Baring Emerging Europe Plc - Changes to investment policy, name, DCM & management fee
Baring Emerging Europe PLC
Change of investment policy, change of name, amended discount control mechanism and reduction in investment management fee
Baring Emerging Europe PLC (the “Company”) is today announcing a proposed change of investment policy which will diversify the current mandate’s geographical scope to include the whole of Emerging Europe, the and (“EMEA”) including, as opportunities arise, investing in select frontier markets within the EMEA region (the “New Investment Policy”). The proposed comparator benchmark for the new mandate is the MSCI Emerging Markets EMEA Index (net). The New Investment Policy has been approved by the Financial Conduct Authority, but remains subject to approval by the Company’s shareholders in an extraordinary general meeting to be called for this purpose (the “General Meeting”).
In order to recognise the expanded investment remit and updated mandate set out in the New Investment Policy, if the New Investment Policy is approved by the Company’s shareholders at the General Meeting, the Board intends to change the name of the Company to “Barings EMEA Opportunities PLC”.
As part of its ongoing discount control procedures, and subject to the adoption of the New Investment Policy, the Board has decided to set new discount and performance based tender offer trigger mechanisms for the five year period commencing . When compared to the tender offer trigger mechanisms calculated over the four year period to , it is proposed to: i) amend the performance criterion, from one which was calculated on the Company’s portfolio to one which will be calculated on the Company’s net asset value per share, in order to compare performance net of fees and costs, and ii) reset the calculation period for the discount and performance criteria to five years, starting from and ending on .
(The above proposals are referred to herein as the “Proposals”.)
The Board is also pleased to announce that Baring Fund Managers Limited, the Company’s Alternative Investment Fund Manager (“AIFM”), which has delegated responsibility of the investment management of the portfolio to Baring Asset Management Limited (“Barings” or the “Investment Manager”), has agreed to a reduction in the investment management fee from 0.80% to 0.75% of the net asset value of the Company per annum. The reduction in the investment management fee reduces the costs borne by shareholders, and will therefore assist growth in the Company’s net asset value per share.
The Board believes that the Proposals will deliver the following benefits to shareholders:
· : The expanded investment universe under the New Investment Policy will allow the reduction of the portfolio’s hydrocarbons exposure and the concentration of its political/country risk.Diversification
· : The New Investment Policy will offer exposure to a larger cross section of high growth opportunities which the Company believes are underrepresented in global portfolios and less concentrated in the energy sector.Larger opportunity set
· : The EMEA region is, in the Company’s view, under-researched when compared to other emerging and developed markets. The Board believes the in-depth fundamental research and experience of the existing Barings EMEA team, who currently manage £1.2bn of assets in the region, will enable the Investment Manager to take advantage of market inefficiencies to deliver outperformance relative to the benchmark.Leveraging investment expertise of Barings
· : The Board believes the New Investment Policy will allow the Company to deliver an attractive level of income by allowing access to markets with appealing yields, whilst reducing the portfolio’s weighting towards fossil fuel energy producers, enabling the Company to remain a true source of income diversification for shareholders.Attractive dividend and income diversifier
· : Following implementation of the New Investment Policy, the Company will be the only listed, EMEA-focused investment company. By offering a differentiated investment opportunity, the Board believes the Company will appeal to a wider range of investors, which in turn will help to improve its liquidity and stabilise its discount.Differentiation
· : Setting new tender offer triggers over a longer calculation period offers shareholders the security of a capital return at close to asset value if the Company does not meet its performance or discount targets, and aims to facilitate the assessment of the New Investment Policy, net of fees and costs, over a full market cycle.Strong discount control mechanism
The adoption of the New Investment Policy is subject to shareholder approval. The change to the Company’s name and the resetting of the Company’s existing performance and discount-based tender offer trigger have been approved by the Board, conditional on the approval of the New Investment Policy by shareholders.
The Board has discussed the Proposals with the Company's largest shareholder, City of London Investment Management Company (holding 25.8% of the Company’s issued share capital) which has indicated its support.
A circular setting out the full details of the Proposals and containing a notice of general meeting is expected to be published on or around (the "Circular").
Change of investment policy
Proposed investment objective
The Company's proposed investment objective in the New Investment Policy is to achieve capital growth, principally through investment in emerging and frontier equity securities listed or traded on EMEA securities markets. The Company may also invest in securities in which the majority of underlying assets, revenues and/or profits are, or are expected to be, derived from activities in EMEA, but which are listed or traded elsewhere.
Investment rationale for expanded mandate
To elaborate on the above bullet points, the Board believes the expanded mandate will give shareholders exposure to wider opportunities in high growth areas underrepresented in global portfolios. Additionally, the enlarged mandate will lower both geographical and sectoral concentrations in comparison with the existing mandate focused on Emerging Europe. This will help lower the portfolio’s exposure to political and country risks, as well as its hydrocarbons exposure, whilst aiming to maintain an attractive level of income.
