European Opportunities Trust plc (the 'Company')

Legal Entity Identifier: 549300XN7RXQWHN18849

Annual results for the year ended 31 May 2024

Highlights

Chair's Statement

I am pleased to present the Company's twenty-fourth Annual Report and Accounts since launch, covering the twelve months ended 31 May 2024.

During the period under review, the total return on the net asset value per share of the Company was 15.5% (with dividends reinvested). This compares with the total return (again reflecting dividends reinvested) of 17.3% from our Benchmark, the MSCI Europe index in GBP, and the total return on the price of the Company's shares of 16.5% during the same period.

Since the year end, the net asset value per share has remained flat at 1,008.8p (as at 31 August), underperforming the Benchmark index which increased by 0.7% over that period. The market price of the Company's shares on 31 August was 900p, a reduction of 0.7% since the financial year end.

Whilst the Company's NAV total return has outperformed our Benchmark over the ten years to 31 May 2024, its three and five year NAV total returns have been below the Benchmark. The Board is painfully aware of the disappointment this entails for shareholders. Through intense engagement with the Investment Manager, the Board is persuaded that the consistency of commitment to a differentiated, high conviction approach will be vindicated in the longer term. Since launch, the Company has generated an annualised net asset value total return of 11.1% and an annualised share price total return of 10.4% as at 31 May 2024.

Annual dividend

The Company's stated investment objective is to achieve shareholder returns primarily through capital growth. Accordingly the Board does not impose a specific income objective on the Investment Manager in the management of the portfolio. Consequently the revenue per share, and therefore the dividends paid, have fluctuated from year to year.

Due primarily to transaction activity in the portfolio involving the disposal of a number of high income generating securities and the reduction in the size of the Company, there has been a particularly sharp decline in the revenue return per share to 0.3p per share in the year under review (3.3p in 2023).

It has generally (but not exclusively) been the Board's policy to pay a dividend covered by the revenue return per share of the year to which it pertains. However in view of the scale of the decline in the year to 31 May 2024, the importance of income to many shareholders and the ample revenue reserves, the Board has decided to recommend a final dividend of 2.0p (3.5p in 2023).

This illustrates one of the flexibilities of investment trusts which, in contrast with open-ended funds such as OEICs, can hold back some of the income in good years, thereby building up revenue reserves that can be used to supplement dividends during periods of lower revenue returns.

The dividend will be proposed at the Annual General Meeting and be payable on 25 November 2024 to shareholders on the Register of Members on 8 November 2024 (the Record Date). The ex-dividend date is 7 November 2024.

Discount management and 2026 tender offer

The discount on the Company's shares was 10.2% at the year end (2023: 10.9%) and the average discount for the year was also 10.2% (2023: 14.4%). The year end discount was wider than the 7.8% average on that date for the investment companies' universe as a whole (excluding VCTs) and wider than the average of the Company's peers in the AIC Europe sector of 6.7%.

The Board has an active discount management policy, the primary purpose of which is to reduce discount volatility. It seeks to maintain the discount in single digits in normal market conditions. Buying shares at a discount also results in an enhancement to the NAV per share.

In January 2024, the Board implemented a tender offer at close to NAV for 25% of the shares in issue which was fully subscribed. The Board has also announced proposals for a further performance-related tender offer for up to 25% of the shares in issue in the event that the Company's net asset value total return does not equal or exceed the Benchmark total return over the three-year period ending on 31 May 2026. The Company will also put a continuation vote to shareholders at the 2026 AGM in accordance with its three-yearly continuation vote cycle.

In the meantime, the Board believes that the most effective means of minimising any discount at which the shares may trade is for the Company to deliver strong, consistent, long-term performance from the investment portfolio (in both absolute and relative terms). However, wider market factors inevitably impact the rating of the shares from time to time.

In determining whether a share purchase would enhance shareholder value, the Board takes into account market conditions, the Company's performance, any known third-party investors or sellers, the impact on liquidity and total expense ratios, as well as the level of discount to net asset value at which the shares are trading. Any purchases will only be made at prices below the prevailing net asset value and where the Board believes that such purchases will enhance shareholder value.

A total of 33,365,814 shares were repurchased during the period under review (with an aggregate value of £302.2 million, inclusive of £222.7 million purchased pursuant to the tender offer implemented in January 2024). This compares with 4,126,242 shares bought into treasury in the previous financial year. A further 630,919 shares (with an aggregate value of £5.6 million) have been repurchased since the financial year end (as at 9 September 2024).

The Board believes that the Company should retain the power to buy back shares during the current financial year and is therefore seeking to renew the annual authority to repurchase up to 14.99% of the shares in issue at the forthcoming AGM.

Gearing

The net gearing level on the Company's investments was 8.4% (2023: 8.9%) at the year end.

The Board believes that borrowing can enhance returns to investors over the long-term. The Board monitors the level of the Company's gearing carefully on an ongoing basis and it should be stressed that all gearing is subject to the Investment Manager's confidence in identifying attractive investment opportunities and to them remaining attractive.

Subsequent to the financial year end, the Company renewed its multi-currency revolving credit facility with The Bank of Nova Scotia, London Branch with a maximum drawable amount of £85 million available until September 2025 (2024: £85 million) and credit approval for an additional 'accordion' amount available upon application for a further £50 million (2024: £50 million). There was £60 million drawn down as at 31 May 2024, unchanged as of the date of this report.

Board re-election at the AGM

As previously announced, Lord Lamont intends to retire from the Board at the forthcoming Annual General Meeting. Lord Lamont has served on your Board since 2015, as chair of the Remuneration Committee and as your Senior Independent Director since 2023. On behalf of the Board and you, our shareholders, I would like to thank him for his exceptional contribution to the Company throughout his nine years of service. He takes with him our very best wishes for the future.

I am delighted that Jeroen Huysinga has agreed to take over as Senior Independent Director and that Manisha Shukla will take over as Chair of the Remuneration Committee with effect from the date of our AGM.

We continue to review Board composition and Directors' succession regularly to ensure that we have a Board with a mix of tenures and one which provides diversity of perspective together with the range of appropriate skills and experience for your Company.

