TIDMEOT
RNS Number : 2218A
European Opportunities Trust PLC
22 September 2022
European Opportunities Trust plc (the 'Company')
Legal Entity Identifier: 549300XN7RXQWHN18849
Annual results for the year ended 31 May 2022
Financial Highlights
31 May 2022 31 May 2021 % change
Net asset value per share (pence) 850.64 824.29 3.2
Net asset value total return (with dividends added back) 3.4
Middle market share price (pence) 746.00 750.00 (0.5)
Share price total return (with dividends added back) (0.3)
MSCI Europe index, total return in GBP (Benchmark) 2.4
Dividend per share (pence) in respect of financial year 2.5 2.0
Discount to net asset value at year end (%) (12.3) (9.0)
Ongoing charges ratio (%) 1.02 0.99
Chairman's Statement
I am pleased to present the Company's twenty second Annual
Report and Accounts since its launch, covering the twelve months
ended 31 May 2022.
The past year has been one of the most challenging for equity
markets since the 2008 global financial crisis, seeing nascent
hopes for recovery from the COVID-19 pandemic overwhelmed by
Russia's invasion of Ukraine, rising energy prices and inflation in
the cost of living. Our thoughts are with those affected directly
and indirectly by the turmoil in Ukraine.
During the twelve months to 31 May 2022 the total return on the
net asset value per share of the Company was 3.4% (with dividends
added back). This compares with a total return of 2.4% from the
Company's Benchmark, the MSCI Europe index in GBP and a total
return on the middle market price of the Company's shares of -0.3%
during the same period.
Since the year end the net asset value per share had fallen by
3.2% from 1 June 2022 to 823p as at 31 August 2022, outperforming
the Benchmark index which fell by 3.9% over that period. The market
price of the Company's shares was 704p as at 31 August, a fall of
5.6% since 1 June.
Over the ten years to 31 May 2022 the annualised total return on
the net asset value per share was 11.9%, the annualised total
return on the share price was 11.8% and on the Benchmark, 10.2%.
The Company has bounced back strongly from periods of
underperformance in the past and I see no reason to doubt that it
will do so again.
Board composition
As previously announced, I intend to retire from the Board at
the forthcoming Annual General Meeting. The Board has agreed that
Matthew Dobbs will take over as Chairman with effect from the end
of that meeting.
With the exception of myself, all Directors who have held office
throughout the financial year are offering themselves for
re-election at the forthcoming Annual General Meeting.
Dividend
A resolution to declare a final dividend of 2.5p per share will
be proposed at the Annual General Meeting, payable on 28 November
2022 to shareholders on the Register of Members on 25 November 2022
(the Record Date). The ex-dividend date is 24 November 2022. The
cost of this dividend is covered by the Company's distributable
revenues during the financial year under review and exceeds the
minimum that the Company is obliged to distribute under applicable
law.
The Company's stated objective is to achieve shareholder returns
primarily through capital growth. However, in order to qualify 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 a
modest annual dividend and one at least sufficient to enable the
Company to maintain its investment trust status.
The declaration of the dividend as a final dividend will provide
shareholders with an opportunity to express their approval on the
matter, in line with corporate governance guidelines. In the
unlikely event that shareholders were to vote against the
resolution at the Annual General Meeting to pay a final dividend
then the Directors would pay an equivalent interim dividend, as
otherwise the Company would be likely to lose investment trust
status, with damaging tax consequences for a large number of its
shareholders.
Gearing
At the end of the financial year under review, the net gearing
level on the Company's investments was 9.4% (after offsetting cash
deposits against the GBP85 million drawn down on that date). The
Investment Manager tends to increase gearing at times of perceived
low valuations, while reducing it as markets recover. This approach
has added sustained value over the course of your Company's
history. The Investment Manager will continue to consider the use
of gearing as a tactical tool to improve returns.
Subsequent to the financial year end the Company renewed its
revolving credit facility with The Bank of Nova Scotia, London
Branch with a maximum drawable amount of GBP100 million available
until September 2023 and credit approval for an additional
'accordion' amount available upon application for a further GBP50
million. There was GBP85 million drawn down as at 31 May 2022,
reduced to GBP75 million drawn down as at the date of these
Accounts.
