect of the company’s broad toolkit is the ability to invest in smaller companies and in “off-the-beaten-track” markets like Vietnam. Can you outline some of the most exciting opportunities you are seeing in those areas?

Answer

One of the key benefits of the investment company structure is that we can take a longer investment horizon and move further down the market cap spectrum. This might be into smaller companies that are less well known by investors and are often poorly covered by the sell side, or companies in frontier markets such as Vietnam.

One mid-cap company we are particularly excited about is Brazil’s Direcional, a developer of large-scale, low-income housing projects in Brazil. Affordable housing is a key priority for Brazil’s President Lula, and recent changes to the “Minha Casa, Minha Vida” social housing programme make the low-income housing market much larger and more profitable than it has been historically. Despite these structural tailwinds and a benign competitive environment, the company is trading on a very cheap valuation, and is, we think, an underappreciated beneficiary of the growth in social housing in Brazil.

We also see opportunities in frontier markets such as Vietnam. One Vietnamese company we hold is FPT, an IT services business that benefits from Vietnam’s highly skilled low-cost labour and is a beneficiary of the diversification of supply chains away from China. FPT owns its own university, providing access to the country’s talent base, and offers unparalleled value to its customers, putting it in a good position to continue gaining market share.

Question

Given the scale of the emerging market opportunity set, one of Fidelity’s strengths is the depth of resources and local presence around the world combined with your frequent research trips to the countries in which the Company invests. How do you leverage that resource to the benefit of the Company’s shareholders and what were some of the key takeaways from recent country visits?

Answer

Travel is a huge part of our process and the investment team go on a number of research trips every year. These overseas trips form a crucial part of our due diligence process, and we’ve visited Poland, Greece, and the Middle East, among other places, over the past year. Speaking to local experts on their home turf is a vital input that allows us to assess all manner of opportunities and, of course, risks.

One of the more recent trips we went on was to Poland, where we wanted to assess the backdrop for companies following last year’s election, when the right-wing PiS party was replaced by Donald Tusk’s pro-EU coalition. This has resulted in management team changes at state-owned companies, leading to many companies having a much more shareholder friendly mandate than previously. We wanted to visit the country to assess this for ourselves and were heartened to see what appears to be a significant corporate change story underway, with a huge improvement in the treatment of minority shareholders. We think it is vital to meet these management teams in person in order to really understand who the winners and losers of this corporate change story are.

Question 

How do you actively and efficiently manage the portfolio, given the extensive universe of companies to choose from in emerging markets?

Answer

Fidelity’s extensive emerging market research team is one of the key mechanisms that lets us effectively manage the portfolio. We have about 50 analysts across the globe looking only at emerging market companies, which means we can develop a deep, unrivalled view of their dynamics, and explore the opportunities among mid-cap companies. There is excellent collaboration between all our analysts across regions and sectors, with those focused on global sectors like oil and gas, metals and mining, and technology helping us analyse what is going on in emerging markets alongside changes in developed markets.

Our research team really allows us to have ‘boots on the ground’ across emerging markets. This year we travelled to countries like Greece and Poland and spent time meeting with companies, their competitors, and their suppliers, seeing the assets and operations of companies first hand. There is no substitute for this sort of on the ground presence, and Fidelity research analysts carry out around 20,000 company meetings a year.

The way our global emerging markets investment team is structured also allows us to effectively cover different regions. The broader team manages three regional portfolios, encompassing Latin America, emerging EMEA, and emerging Asia, which all feed ideas into our global emerging markets portfolio, and within this the Company’s portfolio. This structure is an acknowledgement of the fact that the emerging market universe is vast and means we can apply multiple layers of due diligence to the stocks we invest in.

Question

Finally, how do you view the prospects for the broad asset class and China in particular given overall valuation levels, macroeconomic conditions and the political backdrop across the emerging world?

Answer

Emerging market equities have structurally derated over the past 15 years. Weakness in China and a muted backdrop for commodity prices partly explains this, as well as the environment of higher interest rates and concerns about geopolitics.