In accordance with the UK Corporate Governance Code, all Directors who have held office during the financial year (with the exception of Lord Lamont) are offering themselves for re-election (or, in the case of Neeta Patel who joined the Board since the last AGM, first election) at the forthcoming Annual General Meeting.

I would like to thank my fellow Directors for their diligence and dedication on your behalf over the last year.

Shareholder engagement

The Board believes that shareholder engagement is extremely important and recognises the importance of maintaining an open dialogue with shareholders.  Over the course of the year, we have continued to engage with a range of our shareholders representing in aggregate the majority of the share register. The Board values the feedback it has received and insights it has gained through the engagement process and we thank the shareholders for their valuable contributions. We remain committed to continued engagement with all shareholders.

Update Statement on 2023 Annual General Meeting

At the Company's 2023 Annual General Meeting all resolutions were passed with the requisite majorities. However, the Company received more than 20% of votes cast against several resolutions. In accordance with AIC Code of Corporate Governance, the Board offered meetings with shareholders who voted against the identified resolutions. The relevant shareholders responded that they did not require a meeting at that time. The Board will continue to maintain an open dialogue with shareholders ahead of the forthcoming Annual General Meeting and welcomes feedback from any shareholders on the Company's progress.

2024 Annual General Meeting

The Company's Annual General Meeting will be held at 11:00 am on 13 November 2024. Notice of the Annual General Meeting, containing full details of the business to be conducted at the meeting, is set out in the Annual Report and Accounts.

I would like to take the opportunity to remind shareholders that you have the right to attend and vote on matters that affect the Company. It is an important aspect of an investment trust that shareholders can and are encouraged to make their voices heard by voting on key business matters.

Your attention is also drawn to the Directors' Report in the Annual Report and Accounts where the resolutions classified as special business are explained. The Directors consider that all resolutions to be put to shareholders are in their and the Company's best interests as a whole, and recommend that shareholders vote in their favour.

In addition to the formal business, Alexander Darwall and members of the investment team at Devon will provide a presentation to shareholders on the performance of the Company over the past year as well as an outlook for the future.

Should shareholders have questions for the Board or the Investment Manager, or any queries as to how to vote, they are welcome, as always, to submit them by email to enquiries@devonem.com or call 020 3985 0445.

Outlook

Your Board and I would like to express our thanks to all of our shareholders for their continuing support and as ever, welcome any engagement with our shareholders. Through the superior characteristics and earnings growth prospects of the underlying portfolio, we are confident that the Company is well positioned to offer an attractive investment proposition. We are not, however, complacent and we acknowledge that the five and three year relative returns have been below par. We shall continue to keep the Company's performance, and our Investment Manager, under close review on your behalf.

Matthew Dobbs

Chair

19 September 2024

Investment Manager's Review  

The total return on the net asset value of the Company's shares was 15.5% during the twelve months to 31 May 2024. This compares with a total return of 17.3% from our Benchmark, the MSCI Europe index in GBP.

Index performance

Despite political turmoil in Europe and disappointing growth rates, European equities advanced in the period under review. Moderating inflation in the EU, where the annual inflation was 2.6% in April 2024 compared with 8.1% a year earlier, has prompted cuts in interest rates. Between 2022 and 2024, European interest rates rose rapidly; the ECB's refinancing rate went from 0% in 2022, peaking at 4.5% in 2023. With the cooling in the rate of inflation, the ECB lowered its refinancing rate in June this year, but it remains, at 4.25%, higher than at any time since 2008. Nevertheless, anticipation of a period of rate reductions provided support for European equities.

The brightest element behind the strong equity market performance was the impact of Artificial Intelligence (AI). Whilst principally an American phenomenon, European technology stocks, too, were lifted by the opportunities this will bring. The benefits of AI were recognised in other sectors, where proprietary Intellectual Property (IP) can be leveraged with AI. Notwithstanding the productivity gains from these technological advances, corporate earnings growth in Europe (MSCI Eurozone) is modest. Earnings in 2023 declined slightly, whereas consensus aggregate earnings for 2024 anticipate about 3-5% growth. As in the US, much of the growth is coming from Technology and Communication Services. For the markets more broadly, rising real wages are squeezing corporate margins.

Performance

Whilst the Company's total NAV return was 15.5%, we were disappointed not to outperform the Benchmark during the period under review. As ever, stock picking is the key to our performance. This was hampered by the negative sentiment around small and mid-sized stocks, a part of the market to which our portfolio has a greater than average exposure. We believe that many small and mid-sized companies are significantly undervalued. In some cases, these have attracted private equity interest, underpinning valuations. We still regard this as insufficient and are disappointed to see our holdings, notably Darktrace, taken out of the public market at unsatisfactory prices. We had anticipated years of progress at Darktrace and are disappointed to forego that eventuality.

The Company's relative performance was impacted by an underweight exposure to the banking sector. Banks performed strongly during the period as higher rates, strong fee momentum, moderating cost inflation headwinds, lower regulatory costs and benign credit costs all fed through to better-than-expected earnings reports. This has fed into dividend distributions and a modest re-rating (off a low base).

Whilst we recognise the cyclical tailwind during the period under review from rising rates and continuing low levels of non-performing loans, our structural view of the European banking sector remains unchanged. Specifically, we generally avoid business models dependent on high levels of leverage to generate returns above their cost of capital. Through multiple cycles European banks have proven consistently unable to generate returns above their cost of capital on a sustainable basis, which precludes our involvement in the sector. The significant asymmetric risk to the downside in periods of challenging macro (which can result in equity issuance or even effective/actual bankruptcy) reinforces our aversion to the sector.

Positioning

We continue to invest, as we always have, in 'special' companies that, in our opinion, can flourish in a range of economic scenarios and which are well protected from competitive pressures. We believe that our portfolio is well positioned to navigate macro challenges. Europe's low structural growth is a major challenge. Europe's real GDP has only grown at 1.5% pa in the past decade, below the US at 2.3% pa, and below the wider world at 2.7% pa. This is mitigated in our portfolio by the greater extra-European revenue exposure of the portfolio. The STOXX Europe index derives approximately 41% of its revenues from Europe, 24% from North America and 21% from Asia-Pacific. The respective 'look-through' share of revenues for your Company are 39% and 35% for Europe and North America respectively; emerging markets account for 20% of sales on the same basis.