The existing investment policy limits effective diversification and makes mitigating concentration risk difficult, with , and accounting for 90% of the current comparator benchmark (MSCI EM Europe 10/40) and the energy sector accounting for 34% of the same. For comparison, the same countries account for only 33% of the proposed new comparator benchmark (MSCI Emerging Markets EMEA Index (net)), whilst the energy sector’s weighting in the new comparator benchmark drops from 34% to 15%, allowing effective diversification of both capital and income.
Diversification away from the energy sector under the New Investment Policy will allow the Investment Manager to establish a portfolio exposed to attractive structural growth opportunities, in a range of new geographies, whilst becoming less dependent on fossil fuel production. Further, the expanding middle class and increasing internet penetration rates across EMEA, combined with historically low levels of e-commerce and the shift by consumers from offline to online, supports growth across a number of sectors. Exciting new high growth opportunities can be found across multiple business lines, including social media, gaming, food delivery and FinTech, whilst the structural expansion of consumer demand also reinforces growth in more established businesses and products.
Barings’ EMEA coverage and expertise
The Board are confident that Barings has the investment expertise to deliver strong returns to shareholders, evidenced through its consistent track record in delivering outperformance against its benchmark. The experienced Barings EMEA investment team, headed by , manages approximately £1.2bn of assets across EMEA, with in-depth coverage of over 170 companies that fit the criteria for potential inclusion in the portfolio under the New Investment Policy. Through its fundamental bottom-up approach, the investment team regularly engages with management teams and analyses industry competitors across EMEA to gain an insight into company business models and sustainable competitive advantages, in what Barings and the Company believe is an under-researched area of the market compared to broader emerging and developed markets.
Change of name
The Board has approved, subject to and effective on shareholder approval of the New Investment Policy at the General Meeting, the change of the Company’s name from “Baring Emerging Europe PLC” to “Barings EMEA Opportunities PLC”. It is the Board's opinion that the Company will benefit from a new name that reflects the expanded geographical investment remit of the New Investment Policy. The proposed new name will assist marketing efforts and ensure investors are more aware of the Company’s differentiated investment proposition.
Reduction in the investment management fee
The Board and the AIFM have agreed to a reduction in the annual investment management fee, from the previous level of 0.80% per annum of the net asset value of the Company to 0.75% per annum of the net asset value of the Company. Although following the introduction of the New Investment Policy the Company would have no direct peers, it is noted that the revised investment management fee would be one of the lowest management fees when compared to the constituents of both the AIC’s Global Emerging Markets sector and Country Specialist: – ex- sector, offering shareholders access to a unique investment strategy at an attractive fee level.
For the four year period ending the Board had set targets relating to the Company’s performance and discount that, if not met, would have triggered a tender offer for up to 25% of the Company’s shares. As previously announced to shareholders on , the conditions, based on unaudited figures, were not met over this period, and a tender offer was not triggered.
The Board is aware of shareholders’ continued desire for a strong discount control mechanism, though also mindful of the need to provide Barings the opportunity to achieve its goal of outperforming its benchmark with the New Investment Policy over a full market cycle. The Board has therefore decided, subject to shareholder approval of the New Investment Policy, to set new tender offer trigger mechanisms for the five year period commencing . Given shareholders’ desire for performance criteria which allow the Company’s performance to be judged against the comparator benchmark net of fees and costs, the Board proposes (subject again to shareholder approval of the New Investment Policy) to change the performance criterion from being measured on the Company’s portfolio on a total return basis to the Company’s net asset value per share on a total return basis. The outperformance margin will also change from 100 basis points to 50 basis points. This change reflects the fact that when the Board was setting the performance trigger in 2016 the portfolio performance was measured gross of fees and costs, and it was therefore appropriate to require a higher level of outperformance of the comparator benchmark.
Therefore, the Board proposes to offer shareholders a tender offer for up to 25% of the Company’s issued ordinary share capital if:
i) the average daily discount of the Company’s market share capital to its net asset value (‘cum-income’) exceeds 12%, as calculated with reference to the trading of the Company’s shares over the period between and (the “Calculation Period”); or
ii) the performance of the Company’s net asset value per share on a total return basis does not exceed the return on the MSCI Emerging Markets EMEA Index (net) by an average of 50 basis points per annum over the Calculation Period.
For further information please contact:
, via J.P. Morgan Cazenove
(Chairman)Baring Emerging Europe PLC
J.P. Morgan Cazenove +44 (0)20 7742 4000
Nick Croysdill, Andreea Caraveteanu Tel: +44 (0) 20 7466 5050
Weightings as at . Quoted figures are approximate.1
Quick facts: Baring Emerging Europe
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