Polunin Funds
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POLUNIN FUNDS Société d'Investissement à Capital Variable Annual report including the audited financial statements as at 31 December 2016 RCS Luxembourg B131.312 Database Publishing System: CO-Reporter® by CO-Link, Belgium. POLUNIN FUNDS Table of Contents Page Management and Administration 3 Management Report 5 Report of the Réviseur d’Entreprises agréé 8 Consolidated Statement of Net Assets as at 31 December 2016 11 Statement of Operations and Changes in Net Assets from 1 January 2016 to 31 December 2016 12 POLUNIN FUNDS - Developing Countries Fund Statement of Net Assets as at 31 December 2016 14 Statement of Operations and Changes in Net Assets from 1 January 2016 to 31 December 2016 15 Changes in number of shares outstanding from 1 January 2016 to 31 December 2016 16 Key figures relating to the last 3 years 16 Securities portfolio as at 31 December 2016 17 Geographical breakdown 21 Economical breakdown 22 POLUNIN FUNDS - Emerging Markets Small Cap Fund Statement of Net Assets as at 31 December 2016 24 Statement of Operations and Changes in Net Assets from 1 January 2016 to 31 December 2016 25 Changes in number of shares outstanding from 1 January 2016 to 31 December 2016 26 Key figures relating to the last 3 years 26 Securities portfolio as at 31 December 2016 27 Geographical breakdown 31 Economical breakdown 32 Notes to the financial statements 33 Unaudited information 41 No subscription can be received on the basis of financial reports. Subscriptions are only valid if made on the basis of the current Prospectus and the Key Investor Information Document, accompanied by the latest available annual report of the fund and the latest semi-annual report if published after such annual report. Page 2 POLUNIN FUNDS Management and Administration Registered Office 5, Allée Scheffer L-2520 Luxembourg Grand Duchy of Luxembourg Chairman of the Board of Directors of the Fund Franck A. Willaime * Certified Independent Director Michael Sanders * Managing Director Alceda Fund Management S.A. 5, Heienhaff L-1736 Senningerberg Grand Duchy of Luxembourg Members of the Board of Directors of the Fund Julian Garel-Jones Director Polunin Capital Partners Limited London, United Kingdom Stefan Corthouts ** Independent Director Serge Dollendorf ** Senior Director Alceda Fund Management S.A. 5, Heienhaff L-1736 Senningerberg Grand Duchy of Luxembourg Management Company Carne Global Fund Managers (Luxembourg) S.A. *** European Bank & Business Center 6B, route de Trèves L-2633 Senningerberg Grand Duchy of Luxembourg Alceda Fund Management S.A. *** 5, Heienhaff L-1736 Senningerberg Grand Duchy of Luxembourg Members of the Board of Directors of the John Alldis Management Company Director Carne Global Financial Services (Luxembourg) S.à r.l. European Bank & Business Center 6B, route de Trèves L-2633 Senningerberg Grand Duchy of Luxembourg * Michael Sanders resigned from the Board of Directors of the Fund effective 13 October 2016. On the same day, Franck A. Willaime was appointed Chairman of the Board of Directors of the Fund. ** Serge Dollendorf resigned from the Board of Directors of the Fund effective 13 October 2016. On the same day, Stefan Corthouts was appointed member of the Board of Directors of the Fund. *** Alceda Fund Management S.A. was formerly the Management Company of Polunin Funds until 13 October 2016. On the same day, Carne Global Fund Managers (Luxembourg) S.A. was appointed as Management Company of Polunin Funds. Page 3 POLUNIN FUNDS Management and Administration (continued) Members of the Board of Directors of the William Blackwell Management Company (continued) Principal Carne Financial Services (UK) LLP 107-111 Fleet Street London EC4A 2AB United Kingdom Veronica Buffoni **** Director Carne Global Financial Services (Switzerland) GmbH Industriestrasse 9 6300 Zug Switzerland Steve Bernat ***** Chief Executive Officer Carne Global Fund Managers (Luxembourg) S.A. European Bank & Business Center 6B, route de Trèves L-2633 Senningerberg Grand Duchy of Luxembourg Investment Manager & Principle Distributor Polunin Capital Partners Limited 10, Cavalry Square London, SW3 4RB United Kingdom Investment Adviser Polunin Capital Partners Pte. Limited 80 Raffles Place #20-01 UOB Plaza 048624 Singapore Administrative Agent, Domiciliary Agent, CACEIS Bank Luxembourg Registrar and Transfer Agent 5, Allée Scheffer L-2520 Luxembourg Grand Duchy of Luxembourg Depositary and Paying Agent CACEIS Bank Luxembourg 5, Allée Scheffer L-2520 Luxembourg Grand Duchy of Luxembourg Independent Auditor of the Fund Deloitte Audit Société à responsabilité limitée Cabinet de Révision agréé 560, rue de Neudorf L-2220 Luxembourg Grand Duchy of Luxembourg **** Veronica Buffoni resigned from the Board of Directors of the Fund effective 5 February 2016. ***** Steve Bernat was appointed member of the Board of Directors of the Fund effective 5 February 2016. Page 4 POLUNIN FUNDS Management Report Fund POLUNIN