Consumer spending has been remarkably robust since the outbreak of COVID, on the back of huge public spending support. A squeeze on consumer spending looks inevitable at some point. Accordingly, the portfolio is tilted away from consumer facing stocks and is instead more heavily weighted towards companies which provide goods and services to other companies and governments (often described as B2B). Therefore, we expect the earnings of our investee companies to be less cyclical, more robust and to grow even as consumer spending declines. Perhaps the most obvious example of a sector that is uncorrelated to consumer spending is the Defence sector. We initiated new positions in Thales and BAE Systems, to capture the seemingly inevitable increase in Defence spending.

Our companies typically have more IP and value added across the portfolio. The corollary of this is that Return on Invested Capital (ROIC) tends to be higher than average. Another characteristic of the Company's portfolio is its high active share. The active share at the period end was 91.4% (2023: 92.5%), being defined as the sum of the absolute value of the differences of the weight of each holding versus the weight of each holding in the Benchmark, divided by two. Our investee companies also tend to have relatively low debt levels, which is partly due to their low capital intensity and high cashflow generation, and partly a function of the predominantly 'organic' growth strategies.

The development of the energy market is another important consideration in our positioning. Oil prices, in sterling, rose 10% in the period under review. More significantly, Europe's commitment to the 'Green Economy', not matched elsewhere in the world, is a threat to Europe's industrial competitiveness and has led to 'offshoring', that is to say, moving businesses outside Europe to reset costs lower. This is the opposite of the US experience where their vibrant energy sector has led to the 're-shoring' of industry. Europe is vulnerable to energy costs; the green transition is not likely to reverse its long record of economic underperformance. For these reasons Europe is a difficult area in which to invest. A meagre allocation to European equities disproportionately affects mid and smaller stocks, stocks which form the bulk of our portfolio. Investor indifference is mitigated to a certain extent by Private Equity interest.

Contributors

Yet again, the biggest single contributor to our performance relative to our Benchmark in the period under review was Novo Nordisk, the Danish pharmaceutical company. The company reported strong profit increases over the last twelve months. Its GLP-1 drugs, for diabetes and weight management, have gained significant traction in many markets, most importantly, the United States. A body mass index (BMI) over 30 is considered obese by the World Health Organisation. The anti-obesity part of their business is extraordinary: an almost completely new opportunity, one, moreover, that is relevant to the estimated one billion people worldwide with a BMI of over 30. Moreover, clinical trial results were very encouraging with concomitant labelling improvements. Semaglutide, the GLP-1 active ingredient in Ozempic and Wegovy (respectively the diabetes and weight loss drugs), has been found to have additional beneficial indications. The most important, though not the only one, is cardiovascular (CV) disease. Weight loss is not only good in itself; it also reduces the risk of other diseases such as diabetes and CV disease. Clinical trials show that semaglutide's therapeutic effects go beyond the benefits that come simply from weight loss. The pharmacoeconomic (measuring costs and outcomes) case for GLP-1 drugs is building; arguably, the case for Semaglutide specifically, with its CV indication, is even better.

Being our biggest investment, the strong performance of the shares (up 66% in the twelve months under review) made a big contribution to the portfolio. Novo Nordisk's weighting was 13% of total assets at the beginning of the reporting period; at the end it was 14.2% of total assets. We sold c. £71.4 million of shares during the period under review to keep the weighting down. Nevertheless, this is clearly a very significant position. Our confidence in Novo Nordisk is not simply the excitement about its new blockbuster drugs and the massive latent demand worldwide for anti-obesity drugs. What makes it a great investment, with a weighting to match, is the visibility of its prospects. There is only one other serious competitor at present. It will take years for others to pass through clinical trials and launch new competing products. In the interim, Novo Nordisk is constantly developing more advanced products itself. It has an impressive manufacturing scale, and distribution reach, and enjoys a distinguished heritage in China which is a significant advantage as it addresses that market. Transparency of Novo Nordisk's pipeline and those of its competitors, coupled with the need for regulatory authorisation, means that it is relatively easy to monitor threats to the company's leading position. The nature of this business is such that we are likely to get plenty of warning of any material threats.

Another significant contributor to our performance relative to our Benchmark was RELX, one of our long-standing, major investments. The company is clearly a winner from Generative AI, one factor behind the higher growth rates reported in two areas of the company's business, Risk and Legal. RELX has for many years developed algorithms which might now be described as AI. RELX has the necessary ingredients for success, data sets and domain knowledge, which should help maintain good growth rates. The Exhibitions business has also rebounded very strongly after COVID-related lockdowns.

Shares in Darktrace soared following an offer for the company from a private equity firm. We invested in Darktrace when it came to the market in April 2021. Although the exit price (at more than twice the price of the Initial Public Offering) marked a successful investment for us, it is disappointing that the adverse and often unreasonable commentary that blighted its time in the public markets effectively forced Darktrace into private ownership. We had anticipated many years of growth with Darktrace, which operates in a niche area of cybersecurity.

The global alternative asset manager, Intermediate Capital Group (ICG), which provides investment finance across the capital structure, was another good performer. Just as public markets are squeezed by capital outflows, so the private markets are relatively buoyant. ICG is a beneficiary of this and with its emphasis on private credit markets is less vulnerable to a downturn than pure private equity.

Experian was also a contributor to our performance. As a leading credit bureau in the biggest market, the US, Experian has been vindicated with its differentiated strategy. By developing a consumer-facing credit platform, the company successfully navigated the slowdown in the traditional market for credit bureaus, serving the banks. It also has a strong business in Brazil which is growing rapidly, and where the outlook is good.