We are cautiously optimistic about the year ahead. As the Fed has now started to ease policy, this should give the green light to emerging economies to continue cutting interest rates, which will be supportive of consumers and corporates, and will help drive flows to equity markets. During the current rate-hiking cycle, many emerging economies were far ahead of developed economies in acting decisively to raise rates and bring inflation under control. This means that real interest rates in many emerging markets are still incredibly high, and there is huge scope for rates to come down further.

Emerging economies also benefit from an improved fiscal backdrop, which stands in stark contrast to developed economies like the UK or the US, where the fiscal environment is the worst it’s been for many years. While much of the boom in developed markets has been underpinned by QE and stimulus, we have not seen the same level of support extended in emerging economies, which makes the asset class better equipped for an environment of structurally higher interest rates.

Part of the reason the fiscal backdrop is better for emerging markets is the more buoyant backdrop for commodity prices. For emerging economies, the past decade has been marked by a bursting of the commodity bubble as demand from the China property market slowed down. Looking ahead to the next decade we see a much tighter environment for prices, given there has been a decade of underinvestment in the commodity complex, and the fact that there are strong demand drivers from electrification and AI. We expect this will be a huge tailwind for commodity exporting emerging market economies such as Brazil, South Africa, Indonesia, and Peru.

China remains key to the outlook. We are emerging from a period of significantly negative sentiment towards China and while structural problems persist, any signs that we are past the worst could lead international investors to start reallocating capital to the market. Following the end of the review period there was a significant rally in the Chinese market, as the government announced meaningful stimulus measures. The big challenge for China is consumer confidence as the post-Covid spending boom seen in developed markets failed to materialise, given weakness in the property market, which has historically made up around half of household wealth. This year the government has shifted from deleveraging the property market to looking to reflate it, with the most significant measures announced post the end of the review period in late September. While the recovery will likely be slow and protracted, any positive momentum in prices will support consumer confidence. However, we expect excess capacity in industries like steel, cement, and solar to persist, while the potential for higher tariffs is also a tail risk. For that reason, it is vital to be incredibly selective when investing in China.

Another driver for emerging markets is the exposure it offers to the AI supply chain. While US companies are typically thought of as AI beneficiaries, what is often overlooked is the fact that the bulk of the AI supply chain sits in emerging markets like Taiwan. Indeed, Jensen Huang, Nvidia’s CEO, has said that Nvidia wouldn’t be the company it is today without Taiwan’s TSMC, which manufactures Nvidia’s AI chips. Given the discount that emerging markets are trading on relative to the US, the emerging market universe offers exposure to the AI supply chain at much more attractive valuations.

The emerging market universe is trading at multi-decade lows relative to developed markets. Part of this is down to concerns about geopolitics. 2024 is a busy election year, with developments in both emerging economies and the US requiring close scrutiny. These are the types of events we continue to monitor incredibly carefully, drawing on the inputs of external experts to help make sense of elevated unpredictability in markets, and we continue to focus on staying fully engaged and speaking to geopolitical experts with a range of different perspectives.

With an improving fundamental backdrop, we think today represents an attractive entry point for emerging market equities. Using our bottom-up, highly differentiated approach, we are focused on using the Company’s extensive toolkit to carefully manage country-level exposures, and the short book to benefit from the universe’s structural losers, as well as identifying the winners for the long book. Against a backdrop that will likely remain highly uncertain, we will continue to use this flexibility to closely manage risk, all the while exploiting the most exciting opportunities throughout the emerging market universe.

Nick Price

Chris Tennant

Portfolio Managers

8 October 2024

Principal and Emerging Risks And Uncertainties, Risk Management

In accordance with the AIC Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit and Risk Committee continues to identify any new emerging risks and take any action feasible to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit and Risk Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its corporate governance obligations.