Discount management
The Board considers that it is not in shareholders' interests
for the ordinary shares of the Company to trade at a significant
discount to the prevailing net asset value ('NAV'). The Board's
policy is to maintain the discount in single digits in normal
market conditions. The Board considers that normal market
conditions have not prevailed in the last year. Discounts of
investment trusts, including those investing in European equities,
have generally widened over the last year. The discount on the
Company's shares at the financial year end was 12.3% and the
average during the year under review was 12.0%.
The Board believes that the most effective means of minimising
any discount at which the ordinary 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 conditions and other considerations
inevitably affect the rating of the ordinary shares from time to
time. The Board is committed to repurchasing ordinary shares when
they believe it to be in the interests of shareholders to do
so.
In determining whether a share purchase would enhance
shareholder value, the Board will take into account market
conditions, the Company's performance, any known third-party
investors or sellers, the impact on liquidity and total expense
ratios and of course 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 4,052,000 shares were repurchased into treasury
during the period under review (with an aggregate value of GBP31.6
million) and a further 963,742 shares (with an aggregate value of
GBP6.6 million) have been repurchased since the financial year end
(as at 9 September 2022) pursuant to the Board's discount
management policy. The repurchase of shares at a discount to NAV
added a total of GBP4.3 million to the Company's NAV during the
period under review and has added a further GBP1.3 million since
the year end.
Ordinary shares held in treasury may only be reissued by the
Company at prices representing a premium to the NAV per ordinary
share as at the date of re-issue.
Company's NAV during the period under review. Ordinary shares
held in treasury may only be reissued by the Company at prices
representing a premium to the NAV per ordinary share as at the date
of re-issue.
Our AIFM
Following a period of parallel operation and due diligence in
the first half of 2022 we appointed Devon to take over as our
Alternative Investment Fund Manager ('AIFM') from FundRock, who had
undertaken this role since November 2019.
There was no change in the commercial terms of engagement for
Devon in their role as AIFM nor in the fees payable to Devon. We
would like to thank FundRock for their service to the Company.
Annual General Meeting
The Company's Annual General Meeting will be held on 16 November
2022 at 11:00 a.m. 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.
In addition to the formal business, Alexander Darwall will
provide a presentation to shareholders on the performance of the
Company over the past year as well as an outlook for the future.
The Board would welcome your attendance at the AGM as it provides
shareholders with an opportunity to put questions to both the Board
and of the Investment Manager.
Please note that we have removed paper from the voting process
so as to reduce the environmental impact of the Company. Electronic
proxy voting is now available and shareholders named on the
Company's register may submit voting instructions using the
web-based voting facility at www.signalshares.com and
www.proxymity.io for institutional shareholders. If you have not
already registered with Signal Shares you will need your Investor
Code which can be found on your share certificate or a recent
dividend confirmation. Once registered, shareholders will be able
to vote immediately by selecting 'Proxy Voting' from the menu. If
shareholders are unable to submit voting instructions
electronically they may obtain a paper proxy form from the
Company's registrar, Link Group, whose contact details are set out
in the Annual Report and Accounts. Shareholders who hold their
shares through a platform should contact the platform's customer
services team for details of how to register their vote.
The voting results will be posted on the website following the
Annual General Meeting and the Board will also make the customary
announcement to the London Stock Exchange.
Outlook
2021 and the beginning of 2022 were dominated by the COVID-19
pandemic. Since late February 2022 the war in Ukraine and the
ensuing increases in global energy prices and rising inflation have
dominated our thoughts. The long-term effects of the pandemic and
the war in Ukraine on the global economy and on lives, livelihoods
and businesses will doubtless be felt for years to come. Yet it is
at times like these that active funds have the best opportunity to
lay the foundations upon which long-term outperformance can be
built. Our active philosophy empowers our Investment Manager to
invest according to his convictions. Our portfolio has performed
well relative to both its Benchmark and its peers in the year under
review and I believe that it is well-placed to adapt and
perform.
As indicated above, the long-term performance of the Company has
been good. Investors have their individual investment criteria and
time horizons but those investors who have held shares in the
Company for a number of years have been well- rewarded in terms of
share price performance. The underperformance of the last couple of
years is reflected in the rating of the Company's shares, and
market conditions are not particularly favourable at present, but I
believe that our Investment Manager's investment style remains
capable of delivering consistent outperformance over the medium to
long term.