Camurus, a new investment, was also a strong performer. Swedish-listed, Camurus uses its proprietary, extended- release technology to develop long-acting pharmaceutical drugs (typically using existing approved, active pharmaceutical compounds), addressing the needs of patients living with severe and chronic diseases. Their medicines are developed in-house or in partnerships with international pharmaceutical companies. These long-acting medicines aim to improve chronic disease management both in terms of efficacy and treatment administration, but also in terms of reducing the treatment burden. The company's first product is a once-weekly or monthly medication for the treatment of moderate to severe opioid use disorder (OUD) and is particularly effective in the prevention of withdrawal symptoms caused by stopping the use of opioids for pain management therapy. The medicine has been launched in the US, Australia, the UK and Finland. Initial reports of the markets' acceptance are very encouraging. The opportunity is huge owing to the large addressable market

Prysmian reported a string of good results. Its leading position in the manufacturing of electrical energy cables means that it is a beneficiary of the energy transition. The share of electricity in final energy demand is likely to increase, which might be described as electrification of energy, and for this grid stability and resilience is prerequisite. The initial driver for this transition was the increase in renewable energy. The rapid increase in demand for data centres, itself partly driven by the surge in AI, has intensified the urgent need to upgrade electricity networks and to overhaul and modernise the electric grid, especially in the US.

Deutsche Boerse was another contributor. Its various transactions platforms continue to perform well: 'higher for longer' interest rates in Europe have boosted profits; its power trading platform is proving to be very successful and volatility in financial markets is a boon to their activities.

The continuing demand for Liquified Natural Gas (LNG) has underpinned the success of Gaztransport et Technigaz ('GTT'). There is no doubt that LNG will continue to be an important, indeed growing, part of the energy mix. New sources of natural gas are being developed in the world. The transport of that gas with LNG carriers is almost certain to increase. As a leading technology provider of solutions for transporting LNG, and other liquified fuels, GTT is clearly a beneficiary of this trend.

Detractors

Edenred had a significant negative impact on our relative returns. Although a good long-term performer, the share price stalled on concerns about regulatory changes in its main markets, France and Brazil. However, we do not think that these concerns amount to a serious threat to Edenred's position as the leader in specific purpose benefits. We maintained the holding.

Genus also detracted from our performance relative to our Benchmark during the period under review. Results were impacted by the weak performance in the Chinese market and by delays in the application process for approval for gene-edited pigs. We are confident that they will obtain approval, which will transform their fortunes. Accordingly, we retained the position.

Dassault Systèmes has an excellent long-term record. However, the shares performed poorly in the period under review. The short-term growth rate has moderated, impacted by the slowdown in clinical trials post COVID, which in turn has dampened growth in their life sciences business. Nevertheless, we remain very positive about Dassault Systèmes' strong position and prospects for growth. Automotive-related demand is robust and likely to improve as cost efficiency becomes ever more important with the development of Electric Vehicles (EV). Aerospace and defence demand is another growing opportunity. Moreover, Generative AI is already driving growth. We retained the shares.

Grifols was another significant detractor, as allegations around accounting and governance damaged the company. The company has addressed these concerns, obtained a clean bill of health from the Spanish regulator, published unqualified accounts, appointed a new external CEO and reduced debt. There is considerable scope to improve operating performance, underpinning our confidence in this holding.

Worldline shares have performed badly. Nevertheless, we saw value in the shares and increased the holding.

We sold the holding in Neste following a series of disappointments. We lost confidence in management and its ability to navigate the challenges of the demand, supply imbalance in the biofuels and renewable diesel markets.

We also sold all our shares in Bayer, a chronic underperformer that also detracted from performance in the period. We were unimpressed by the new management and do not believe that they are tackling the company's challenges successfully.

S.O.I.T.E.C also detracted from our returns relative to our Benchmark. The business has proved to be more cyclical than we expected with high smartphone inventories dampening demand for their products. Furthermore, it has not succeeded in getting widespread adoption of its unique silicon carbide splitting technology. Whilst acknowledging that progress is slower than we had hoped, we still believe that the company's technology will gain extensive acceptance and retained the shares.

Finally, we note the negative impact of Genmab shares on the portfolio. Whilst its standing as a leader in the production of antibody therapeutics is not in doubt, its ability to monetise its technology leadership is a concern. Nevertheless, we decided to keep the position, believing that in due course the company will be properly rewarded for its impressive technology.

Portfolio activity

During the period under review, we raised approximately £325.5 million net cash. We sold about £605.7 million of stocks and reinvested around £280.3 million, representing a turnover ratio of 71% of the Company's average net assets during the year (2023:28%). Takeover activity within the portfolio, the funding of share buy backs and the tender offer in January 2024, for which we had to raise approximately £222.7 million, accounted for most of this activity. We reduced the number of holdings from 31 to 27. There were four new investments and eight complete sales during the period under review.

The biggest sales in the period under review were of three troubled holdings, Merck KGaA, Neste and Bayer. Merck's pharmaceutical business announced disappointing clinical trial results. We sold because we saw better opportunities in other stocks. The sale of Neste followed a series of disappointments with the management's performance. Poor execution and poor communication undermined our confidence in the company. There is also some evidence that European governments are backing away from earlier biofuels commitments, representing a setback for Neste. We decided to sell all our shares in Bayer as we are not convinced that the new CEO's plans will work. The cultural challenges, not to mention litigation overhangs, need to be addressed and overcome at Bayer.

We also made outright sales of Borregaard, Elkem, Wolters Kluwer, OHB Technology and SUSE. The last two companies were sold following offers from private equity firms. We sold Borregaard because profit growth failed to match our expectations; we sold Elkem as reported profits disappointed and Wolters Kluwer on valuation grounds.

We took new positions in, Camurus, CTS Eventim, Thales and BAE Systems, the biggest new position being Swedish-listed Camurus.

We initiated a position in CTS Eventim, which is Europe's leading promotor of live entertainment, and the number one provider of ticketing services in Europe. It also operates some of Europe's most renowned venues, a few of which it owns. Demand for live entertainment is growing. CTS Eventim's continues to develop its ticketing services, gaining market share and expanding geographically.

We made two small new purchases in Thales and BAE Systems. Both companies will benefit from increasing European defence spending. They also stand to benefit from more defence spending in other parts of the world, notably Asia. Moreover, both companies cover the fullest range of defence which, nowadays, is not simply Land, Sea and Air, but also extends to cyber and space. Competence across all these areas is thought to improve the value proposition of each offering. Thales, the French multinational company that designs, develops and manufactures systems, devices and equipment for the aerospace, defence and security sectors is a leader in cyber security and data protection. Increasing demand for their products and services is evident. BAE Systems, the UK-listed defence and aerospace company, is gaining business in the US and also looks well-placed to grow in Asia where there is clearly increasing long-term demand for defence solutions.