Key emerging issues that the Board has identified include; rising geopolitical tensions, including contagion of the Ukraine crisis and escalation of Middle East tensions or tensions between China and Taiwan into the wider region or an increase in tensions in the South China Sea; continuous ”high levels of so-called cost of living crisis impacting demand for UK-listed shares; Artificial Intelligence hype. AI as a differentiator capability and as a multiplier of existing risks and climate change, which is one of the most critical emerging issues confronting asset managers and their investors. The Board notes that the Manager monitors these issues, and has integrated macro and ESG considerations, including climate change, into the Company’s investment process. The Board will continue to monitor how this may impact the Company as a risk, the main risk being the impact on investment valuations.

The Board considers the following as the principal risks and uncertainties faced by the Company.

Principal Risks	Risk Description and Impact	Risk Mitigation	Trend
Volatility of Emerging Markets and Market Risks	The economies, currencies and financial markets of a number of developing countries in which the Company invests may be extremely volatile.Further risks on emerging markets from high inflation, and challenging financial conditions exacerbated by the war in Ukraine and Middle East.Market volatility from worsening Chinese/Taiwanese relations that could prompt the US to intervene amplified by uncertainty of the foreign policy changes following US elections.US imposed Executive Orders prohibiting US investments in certain Chinese companies and the passing of the Holding Foreign Companies Accountable Act (HFCAA).Rising geopolitical tensions, including contagion of the Ukraine and Middle East crisis or tensions between China and Taiwan into the wider region.Regulatory measures impacting sectors such as IT sector or biotech sector and a lingering weakness in the real estate sector.	The Company’s investments are geographically diversified in order to manage risks from adverse price fluctuations.Russian securities already held at nil value.The exposure to any one company is unlikely to exceed 5% of the Company’s net assets at the time the investment is made.Review of material economic or market changes and major market contingency plans for extreme events.China’s integration into the global financial system and into global supply chains.Companies that were solely listed in the US are listing on the HK or mainland markets.Robust risk governance in place supports risk profile assessment.	Stable
Investment Performance Risk	The Portfolio Manager may fail to outperform the Benchmark Index over the longer-term.	An investment strategy overseen by the Board to optimise returns.A well-resourced team of experienced analysts covering the market.Board scrutiny of the Manager and the ability in extreme circumstances to change the Manager.	Stable
Changing Investor Sentiment	As a Company investing in emerging markets, changes in investor sentiment may lead to the Company becoming unattractive to investors and reduced demand for its shares, causing the discount to widen.	The Company has an active investor relations programme.The Board is updated regularly by the Investment Manager on developments in emerging markets and on the portfolio.The Chairman communicates regularly with major shareholders.The Company pays a regular dividend and considers regularly when and how to use share buybacks.	Stable
Cybercrime and Information Security Risks	Cybersecurity risk to the functioning of global markets and to national infrastructure, as a targeted attack or overspilling from the Russia/Ukraine war, Middle East crisis and geopolitical events.Cybersecurity risk from Covid or successor pandemics affecting the functioning of businesses and global markets.External cybercrime threats such as spam attacks, ransomware, DDoS (Distributed Denial of Service) attacks, financial theft and reputational risk arising from accidental data leakage. Ransomware continues to increase globally and is also becoming a supply chain risk.	The risk is monitored by the Board with the help of the extensive Fidelity global cybersecurity team and assurances from outsourced suppliers.Development of systems and procedures by the AIFM resulting from the experience of the Covid pandemic and cyber activity following the Russian invasion of Ukraine.	Increased
Level of Discount to Net Asset Value (“NAV”) Risk	The share price performance lags NAV performance.The Board may fail to implement its discount management policy.Elevated energy costs and cost of living crisis impact on retail demand for shares.	The Board reviews the discount on a regular basis and has the authority to repurchase shares so shares can trade at a level close to the NAV.If the NAV total return for the five years ending 30 September 2026 does not exceed the Benchmark Index, the Company will make a tender offer for up to 25% of the shares in issues (excluding shares held in treasury) at that time.The Board and manager proactively try to raise the Company’s profile through events, presentations, and meetings with stakeholders, combined with regular advertising and content placement on many of the UK’s leading investment websites and in key printed media to reach the broadest possible audience.	Increased
Lack of Market Liquidity Risk	Low trading volumes on stock exchanges of less developed markets.Lack of liquidity from temporary capital controls in certain markets.Exaggerated fluctuations in the value of investments from low levels of liquidity.	Restrictions on concentration and diversification of the assets in the Company’s portfolio to protect the overall value of the investments and lower risks of lack of liquidity.	Stable
Business Continuity & Event Management Risks	The wars in Ukraine and Middle East conflict has increased the risk for working from home or in offices, specifically concerning the potential loss of network outages.Business process disruption risk globally considers Cyber, Geopolitical, and Earthquake as the top risks, which if were to materialise to a business disruption event, the impact could be reputational in the near term and broader over time (financial, client, industry) depending on the duration/severity of the events.	Business Continuity and Crisis Management Frameworks in place. Business Continuity Oversight Group (BCOG) is established which provides support to drive business continuity through the organisation that ranges from strategic input to operational processes.Digital teams continue to maintain solutions to allow business continuity and operational.Annual requirement to perform recovery site test, remote working test, work transfer test and notification test.	Stable
Gearing Risk	The Portfolio Manager may fail to use gearing adequately, resulting in a failure to outperform in a rising market or to underperform in a falling market.	The Board sets a limit on gearing and provides oversight of the Manager’s use of gearing.	Stable
Foreign Currency Exposure Risk	The functional currency in which the Company reports its results is US dollars, whilst the underlying investments are in different currencies. The value of assets is subject to fluctuations in currency rates and exchange control regulations.	The Portfolio Manager does not hedge the underlying currencies of the holdings in the portfolio but will take currency risk into consideration when making investment decisions.	Stable
Environmental, Social and Governance (ESG) Risk	The adoption of international standards may adversely impact the profitability of companies in the portfolio.The Manager may fail to meet its regulatory requirements on ESG, including climate risk, in relation to the Company.Higher degree of valuation and performance uncertainties and liquidity risks.	Fidelity has adopted a sophisticated and comprehensive system for analysing ESG risks, including climate risk, in investee companies.The Portfolio Manager is active in analysing the effects of ESG when making investment decisions.The Company is not labeled as an ESG product.	Stable
Key Person Risk	Loss of the Portfolio Manager or other key individuals could lead to potential performance and/or operational issues.	Succession planning for key dependencies.Depth of the team within Fidelity.Experience of the analysts covering the Company’s investments.	Stable