As this is my last statement as Chairman, I would like to
express my thanks to all of our shareholders and stakeholders for
their continuing support. I am grateful to the Board for its
support during my time as a Director and I offer my best wishes to
the ongoing Board in its work on behalf of shareholders and my hope
to the Company for its future success.
Andrew Sutch
Chairman
21 September 2022
Investment Manager's Review
The total return on the net asset value of the Company's
ordinary shares was 3.4% during the twelve months to 31 May 2022.
This compares with a total return of 2.4% from our Benchmark, the
MSCI Europe index in GBP.
The index's modest advance belies a turbulent period. Cheap
money and undue optimism carried the index 10% higher until
inflation and the prospect of higher interest rates caused a 15%
drop, peak to trough. The war in Ukraine has led to food and fuel
shortages, cementing inflation into the mid-term outlook. The US
Federal Reserve is showing the way in raising interest rates to
tackle inflation. The European Central Bank (ECB), however, is a
reluctant, 'slow follower'. As at 31 May 2022 the ECB's main
refinancing rate remained at 0%, as it had been for the last six
years; the 3-month Euribor interest rate had risen slightly to
-0.34% at the end of May 2022. In June 2022 the Governing Council
decided to discontinue net asset purchases under the Asset Purchase
Programme as of 1 July 2022, thereby signalling its intention to
raise interest rates. The ECB, apparently, still does not accept
the need for aggressive tightening as it thinks that inflation is a
transitory phenomenon. Its own projections foresee annual inflation
at 6.8% in 2022, before it is projected to decline to 3.5% in 2023
and 2.1% in 2024. I believe this is likely to be optimistic.
For once, the different regional indices tell a clear story
about economic performance. The MSCI World index advanced 7.7% in
sterling. The S&P 500 was up 12.1% in sterling. Compared with
Europe, the US is much better placed in terms of fuel and food
supplies. The Nasdaq Composite index was down 0.4% as highly rated
technology stock prices started to slide. On the back of much
higher soft commodity prices (grain and soy), the Brazilian economy
grew, driving a 17.0% increase in the MSCI Latin America index.
Lockdowns in China partly explain the 11.5% fall in the MSCI AC
Asia ex-Japan.
The macroeconomic outlook is deteriorating. In June 2022, the
World Bank reduced its forecasts for world economic growth to 2.9%.
It projects 2.5% European growth in 2022. For 2023, it projects
1.9% growth in Europe compared with global growth of 3%. I believe
these forecasts are likely to prove overly optimistic. Inflation is
likely to remain persistent and there is a likelihood of a long
upcycle in interest rates. Forward interest rates point to 3.5% in
the US and 1.3% in Europe by the year end. The World Bank's
forecasts suggest that China and other Asian economies will, again,
be the growing economies in 2023 with China forecast to grow at
5.2% and India 7.1%. I believe current analysts' corporate earnings
expectations are unrealistic. We expect aggregate European
corporate earnings to fall in 2023 as cost inflation and higher
interest rates impact corporates and consumers.
Performance
It was pleasing that our performance was generated by stocks in
many sectors. Whilst the market experienced a major rotation from
'Growth' to 'Value', we persisted throughout with 'special'
companies. These are companies that, in our opinion, can flourish
in a range of economic scenarios. For this reason, we do not need
to churn the portfolio as market conditions change. Our winners
come from a very eclectic range of companies including
pharmaceutical, food, technology, oil services, financial trading
and crop science. What they have in common is that we consider them
to be niche winners in their respective fields. Our losers, too,
came from an equally diverse range of companies including
technology, genetics, and food companies. What this shows is that
the Company's portfolio is a series of 'special' companies in many
different areas and not easily classified as 'Growth' or 'Value'.
We believe that this wide range of businesses, and their extensive
geographic reach, represents good risk mitigation. In addition, we
believe that our companies' relatively strong balance sheets were a
factor behind the portfolio's modest outperformance. As interest
rates started to rise, other investors started to appreciate our
companies' better balance sheets.