We also increased commitments in a number of existing holdings. We bought more shares in Genus following setbacks in the process of obtaining FDA approval for its gene-edited pigs. We expect them to get approval and expect this to transform the company's fortunes. We also bought more shares in BFF Bank after a sharp fall in the share price, a fall caused by a regulatory enquiry by the Bank of Italy. We expect the bank to recover fully in due course. The decision to buy more shares in Oxford Instruments followed the appointment of a new CEO who has refreshed the strategy. The clarity, credibility and accountability of this strategy is encouraging. We also bought more shares in Bachem, which should benefit from the surging demand for peptide manufacturing, and Prysmian which is flourishing on the back of increasing power demand.

Gearing

Our net borrowings as at 31 May 2024 were £55.4 million (2023: £76.5 million), representing net gearing of 8.4% (2023: 8.9%). The gross gearing drawn down under the Company's loan facility was £60 million as at 31 August 2024, representing net gearing of 7.8% after offsetting cash held on deposit.

Outlook

The direction of interest rates is always an important factor for equity markets, determined in part at least by the rate of inflation. AI is a new productivity tool helping this trend. The US, where the most innovative AI-related technologies are developed is the biggest beneficiary, but all regions, including Europe, will profit from AI. However, it is unlikely to reverse the pattern of the last twenty years, or more: Europe has been a structurally lower growth region than North America and Asia. The economic cost of decarbonisation in Europe, which is being pursued with a zeal unmatched elsewhere in the world is also a major constraint. With European politics in turmoil, investor sentiment regarding Europe is not good. The tide is going out with money funds flowing out of European equities.

However we are confident that our investment style can overcome this difficult backdrop. Our investee companies typically have strong balance sheets and global exposure, protecting downside risk. Our focus on IP rich, high value-added, innovative companies means that the portfolio is well placed to deliver upside for our shareholders. The earnings record of the fund shows that earnings per share (EPS) of our investee companies have grown faster than the average of the Benchmark over the last five years and our forecasts for the next three years suggest this will continue. We will provide further updates on performance in the coming year, which we look forward to with confidence.

Alexander Darwall

Devon Equity Management Limited

19 September 2024

Investment Portfolio as at 31 May 2024

* Price performance and relative contribution to portfolio returns have been calculated on a total return basis by reference to each portfolio transaction. Over the period from close on 31 May 2023 to 31 May 2024. These calculations include the impact of foreign currency rates and are based on Bloomberg securities and FX pricing sources and Bloomberg's estimation of the portfolio's total market value. Relative contribution to portfolio return is measured against the MSCI Europe total return index in GBP. Source: Devon, Bloomberg.

The five largest contributors to performance relative to the Benchmark are highlighted in bold and the five largest detractors are highlighted in italics.

Strategic Report

The Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013. The Strategic Report seeks to provide shareholders with the relevant information to enable them to assess the performance of the Directors and the Company during the financial year under review as per the requirements for Directors in the Companies Act 2006.

Business and Status

During the year, the Company carried on business as an investment trust with its principal activity being portfolio investment. The Company has been approved by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the eligibility conditions of sections 1158 and 1159 of the Corporation Tax Act 2010 and the ongoing requirements for approved companies as detailed in Chapter 3 of Part 2 of the Investment Trust (Approved Company) (Tax) Regulations 2011. In the opinion of the Directors, the Company has conducted its affairs in the appropriate manner to retain its status as an investment trust.

The Company is an investment company within the meaning of section 833 of the Companies Act 2006. It is not a close company within the meaning of the provisions of the Corporation Tax Act 2010 and it has no employees. The Company is domiciled in the United Kingdom, was incorporated in England & Wales on 16 August 2000 and started trading on 20 November 2000. The Company is an Alternative Investment Fund (AIF) for the purposes of the UK Alternative Investment Fund Managers Regulations.

Reviews of the Company's activities are included in the Chair's Statement and the Investment Manager's Review above. There has been no significant change in the activities of the Company during the year to 31 May 2024 and the Directors anticipate that the Company will continue to operate in the same manner during the current financial year.

Investment policy

The Company will, at all times, invest and manage its assets, with the objective of spreading risk and in accordance with the following Investment Restrictions:

The Board is responsible for promoting the long-term success of the Company for the benefit of all stakeholders and in particular its shareholders. Although the majority of the day-to-day activities of the Fund are delegated to the Investment Manager and third-party service providers, the responsibilities of the Board are set out in the schedule of matters reserved for the Board and the relevant terms of reference of its Committees, all of which are reviewed regularly by the Board.

To ensure that the Board is able to discharge this duty, both the Investment Manager and third-party service providers are required to provide the Board with regular updates. In addition, the Directors, or the Board as a whole, have the authority to seek advice from professional advisers including the Company's service providers and independent external advisers as well as attend any relevant training seminars.

Any material change in the investment policy of the Company described above may only be made with the approval of shareholders by an ordinary resolution.

Investment Approach

The Investment Manager adopts a stock picking approach in the belief that a thorough analysis and understanding of a company is the best way to identify long-term superior growth prospects. This understanding begins with identifying those companies where the ownership structure and incumbent management are conducive to the realisation of the aim of achieving superior long-term earnings growth.

The Investment Manager seeks to identify companies which enjoy certain key business characteristics including some or all of the following:

In analysing potential investments, the Investment Manager employs differing valuation techniques depending on their relevance to the business characteristics of a particular company. However, the underlying feature will be the sustainability and growth of free cash flow in the long-term.

Portfolio risk

Portfolio risk is mitigated by investment in a diversified spread of investments. The Investment Manager is not constrained by Benchmark weightings, sector, geographical location within Europe or market capitalisation or size of investee companies.

Benchmark index

The Company's Benchmark is the total return on the MSCI Europe index in GBP.

Borrowing limits

The Board considers that long-term capital growth can be enhanced by the use of gearing through bank borrowings. The Board considers that the Company's level of gearing should be maintained at appropriate levels, with sufficient flexibility to enable the Company to adapt at short notice to changes in market conditions.