Other risks facing the Company include:

Tax and Regulatory Risks

There is a risk of the Company not complying with the regulatory requirements of the Guernsey Financial Services Commission, UK listing rules, corporate governance requirements or local tax requirements that could result in loss of status as an Authorised Closed Ended Investment Scheme, becoming subject to additional tax charges or to exclusion from trading in particular markets.

The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.

Operational Risks

The Company relies on a number of third-party service providers, principally the Manager, Registrar and Custodian. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements. The Registrar and Custodian are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an annual basis and any concerns are investigated. Risks associated with these service providers is rated as low, but the financial consequences could be serious, including reputational damage to the Company.

Professional negligence liability risks

The requirement to cover potential liability risks arising from professional negligence is covered by the Manager’s own funds. Sufficient capital above the regulatory limit is held which is monitored by the board of the Manager.

VIABILITY STATEMENT

In accordance with provision 35 of the 2019 AIC Code of Corporate Governance the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment fund with the objective of achieving long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging market companies, both listed and unlisted. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period. In making an assessment on the viability of the Company, the Board has considered the following:

• The ongoing relevance of the investment objective in prevailing market conditions;
• The Company’s NAV and share price performance;
• The principal and emerging risks and uncertainties facing the Company as set out above and their potential impact;
• The future demand for the Company’s shares;
• The Company’s share price discount to its NAV;
• The liquidity of the Company’s portfolio;
• Consideration of the continuation vote in 2026;
• The level of income generated by the Company; and
• Future income and expenditure forecasts.