FUNDS Reporting Period 1 January 2016 until 31 December 2016 Introduction The Investment Objective of the Sub-Fund Developing Countries Fund is to outperform the MSCI EM Total Return (Net) Index in USD over rolling 5 year time periods. The Investment Objective for the Sub-Fund Emerging Markets Small Cap Fund is to outperform the MSCI EM Small Cap Index over rolling 5 year time periods. In truth, 2016 ended with a bit of whimper for emerging markets. By contrast, the MSCI World Equity Index made new highs at the end of the year, led by the S&P, the NASDAQ even the NIKKEI. Only the Euro area looked as weak as the Emerging Market indices as the year finished, weighed down by the uncertainties introduced by the British Brexit vote. Both sub-funds acquitted themselves very well in an extremely challenging year. The Developing Countries Fund’s NAV per share rose by 18.34% (Class A), compared with a rise of 11.19% for its benchmark. For the Emerging Markets Small Cap Fund the results were even better in relative terms, returning a net 12.18% (Class A) compared with a very small rise of just 0.27% for the benchmark. It was difficult making the bear case for emerging equities last year, and even harder to sustain it through the euphoric recovery experienced between late January and October 2016 (a 34% trough to peak rally). Now, however, the distinct feeling from interaction with other asset managers is that the consensus trade is the bearish one, and that raises concerns. The instinct is to remain bearish for longer on pure fundamental valuation grounds, but the weight of anecdotal evidence is building against that position. Content In sharp contrast to 2015, it was the large cap stocks which performed best in 2016, driven by a surge of buying in ETFs and other index products. As Investment Manager, we have previously stated that we do not know when global monetary policy might start to normalise, and what event(s) might kick start the process. Now investors seem to be convinced that 2016, taken in aggregate, was the “event”. It is plain to see why a bearish stance has become the easy consensus. Few long term investors were sucked into the EM rally during 2016. In fact the evidence from market interactions is that asset allocators have been taking money off the table. Worse, and in contrast to the global trend of active managers losing assets to passive funds, emerging market investors do not appear to be swapping active for passive allocations. Rather they are reducing the emerging markets asset class after almost six and a half years of poor relative and absolute returns. “De-risking” is the word most often used. The figures stated in the report are historical and not necessarily indicative of future performance. Page 5 POLUNIN FUNDS Management Report (continued) Content (continued) The end result of all the noise in 2016 is that markets appear to be back where they started. The total market value of emerging equities according to Datastream is up 12.2% (because of dilution the MSCI EM price index is only up 8.6% and including dividends it is +11.2%). The P/E has risen from 13.09 to 13.50 and the P/BV from 1.55 to 1.65. Perhaps more encouragingly, Enterprise Values have risen just 2.98%. This suggests that total debt has either risen more slowly than market capitalisation or it has actually fallen a little in USD terms, perhaps due to significant local currency appreciation. Looking at the EV to Replacement Cost ratio tracked by the Investment Manager, it appears that some industries that were already cheap on this metric have remained cheap, or in some cases have actually risen a bit (for example Steel and Mining). By contrast the expensive industries one year ago have mostly declined in valuation (mainly Consumer sectors such as Food, Media, Hotels etc). In summary it appears that Emerging Markets are getting a little cheaper overall, and that debt reduction has played a part. Performance Review Unlike 2015, stock selection dominated the excess return calculation in – Countries 2016. Part of the reason was that the Fund’s stock picking worked especially well even in markets where it was incorrectly positioned. For example China, Turkey, South Africa. Allocation gains were centred on Russia, Pakistan, Mexico and India. Country positioning was least positive in Brazil, Turkey and Greece. Performance Review The Russian utilities Federal Grid and Inter Rao were purchased in 2013 – Stocks and 2014, respectively, during the currency weakness caused by the Crimea crisis. The performance has been partly currency revaluation and partly investors chasing high dividend yields. Metals producers KAZAKHMYS, Vale and Anglo American have essentially benefitted from higher prices, but recent currency strength has dented their appeal. China High Speed is a gearbox manufacturer for wind turbines which was subject to a takeover bid. Several big index stocks significantly outperformed, posing a noteworthy obstacle to the Sub-Fund which did not own them.