Half-year results from Barings Emerging EMEA Opportunities (BEMO ) underline the havoc caused to its investments by Russia’s war against Ukraine, with the interim dividend more than halved, though investors can be very glad the investment trust broadened its mandate away from eastern Europe 18 months ago.

Chair Frances Daley expressed frustration at the 22.4% slump in net asset value (NAV) in the six months to 31 March, which followed strong performance in the previous year and was caused by events beyond the board and fund manager’s control.

The closure of Moscow’s stock exchange and crippling sanctions against Russia, to which the trust had a 23% weighting before the 24 February invasion of Ukraine, saw BEMO severely underperform the 13.7% fall in the MSCI Emerging Markets EMEA index covering eastern Europe, Middle East and Africa.

Bad as this was, Daley said it could have been a lot worse had shareholders in what was previously the Baring Emerging Europe not approved in November 2020 the widening of its remit to include Saudi Arabia, UAE, Kuwait and Qatar. These benefited from the surge in the price of crude oil after the outbreak of war and, with gains of 22%-37%, had been among the trust’s strongest performers.  

‘Two years ago, our exposure to Russian securities would have been closer to 70% but this had fallen to around 30% at the end of January 2022. EMEA equities declined 13.7% over the period, but substantially outperformed the company’s old emerging Europe investment universe which fell approximately 70%,’ Daley told shareholders.

The suspension of the Moex stock exchange and internationally-listed Russian securities, along with MSCI’s removal of Russia from its indices led the trust to write down all its Russia assets – such as Sberbank and Lukoil – to zero.

‘Consequently, while the portfolio does continue to hold shares in Russian companies, effective exposure to Russia in the NAV at the end of the period was 0%,’ said fund manager Matthias Siller.

Although dividend income received by the fund only dipped to 8p from 8.9p a share a year ago, the collapse in Russia holdings, which were historically big distributors, is expected to hit future revenues. As a result the board has proposed an interim dividend of 6p per share, down from 15p this time last year, as it looks to cover payouts and move a greater proportion of its income distribution to the final dividend each year.

This would give the board greater certainty over the income coming in during a time of great volatility, while looking to maintain the work towards the enchanced dividend policy adopted five years ago. 

‘The investment manager continues to believe that the portfolio should be able to offer supportive levels of income in future. This policy also allows the company to pay out up to 1% per annum of NAV from capital as income to shareholders, which will be considered as appropriate,’ Daley added.

Siller, who will run the portfolio with just Adnan El-Araby after co-manager Maria Szczesna decided to return home to Poland for family reasons, said underlying revenue generation potential ‘remains one of the strongest globally’.

The lead manager, who has overseen a 36% increase in net asset value in the past 10 years, said Middle Eastern economies and South Africa were ‘potential safe havens’ compared to eastern Europe, which faced a short-term future of supply disruptions and high inflation.

South Africa, which accounted for 32.5% of the trust in March, was one of the strongest performing regions over the half-year, advancing 22.5% as stocks such as FirstRand outperformed.

Prospects for the Middle East, to which the trust is now 52% invested, are good. Saudi Arabia, which accounts for a third of the portfolio, continues to be supported by high crude prices as a result of the Ukraine war and the shift away from Russian fossil fuel.

The increased demand should improve the spending power of consumers in the region, which in turn increases opportunities in healthcare and financials like Al Rajhi Bank and insurer Tawuniya.

‘Additionally, because of the high oil price and extensive government reserves, consumers in the region are relatively immune from global inflationary pressures and fears regarding food security,’ said Siller.

‘Longer term, the representation of Middle Eastern countries in benchmarks is going up, while a strong IPO [flotation] pipeline is helping to broaden and deepen the market.’

South Africa has a wealth of metals to buoy its economy as the energy transition increases demand for specialist metals.

He said a ‘renewed vigour’ around renewable energy infrastructure is providing benefits for South African commodity producers, including his holding in Anglo American (AAL), which produces nickel, a key component of electric batteries.

‘We also hold Impala Platinum, which supplies platinum and palladium to carmakers globally to support the production of catalytic converters, which help reduce poisonous emissions from vehicles,’ he said.

The reinvention of BEMO as a broader global emerging markets fund may be attractive longer term but the trust’s problem is its small size. A 29% slide in the share price leaves the closed-end fund with a market value of just £66m, which may deter big buyers, with the shares standing on an 18% discount to asset value.