The Company has assumed for the purposes of the viability statement that the continuation vote in 2026 would be passed.

The Company’s performance for the five year reporting period to 30 June 2024 lagged the Benchmark Index, with a NAV total return of +3.1%, and a share price total return of +2.3% compared to the Benchmark Index total return of +18.2%.

The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:

• The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;
• The fact that the portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary; and
• The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.

When considering the risk of under-performance, a series of stress tests were carried out including in particular the effects of any substantial future falls in investment value on the ability to maintain dividend payments and repay obligations as and when they arise.

In preparing the Financial Statements, the Directors have considered the impact of climate change, particularly in the context of the climate change risk identified within the ESG Risk on in the Annual Report . The Board has also considered the impact of regulatory changes and significant market events and how this may affect the Company. In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which is included in the Directors’ Report in the Annual Report .

Promoting the Success of the Company

The Company is not required to comply with the provisions of the UK Companies Act 2006, but it is a requirement of the AIC Code of Corporate Governance to report upon Section 172 of this statute irrespective of domicile. Section 172 recognises that Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company’s suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the Company.

As an externally managed Investment Company, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodian, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential shareholders, the external appointed Manager and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.

The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this regularly. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.

The Board places great importance on communication with shareholders and is committed to listening to their views. The primary medium through which the Company communicates with shareholders is through its Annual and Half Year Financial Reports. Monthly factsheets are also produced. Company related announcements are released via the Regulatory News Service (‘RNS’) to the London Stock Exchange. All of the aforementioned information is available on the Company’s website www.fidelity.co.uk/emergingmarkets. Shareholders may also communicate with Board members at any time by writing to the Company Secretary at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or by email at [email protected]. The Portfolio Managers meet with major shareholders, potential investors, stock market analysts, journalists and other commentators throughout the year. These communication opportunities help inform the Board in considering how best to promote the success of the Company over the long-term.

The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.

Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of ESG issues aligns with the Company’s investment objective to deliver long-term growth in both capital and income, and the Board’s review of the Manager includes an assessment of their ESG approach.

In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of this report, have included:

• Marketing & PR

The Board has been proactive in its efforts to promote the success of the Company. It has worked closely with the Manager, utilising the Manager’s extensive marketing capabilities, in combination with the Company’s appointed stockbrokers, and public relations firm to execute a comprehensive promotional programme for the Company.

• Discount Control – Share Buybacks

In November 2023 the Company announced a share buyback programme to address the discount to NAV at which the Company’s shares trade with the ambition that it may ultimately be maintained in single digits in normal market conditions on a sustainable basis.

• Discount Control – Tender Offer

In recognition of the imbalance between demand and supply of its shares the Company undertook a tender offer for 14.99% of its issued share capital in March 2024. The tender was priced at a 2% discount to the Net Asset Value per Share as at 6.00 p.m. on 22 March 2024 and resulted in 13,531,881 participating preference shares being repurchased by the Company and cancelled.

• Dividend

The decision to recommend a dividend of $0.19 per Participating Preference Share in respect of the year ended 30 June 2023 (2022: $0.16). Shareholders approved the dividend at the 2023 AGM.

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Financial Report in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union to meet the requirements of applicable law and regulations.

Under company law the Directors must not approve the financial statements unless they are satisfied that taken as a whole, they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
• assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper 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 its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. The work carried out by the auditor does not include consideration of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts when they are presented on the website.

The Directors who hold office at the date of approval of this Directors’ Report confirm that so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware, and that each Director has taken all the steps he/she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

Responsibility statement of the Directors in respect of the Annual Report

The Directors confirm that to the best of their knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the Chairman’s statement, Strategic Report and Portfolio Managers’ Review 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 and emerging risks and uncertainties that the Company faces.

The Directors consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.

There were no instances where the Company is required to make disclosures in respect of UK Listing Rule 6.6.1 during the financial period under review.

For and on behalf of the Board

Heather Manners

Chairman

8 October 2024

Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.