The Board oversees the level of gearing in the Company and reviews the position with the Investment Manager on a regular basis. In normal circumstances the Board does not expect the level of gearing to exceed 20% of the Company's total assets (calculated at the time of borrowing).

Environmental, Social and Governance considerations

The Board considers Environmental, Social and Governance ('ESG') and sustainability risks to be an important element to be integrated into the Company's investment decisions. It has instructed Devon to take ESG risk considerations into account in both the discretionary management of the Company's investment portfolio and in its ongoing engagement with investee companies.

Devon's primary objective is to produce superior financial returns for the Company's shareholders. High standards in sustainability and efficiency make good business sense and have the potential to protect and enhance investment returns.

The Board has not established formal sustainability investment goals for the Company, nor has it mandated Devon to implement automatic exclusion criteria for certain categories of investee companies. Nevertheless, Devon's investment decision-making process and ongoing risk monitoring integrate the assessment of potential and actual sustainability risks and opportunities for all investee companies.

Devon's investment team constructs a comprehensive business case for each investee company in the portfolio. As part of its due diligence, the team analyses the value chain for each investee company, seeking to identify any involvement in industries deemed to be high risk through production, distribution, or related practices which could harm the business case for the investment.

The factors considered vary depending on the type of investee company being assessed. These may include:

Devon's approach focuses on targeted dialogue, active governance, and collaborative efforts to ensure the alignment of investee companies, while also upholding the fiduciary responsibilities to their clients.

Stewardship and engagement

By engaging with investee companies, Devon seeks to foster constructive relationships, inform investment decisions, and drive positive change within the portfolio with the expectation of enhancing shareholder returns. Specifically, Devon's concentrated, long-term approach to investment facilitates meaningful engagement on culture, governance, and sustainability issues with the management of investee companies. This enables them to:

Matters that have been raised through engagement include: remuneration policies, board composition, workforce engagement, shareholder and voting structures, diversity strategy, health and safety, energy transition, capital allocation, sustainability strategy, labour and human rights, and climate change mitigation efforts.

For example, during the financial year under review, Devon engaged successfully with Bachem. Following two material events, we felt the company's communication with the market could be improved. Devon engaged with the company on this issue, emphasising that timely and widespread dissemination of material information was critical to ensure both confidence in the management team and protect minority shareholder interests. The management team were receptive to Devon's representations, and Devon has recognised an improvement in their communication with the market.

Another example, during the financial year in review, was Devon's engagement with the management of Oxford Instruments. Devon had two principal concerns. One was the CEO's lack of formal science expertise, a consideration for the leadership of a science driven company. The second concern was the complexity of the way in which the group presented its operations. The senior management of Oxford Instruments was happy to address Devon's concerns. Devon was reassured and fully satisfied with their response on both points. On the first, the company explained that they have a science advisory committee to support the CEO and other senior management. In response to the second point, management announced a new, simplified divisional structure which has hugely improved the quality of communicating the group's business. Moreover, the recent capital market's day, the first in many years, was an excellent opportunity to see one of the big new facilities, see demonstrations of some of the company's tools, and meet more senior management. Devon welcomes the improved transparency and engagement.

Voting at investee company meetings

In addition to direct engagement, the Board has given discretionary voting powers to Devon and, wherever practicable, Devon will exercise all voting rights associated with the shares held in the Company's portfolio. A report of all votes cast on the Company's behalf during the financial year under review may be viewed on Devon's website at www.devonem.com.

Policies and transparency

Devon has established an ongoing process for identifying, evaluating and managing significant risks faced by the Company. This is described in more detail below.

In publishing these policies, Devon seeks to demonstrate its commitment to transparency, responsible investment practices and compliance with regulatory requirements. These policy statements, along with associated disclosures, can be downloaded from www.europeanopportunities.com.

Planned life of the Company

The Articles of Association of the Company provide that at every third Annual General Meeting, an ordinary resolution be proposed that the Company shall continue as an investment trust. The next scheduled continuation vote will be at the 2026 Annual General Meeting. If such resolution is not passed, the Directors shall, within 90 days of the date of the resolution, put forward to shareholders proposals (which may include proposals to wind up or reconstruct the Company) whereby shareholders are entitled to receive cash in respect of their shares equal as near as practicable to that which they would be entitled on a liquidation of the Company at that time (and whether or not shareholders are offered other options under the proposals).

Shareholders should note that the valuation policies used to produce these Accounts on a going concern basis might not be appropriate if the Company were to be liquidated.

Dividend policy

The Company's objective is to achieve shareholder returns through capital growth rather than income. However, in order to qualify for approval as an investment trust, the Company is not permitted to retain more than 15% of eligible investment income arising during any accounting period. Accordingly, the Board's policy is to propose an annual dividend which is at least sufficient to enable the Company to maintain its investment trust status.

Management

The Company has no employees and most of its day-to-day responsibilities are delegated to the Investment Manager.

J.P. Morgan Europe Limited acts as the Company's depositary and the Company has entered into an outsourcing arrangement with J.P. Morgan Chase Bank N.A. for the provision of accounting and administration services.

Although Devon Equity Management Limited is named as the Company Secretary at Companies House, J.P. Morgan Europe Limited provides all company secretarial services to the Company as part of its formal mandate to provide broader fund administration services to the Company.

Viability statement

In accordance with the Code of Corporate Governance issued by the Association of Investment Companies (AIC) in February 2019 (the 'AIC Code'), the Board has assessed the longer-term prospects for the Company beyond the twelve months required by the going concern basis of accounting. The period assessed is the five years to 31 May 2029.

The Directors' view of the Company's viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long-term investment. The Company's investment objective is to achieve long-term capital growth and the Board regards the Company's shares as a long-term investment. 'Long-term' for this purpose is considered by the Directors to be at least five years, a timeframe in which the accuracy of estimates and assumptions is deemed to be reasonable. The Company's viability has thus been assessed over that period. Five years is considered a reasonable time frame for a forecast, however, the life of the Company is not intended to be limited to that or any other period.