Positioning
Our investment style has not changed: companies that are
typically differentiated, high value added, capital light, global,
profitable, and with less debt than the average. We expect these
companies to enjoy relatively good levels of demand visibility.
The Company's portfolio is relatively well positioned to cope
with demand weakness in Europe, and higher energy costs. Our
companies are, typically, world leaders that happen to be European
listed. Further, these companies tend to be less volume dependent,
higher margin businesses which can still prosper in a weaker
economic environment. Industry pricing discipline is a key
consideration in a softer economic environment. Whilst there are
undoubtedly significant inflationary pressures from rising
commodity prices (not least energy costs), our companies are
relatively low users of energy.
Contributors to performance
The following tables detail which stock positions in the
Company's portfolio had the greatest impact on performance during
the twelve months under review, both positive and negative. The
impact is the result of price performance of each stock over the
period, calculated on a transaction basis and including the impact
of foreign currency rates:
Positive contributors Portfolio Benchmark Contribution
weight weight Price to
31.05.2022 31.05.2022 12 months NAV return
Security % % % %
--------------------------- --------- ---------- --------- ------------
Novo Nordisk 11.2 1.6 60.0 5.0
--------------------------- --------- ---------- --------- ------------
RELX Plc 9.4 0.5 25.8 1.8
--------------------------- --------- ---------- --------- ------------
Gaztransport & Technigaz 3.3 - 84.1 1.6
--------------------------- --------- ---------- --------- ------------
Bayer 5.2 0.6 32.1 1.5
--------------------------- --------- ---------- --------- ------------
Deutsche Boerse 5.4 0.3 17.8 0.9
--------------------------- --------- ---------- --------- ------------
Mowi 2.5 0.1 15.7 0.3
--------------------------- --------- ---------- --------- ------------
Edenred 4.1 0.1 2.1 0.2
--------------------------- --------- ---------- --------- ------------
bioMérieux 5.8 0.0 3.6 0.2
--------------------------- --------- ---------- --------- ------------
Barry Callebaut 1.8 0.1 9.5 0.2
--------------------------- --------- ---------- --------- ------------
Wolters Kluwer 0.8 0.3 18.0 0.1
=========================== ========= ========== ========= ============
Negative contributors Portfolio Benchmark Contribution
weight weight Price to
31.05.2022 31.05.2022 12 months NAV return
Security % % % %
--------------------------- --------- ---------- --------- ------------
Genus Plc 4.5 - (15.0) (3.5)
--------------------------- --------- ---------- --------- ------------
Intermediate Capital Group 3.8 - (23.1) (1.0)
--------------------------- --------- ---------- --------- ------------
Infineon Technologies 3.7 0.5 (13.3) (0.8)
--------------------------- --------- ---------- --------- ------------
Grifols 4.8 0.1 (13.8) (0.6)
--------------------------- --------- ---------- --------- ------------
Worldline 0.6 0.1 (46.6) (0.4)
--------------------------- --------- ---------- --------- ------------
Grenke 0.8 0.1 (27.7) (0.3)
--------------------------- --------- ---------- --------- ------------
Neste 2.1 - (22.2) (0.2)
--------------------------- --------- ---------- --------- ------------
Merck 2.4 0.2 (6.0) (0.2)
--------------------------- --------- ---------- --------- ------------
Pets At Home Group 0.8 0.3 (21.1) (0.2)
--------------------------- --------- ---------- --------- ------------
Darktrace 1.6 - 6.6 (0.2)
=========================== ========= ========== ========= ============
The biggest single contributor to our performance in the period
under review was Novo Nordisk, the Danish pharmaceutical company.
Shares in Novo Nordisk, our biggest investment, rose sharply as
prescriptions for three of its new diabetes and obesity drugs
soared in America. We believe that Novo Nordisk, along with their
principal competitor, will dominate these two therapeutic areas for
many years. Moreover, the market for the treatment of obesity,
presently limited, is likely to expand enormously, not just in
North America but worldwide, as health authorities understand the
tremendous pharmacoeconomic benefits of these new drugs.
The next biggest contributor to our performance was that of
RELX, the global provider of information and analytics for
professional and business customers. Growth rates in all divisions
(except exhibitions which is still affected by COVID concerns) have
picked up, underpinning investors' confidence that RELX is
benefitting from well-established trends. In particular, the
company's risk division is a play on the growth in digitalisation
and artificial intelligence. Authentication services for both
governments and businesses are increasingly important to counter
fraud. RELX is a leader in this area.