In assessing the viability of the Company under various scenarios, the Directors undertook a robust assessment of the principal risks and uncertainties to which it is exposed (including the issues arising from Russia's invasion of Ukraine, the war in Gaza and climate change), together with mitigating factors. The risks of failure to meet the Company's investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of Devon; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company's borrowings (the Company maintains a relatively low level of gearing and has at all times been comfortably compliant with its loan to value and other covenant obligations to its lender, The Bank of Nova Scotia, London Branch); the ability of the Company to meet its liabilities as they fall due; the Company's annual operating costs and that, as a closed ended investment trust, the Company is not affected by the liquidity issues of open-ended companies caused by large or unexpected redemptions.

In taking account of these factors and pursuant to the Board's review of the detailed internal controls and risk management processes described on in the Annual Report and Accounts, the Directors have undertaken a reverse stress test seeking to identify the financial circumstances that might result in the Company becoming unviable. This concluded that the viability of the Company might start to be challenged if the value of the Company's net assets were to fall permanently by approximately 80% from the level at the year end, a fall that the Board considers to be near implausible having noted that since the launch of the Company in November 2000, the largest fall in the Company's Benchmark, the total return on the MSCI Europe index, over any calendar year has been 34.4% and the largest fall over any rolling five year period has been 14.5% (each based on Benchmark calendar month end values).

As part of its assessment, the Board has noted that shareholders are required to vote on the continuation of the Company at three-year intervals, the next vote being at the 2026 Annual General Meeting.

Based on the above, and assuming there is no adverse change to the regulatory environment and tax treatment of UK investment trusts to the extent that would challenge the viability of the UK investment trust industry as a whole, 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 five year period of assessment.

The Directors' assessment of the Company's ability to operate in the foreseeable future is included in the Going Concern Statement in the Directors' Report in the Annual Report and Accounts.

Key Performance Indicators

At the quarterly Board meetings, the Directors consider a number of performance indicators to help assess the Company's success in achieving its objectives. The Board monitors the Company's performance in relation to both the investment trust market as a whole and the companies within the geographical sector which the Board considers to be its peer group. There were 7 investment trusts in the AIC Europe sector as at 31 May 2024. The key performance indicators used to measure the performance of the Company over time are as follows:

Discount to net asset value

The Company's discount management policy is set out in the Chair's Statement above.

Under the Listing Rules, the maximum price that may currently be paid by the Company on the repurchase of shares is 105% of the average of the middle market quotations for the shares for the five business days immediately preceding the date of repurchase. The minimum price is the nominal value of the shares. Any repurchase made will be at the discretion of the Board, considering prevailing market conditions and within guidelines set from time to time by the Board, the Companies Act, the Listing Rules and the Disclosure, Guidance and Transparency Rules of the FCA.

Treasury Shares

In accordance with the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003, any shares repurchased, pursuant to the above buy back authority, may be held in treasury. These shares may subsequently be cancelled or sold for cash. This gives the Company the ability to reissue shares quickly and cost effectively and provide the Company with additional flexibility in the management of its capital. The Company may hold in treasury any of its shares that it purchases pursuant to the share buyback authority granted by shareholders.

Shares held in treasury may only be reissued by the Company at prices representing a premium to the net asset value per share as at the date of re-issue.

Principal risks and uncertainties

In accordance with the AIC Code, the Board is responsible for establishing procedures to manage risk, oversee the internal control framework, and determine the nature and extent of principal risks the Company is willing to take in order to achieve its long-term strategic objectives. The Board has overall responsibility for the Company's systems of internal controls and for reviewing their effectiveness. The Board, with the support of the Audit & Risk Committee and the Investment Manager, has carried out a robust assessment of the principal and emerging risks which may impact the Company. The principal risk factors that may affect the Company and its business can be divided into the following areas:

Emerging Risks

Emerging risks that could impact the Company in the future are considered at each Board meeting, along with any potential mitigating actions. Artificial Intelligence, the ongoing global conflicts (and the resulting economic uncertainty), the outcome of political elections in Europe and the United States and climate change each pose emerging risks to the Company beyond the principal risks described above. While these risks currently exist, their extent and long-term impact are yet to emerge. They are assessed by the Investment Manager and the Board on a continuing basis and embedded into Devon's investment process. The Company has no exposure to investee companies in Russia or Ukraine.

The Investment Manager seeks to ensure that individual stocks in the Company's portfolio meet an acceptable risk/reward profile by reference to both principal and emerging risks.

Effectiveness of internal controls

In accordance with the AIC Code, the Board has carried out a review of the effectiveness of the system of internal control as it has operated over the year and up to the reporting date of this Annual Report and Accounts.

Directors

Biographical details of the Directors and the Board's policy on diversity can be found in the Annual Report and Accounts. The Board currently comprises three male Directors and three female Directors.

Modern Slavery statement

The Modern Slavery Act 2015 requires certain companies to prepare a slavery and human trafficking statement. The Company does not fall within the scope of the Modern Slavery Act and therefore no slavery and human trafficking statement is included in the Annual Report.

The Board nevertheless requires regular confirmation from each of its third-party suppliers, at least once a year, of their compliance with the UK Modern Slavery Act. The Board also requires each supplier to have sufficient measures in place to align with the requirements outlined in the Bribery Act 2010 and the Criminal Finances Act 2017. Specifically, the Company has obtained assurances from each of its primary suppliers that they adhere strictly to a zero-tolerance policy regarding the provision of services that would contravene The Modern Slavery Act, the Bribery Act or the Criminal Finances Act.

Section 172 statement

Under section 172 of the Companies Act 2006, the Directors have a duty to act in the way they consider, in good faith, would be most likely to promote the long-term success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

As an investment trust, the Company has no employees, customers or physical assets; its stakeholders include its shareholders and its service providers, including the Investment Manager, Depositary, Custodian, Lender, Registrar, Auditors, Broker and Administrator, each as identified in the Annual Report and Accounts.

The Board considers that the interests of the Company's key stakeholders are aligned, in terms of wishing to see the Company deliver sustainable long-term capital growth, in line with the Company's stated objective and strategy, and meet the highest standards of legal, regulatory, and commercial conduct, with the differences between stakeholders being merely a matter of emphasis on those elements.