Our best performing stock in the period under review was the
French company, Gaztransport & Technigaz ('GTT'). It provides
engineering and design technologies for liquefied natural gas
('LNG') carriers. It also provides engineering and design
technologies for LNG propulsion systems for ships. The reason for
the shares' strong showing is the 'energy crisis', as reflected by
the EU Parliament's decision to approve the inclusion of gas and
nuclear in the EU Taxonomy. It was our firm view that natural gas
would remain an important and growing element in the energy mix,
thereby providing GTT with a big and growing market. The war in
Ukraine effectively accelerated and increased this opportunity.
Bayer was another important contributor to performance. This
German conglomerate has been plagued by lawsuits in the US over the
alleged carcinogenic effects of Roundup, its systemic,
glyphosate-based herbicide originally produced by Monsanto. To
date, the company has set aside approximately $13 billion to settle
with most plaintiffs. There is a risk of further costs.
Nevertheless, Bayer's shares have performed well on the back of
higher grain prices, which in turn have boosted demand for Bayer's
seeds and agrochemicals. Against a background of rising food
prices, we remain positive about the company's prospects as its
technologies are vital to the agriculture industry worldwide.
Deutsche Boerse is the German-listed international exchange
organisation and market infrastructure provider. Its shares have
performed well as macro circumstances have changed. Higher interest
rates and greater volatility are good for their business. Moreover,
their exchanges ensure safe and transparent trading, an important
driver of their business as financial pressures increase on market
participants. We believe that the factors that drove the recent
good price performance are likely to endure for the foreseeable
future and we have confidence in retaining this position.
Another positive contributor to performance was Mowi, the
world's leading salmon farmer. Demand for salmon in the retail
channel increased during COVID-19 lockdowns, in part because of the
health benefits associated with eating salmon. This demand has
proved resilient as economies re-opened. This has had the effect of
raising overall, sustainable demand. As demand for salmon outstrips
supply, prices and profitability are squeezed higher. Moreover,
compared to other sources of protein like meat, conversion rates
are higher with salmon, thereby making the product relatively
cheaper than other sources of protein. For these reasons we think
this business will continue to prosper in tougher economic
conditions.
Finally, we highlight Edenred as one of the positive
contributors to our performance. This French company processes and
promotes 'specific purpose money', operating schemes for
governments and corporates which want to give benefits to employees
for specific purposes. There are multiple drivers behind its high
growth rates. One is that digital technologies have allowed the
company to develop more services. Further, companies and
governments increasingly use these services to provide targeted
financial support. Finally, Brazil, its second biggest market, is
flourishing on the back of the buoyant agriculture sector, which
accounts for approximately a quarter of Brazil's GDP, when
production, processing, and distribution are included.
The worst stock in the period under review was Genus, the world
leader in porcine and bovine genetics. Their sales of porcine
genetics to the Chinese market fell sharply due to low pork prices,
caused by a combination of factors: a supply glut stemming from
high slaughter rates (this because of African Swine Fever) and
lockdowns. We consider these factors to be temporary. In due
course, we expect pork prices to recover; this will catalyse demand
for Genus' services. The company is in the final phases of its gene
editing research programme for porcine reproductive and respiratory
syndrome virus. If these trials are successful and lead to
regulatory approval, it will hugely increase the company's earnings
power. We have retained the holding.
Intermediate Capital Group (ICG), too, was a significant
detractor from our returns, having been one of the best
contributors in recent reporting periods. ICG is a UK-listed
private equity company, investing in private credit and debt. The
company's recent reports have been very strong. The sharp share
price reversal is explained by the changing macro conditions,
specifically, rising interest rates. Nevertheless, institutions are
allocating more resources to the private markets. This favourable
trend and the long-term commitment of funds make for high
visibility. Accordingly, we have retained the holding.
Infineon shares also retreated in the period under review.
German-listed, Infineon designs, manufactures and markets
semiconductors. They are a world leader in power semiconductors.