The Board believes that the optimum basis for meeting its duty to promote the success of the Company is by appointing and managing third-parties with the requisite performance records, resources, infrastructure, experience and control environments to deliver the services required to achieve the investment objective and successfully operate the Company. By developing strong and constructive working relationships with these parties, the Board seeks to ensure high standards of business conduct are adhered to at all times and service levels are enhanced whenever possible. This combined with the careful management of costs is for the benefit of all shareholders who are also key stakeholders.

Whilst the Company's operations are limited, as third-party service providers conduct all substantive operations, the Board is aware of the need to consider the impact of the Company's investment strategy and policy on wider society and the environment. The Board considers that its oversight of ESG matters is an important part of its responsibility to all stakeholders and that proper consideration of ESG factors sits naturally with the Company's longstanding aim of providing a sustainable basis for adding value for shareholders. Further details on the Investment Managers' approach to stewardship and examples of engagement are provided above. The remaining sections of this Strategic Report titled 'Relations with the Investment Manager,' 'Engagement with shareholders', 'Board activities' and 'Principal decisions taken during the year under review' form part of this Section 172 Statement.

Relations with the Investment Manager

Alexander Darwall, CIO of Devon, continues to be responsible for the portfolio management of the Company on behalf of Devon, supported by Luca Emo Capodilista, Charlie Southern, James Bird and Angus Denison-Smith within Devon's investment team.

As AIFM, Devon has responsibility for additional risk oversight in accordance with the requirements of applicable law. The Board regularly meets with Devon and pays particular attention to the control procedures and processes in place at Devon, to ensure that its duties for the Company continue to be handled with the appropriate level of resource and professionalism.

The portfolio activities undertaken by the Investment Manager and the impact of decisions taken are described in the Investment Manager's Review above. Further information on the annual evaluation of the Investment Manager, to ensure that its continued appointment remains in the best interests of shareholders, is set out in the Annual Report and Accounts.

Engagement with shareholders

The Directors place great importance on engagement with shareholders. The Company reports to shareholders twice a year by way of the Half-Yearly Financial Report and the Annual Report and Accounts. In addition, net asset values are published daily and newsletters are published monthly on the Company's website, www.europeanopportunities.com. Key decisions are announced to the London Stock Exchange through the Regulatory News Service.

The Company holds an Annual General Meeting which all shareholders are invited to attend, and this provides an open forum for them to discuss issues and matters of concern with the Board and representatives of the Investment Manager and the Company's advisors.

In accordance with the AIC Code, in the event that votes of 20% or more are cast against a resolution at a General Meeting the Company will announce the actions it intends to take to consult with Shareholders to understand the reasons behind the result. A further update will be published within six months. Actions taken in response to such votes received during the year ended 31 May 2024 are set out in the Chair's Statement.

The Board seeks to ensure that shareholder views are taken into consideration as part of any decisions taken by the Board. The Chair actively seeks to engage directly with shareholders and has attended a number of meetings with investors during the year. Committee chairs also seek direct engagement with shareholders on specific matters relating to their area of responsibility. The Investment Manager and the Company's brokers also engage with the Company's shareholders and the outcome of these discussions are reported to the Board.

Shareholders are invited to communicate with the Board through the Chair, any Committee Chair or the Company Secretary, as appropriate. Alternatively, issues can be discussed with the Company's Senior Independent Director, who can be contacted at the Company's registered office address.

Board activities

The Board ensures that the Directors are able to discharge their duties by, amongst other things, providing them with relevant information and training on their duties. At all times, the Directors can access as a Board, or individually, advice from its professional advisers including their lawyers and Auditors.

Whilst certain responsibilities are delegated, the Board has established terms of reference for its Committees which are reviewed regularly by the Board. The structure of the Board and its Committees and the decisions it makes are underpinned by the duties of the Directors under the Companies Act, 2006 and the provisions of the AIC Code. The Board has set the parameters within which the Investment Manager operates and these are set out under the terms of the investment management agreement and within the minutes of corresponding Board meetings.

Principal decisions taken during the year under review

The Directors take into account section 172 considerations in all material decisions of the Company. Examples of how the Company's stakeholders were considered in relation to the principal decisions taken by the Board during the year under review (and post year end) include:

Employees, Human Rights and Community Issues

The Board recognises the requirement to provide information about employees, human rights and community issues. As the Company has no employees, all its Directors are non-executive and all its functions are outsourced, there are no disclosures to be made in respect of employees, human rights and community issues.

Future developments of the Company

The outlook for the Company for the next 12 months is set out in the Chair's Statement and the Managers' Report above. It is the Board's ambition to grow the asset base of the Company through a combination of organic growth and new issuance of shares (where there is an opportunity to do so at a premium to NAV). The Investment Manager is encouraged to use the particular advantages of the Company's investment trust structure to enhance potential returns to shareholders, including the use of gearing and the freedom to hold high conviction positions through periods of market fluctuations.

For and on behalf of the Board

Matthew Dobbs

Chair

19 September 2024

Income Statement

for the year ended 31 May 2024

* There is no other comprehensive income and therefore the 'Net return after taxation' is the total comprehensive income for the financial year.

The total column of this statement is the income statement of the Company, prepared in accordance with UK adopted International Accounting Standards.

The supplementary revenue return and capital return columns are both prepared under guidance produced by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations.

No operations were acquired or discontinued during the year.

Statement of Financial Position

as at 31 May 2024

Statement of Changes in Equity

For the year ended 31 May 2024

* Dividends paid during the financial year were paid out of revenue reserves.

Cash flow statement for the year ended 31 May 2024

Availability of Annual Report and Accounts

The Annual Report and Accounts will be posted to those shareholders who have elected to receive hard copies.

An electronic version of the Annual Report and Accounts will shortly be available on the Company's website at: www.europeanopportunitiestrust.com and on the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism

Monthly newsletter

Please use the following link to be added to the distribution list for the Company's monthly newsletter and factsheet: https://www.devonem.com/newsletter-sign-up/

For further information, please contact:

www.europeanopportunities.com

Neither the Company's website nor the content of any website accessible from hyperlinks on it (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

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