Anticipating a downturn in economic activity, the share price fell
as it is viewed as a cyclical company. However, we believe that the
company enjoys more structural growth than before; Infineon's
prospects are enhanced by its strong position in power
semiconductors. Whatever the energy source, power efficiency and
savings are clearly of increasing importance and Infineon is well
placed to benefit.
Grifols, a Spanish company, is a world leader in the manufacture
and marketing of blood plasma derivatives. The weak share price is
explained by two factors. The first is that COVID-19 lockdowns and
furlough payments in the US had the effect of reducing incentives
for potential plasma donors. The second is competition from new
anti-FcRn inhibitors which threaten to displace Grifols' IgG
fractionated products. In our view, demand for fractionated blood
plasma will remain strong notwithstanding the impact of FcRn
inhibitors, and in due course collections will return to normal as
harsher economic conditions incentivize blood plasma donors to
return. We retained the position.
Worldline, the French digital payments processing company, was
another poor performer. There is a clear trend to digital payments.
Moreover, as the largest processor in Europe, Worldline should be a
winner in this 'scale' business.
Grenke shares also slightly detracted from our relative returns.
In 2020, Grenke, the German small-ticket leasing company, was
assailed by unwarranted allegations about its financial probity.
Having received an unqualified audit for 2021, we believe that the
company has been thoroughly vindicated. Repairing the unjustified
damage to its reputation is taking time. However, we believe that
it will now recover strongly. Historically, rising interest rates
have been good for Grenke; banks become stricter on lending
criteria and the attractions of leasing are more apparent to
corporate customers. Accordingly, we retained this position.
Neste, the Finnish-listed company, had a small negative impact
on returns. Its principal business is the production and marketing
of renewable biodiesel including Sustainable Aviation Fuel (SAF).
One of its main challenges is obtaining sufficient quantities of
raw materials, mainly used cooking oils, to convert into its high
value renewable diesel products. Rising costs of these raw
materials explains the shares' poor performance last year. We
decided to retain this holding, indeed we added to it, because we
expected its significant advantages to outweigh the cost
consideration. We appear to have been vindicated as the business
and the shares are now performing well. Neste's proprietary
processing technology allows it to use lower quality waste
materials, giving it an advantage over its competitors. Mandates
for SAF in the EU are providing good, visible demand growth. We
remain confident that the company's prospects are soundly
based.
Activity
We sold approximately 19% of the portfolio and reinvested the
proceeds. We reduced the number of holdings to 28, selling some
small positions that we did not want to build upon. The biggest
sale was that of Arrow Global, a c.4% position at the time of
disposal, which was sold following a successful takeover. Other
sales included KWS Saat, ASML, Ubisoft, adidas and Elkem. One of
the reasons for selling KWS Saat was that contact with the company
had become progressively more difficult. In any case, we believe
that our holding in Bayer is the best exposure to crop sciences.
ASML was sold on valuation grounds. Ubisoft was sold because we
lost confidence in their strategy following an extended run of
disappointments. We slightly reduced holdings in ICG for risk
management reasons.
In the course of the year we took new positions in Neste and
Merck. Merck is an old German conglomerate operating in healthcare,
life sciences and electronics. We see good growth opportunities in
all three activities. In healthcare, the company is well placed
with its single use biopharmaceutical products. The growth in
biologics is one driver of this business. In its electronics
business it supplies critical materials for the semiconductor
industry. Materials are becoming more important as the
semiconductor industry responds to the demands of the growth of
data, 5G, artificial intelligence, 'internet of things' and
extended reality. These all require smaller and more
power-efficient products, driving demand for better materials.
We added to a number of existing holdings during the period
under review. We bought more shares in Bayer as rising soft
commodity prices highlighted demand for their products; we bought
more shares in Mowi as salmon prices rose; we bought more shares in
GTT as energy prices rose; and we added to our position in Oxford
Instruments on the back of solid results.
Gearing
Net gearing at 31 May 2022 was 9.4%. Average borrowing costs
were 1.07%. In setting the level of borrowings, we are mindful of
the levels of debt in our underlying companies, as well as the
macro situation and upside potential of our investments. It is not
our intention in the foreseeable future to increase borrowings.
Outlook
Our past reports have warned that the ultra-benign conditions
associated with the COVID-19 era could not last, that at some point
reality would bite, and businesses would be challenged by the
enormity of inflation, debt repayments and weaker demand. Indeed,
the market environment has dramatically changed: the COVID-19 era,
characterised by free money (that is to say, low or negative
interest rates) is over. This has given way to a much harsher
environment. The change is extraordinary and sudden. Inflation and
higher interest rates are back. Although these are global
phenomena, Europe is especially vulnerable. The invasion of Ukraine
in February 2022 has exacerbated the 'food and fuel' challenges in
Europe. Europe's dependence on Russian oil and gas sets it apart
from other regions of the world. Moreover, Europe's commitment to
the 'Green Economy', not matched elsewhere, puts further pressure
on the energy crisis. These are all the ingredients for a severe
and prolonged recession.
We remain committed to our investment style, which we believe is
well-suited to the current investment environment. There is no
'style drift'. Our investments, overall, have strong cashflows and
relatively low debt. This is important not just for companies to
survive the rigours of a recession but because it will be easier
with a strong balance sheet to take advantage of acquisition
opportunities; notwithstanding this severe and deteriorating
economic backdrop, it is vital that we continue to seek and
identify special companies that can capture exceptional
opportunities. A solely defensive mindset will not capitalise on
the great opportunities which undoubtedly exist.
We believe that we can mitigate the pitfalls - high
indebtedness, dependence on the declining European economies, high
energy costs - in many ways. Our companies, typically, have low
debt, address global markets, have relatively low energy costs and,
we believe, have differentiated and superior products and services.
It is our view that our companies all have the potential to make
significant progress in the medium term despite the severe macro
challenges. This gives us great confidence.
Alexander Darwall
CIO, Devon Equity Management Limited
21 September 2022
Investment Portfolio as at 31 May 2022
31 31
May May
2022 2022
------------------------------- ----------------------- -------------------- ------------ ------------
Market Value Percentage
------------------------------- ----------------------- -------------------- ------------ ------------
Company Sector Country of Listing GBP'000 of Portfolio
------------------------------- ----------------------- -------------------- ------------ ------------
Novo Nordisk Healthcare Denmark 107,003 11.2
------------------------------- ----------------------- -------------------- ------------ ------------
RELX Industrials Netherlands 89,240 9.4
------------------------------- ----------------------- -------------------- ------------ ------------
Experian Industrials United Kingdom 86,361 9.1
------------------------------- ----------------------- -------------------- ------------ ------------
Dassault Systèmes Information Technology France 77,168 8.1
------------------------------- ----------------------- -------------------- ------------ ------------
bioMérieux Healthcare France 55,105 5.8
------------------------------- ----------------------- -------------------- ------------ ------------
Deutsche Boerse Financials Germany 51,067 5.4
------------------------------- ----------------------- -------------------- ------------ ------------
Bayer Healthcare Germany 50,092 5.2
------------------------------- ----------------------- -------------------- ------------ ------------
Grifols Healthcare Spain 45,523 4.8
------------------------------- ----------------------- -------------------- ------------ ------------
Genus Healthcare United Kingdom 42,652 4.5
------------------------------- ----------------------- -------------------- ------------ ------------
SOITEC Information Technology France 40,688 4.3
------------------------------- ----------------------- -------------------- ------------ ------------
Edenred Information Technology France 39,106 4.1
------------------------------- ----------------------- -------------------- ------------ ------------
Intermediate Capital Group Financials United Kingdom 36,621 3.8
------------------------------- ----------------------- -------------------- ------------ ------------
Infineon Technologies Information Technology Germany 35,335 3.7
------------------------------- ----------------------- -------------------- ------------ ------------
Gaztransport & Technigaz Energy France 31,014 3.3
------------------------------- ----------------------- -------------------- ------------ ------------
Mowi Consumer Staples Norway 23,706 2.5
------------------------------- ----------------------- -------------------- ------------ ------------
Merck Healthcare Germany 22,749 2.4
------------------------------- ----------------------- -------------------- ------------ ------------
Neste Energy Finland 20,020 2.1
------------------------------- ----------------------- -------------------- ------------ ------------
Barry Callebaut Consumer Staples Switzerland 17,165 1.8
------------------------------- ----------------------- -------------------- ------------ ------------
Darktrace Information Technology United Kingdom 14,951 1.6
------------------------------- ----------------------- -------------------- ------------ ------------
Oxford Instruments Information Technology United Kingdom 12,858 1.4
------------------------------- ----------------------- -------------------- ------------ ------------
Borregaard Materials Norway 10,896 1.1
------------------------------- ----------------------- -------------------- ------------ ------------
Grenke Financials Germany 7,891 0.8
------------------------------- ----------------------- -------------------- ------------ ------------
Wolters Kluwer Industrials Netherlands 7,832 0.8
------------------------------- ----------------------- -------------------- ------------ ------------
Pets at Home Group Consumer Discretionary United Kingdom 7,434 0.8
------------------------------- ----------------------- -------------------- ------------ ------------
Worldline Information Technology France 5,733 0.6
------------------------------- ----------------------- -------------------- ------------ ------------
Network International Holdings Information Technology United Kingdom 4,878 0.5
------------------------------- ----------------------- -------------------- ------------ ------------
Grifols Preference Healthcare Spain 4,294 0.5
------------------------------- ----------------------- -------------------- ------------ ------------
OHB Industrials Germany 2,963 0.3
------------------------------- ----------------------- -------------------- ------------ ------------
Bachem Holding Healthcare Switzerland 1,408 0.1
=============================== ======================= ==================== ============ ============
Total 951,753 100.0
============================================================================== ============ ============
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.
The Company is not a close company within the meaning of the
provisions of the Corporation Tax Act 2010 and has no
employees.
The Company is domiciled in the United Kingdom and was
incorporated in England & Wales on 16 August 2000. The Company
started trading on 20 November 2000.
Reviews of the Company's activities are included in the
Chairman's Statement and the Investment Manager's Review ,
respectively.
There has been no significant change in the activities of the
Company during the year to 31 May 2022 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:
* no single holding shall constitute more than 10% of
the Company's total assets (calculated at the time of
investment). The Board will pay particular attention
to holdings which grow to represent more than 10% of
total assets;
* the Company will not invest in unlisted securities;
* the Company will not invest in derivative instruments,
whether for efficient portfolio management, gearing
or investment purposes;
* the Company will not invest in other listed
closed-ended investment funds;
* the Company shall not take legal or management
control over any investments in its portfolio; and
* not more than 50% of the Company's investments may be
in securities which are not qualifying securities or
government securities for the purposes of the UK ISA
Regulations.
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:
* a strong management record and team, and the
confidence that the Investment Manager has in that
management's ability to explain and account for its
actions;
* proprietary technology and other factors which
indicate a sustainable competitive advantage;
* a reasonable expectation that demand for their
products or services will enjoy long-term growth; and
* an understanding that structural changes are likely
to benefit rather than negatively impact that
company's prospects.
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 cashflow 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).
Future developments
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.
Planned life of the Company
The Articles of Association of the Company provide that at every
third Annual General Meeting an ordinary resolution shall be
proposed that the Company shall continue in existence as an
investment trust. If any such resolution is not passed at any of
those meetings, 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 to 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).
As a resolution to that effect was passed at the 2020 Annual
General Meeting held on 16 November 2020, the next scheduled
continuation vote will be at the 2023 Annual General Meeting.
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 a modest annual dividend and one 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.
Risk management & internal controls
The Board has established an ongoing process for identifying,
evaluating and managing significant risks faced by 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 for five years
to 31 May 2027.
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. The Board believes that a period of five
years is considered a reasonable period for investment in equities
and is appropriate for the composition of the Company's
portfolio.
As part of its assessment, the Board has noted that shareholders
voted in favour of the continuation of the Company at the Annual
General Meeting held on 16 November 2020.
As part of its assessment of the viability of the Company, the
Board has reviewed and considered the principal risks and
uncertainties that may affect the Company, including emerging risks
and matters relating to the COVID-19 pandemic, the economic turmoil
following the recent invasion of Ukraine, rises in energy prices,
inflation and higher taxes. The Board has also considered the
Company's business model including its investment objective and
investment policy, a forecast of the Company's projected income and
expenses and the liquidity of the Company's portfolio to ensure
that it will be able to meet its liabilities as they fall due.
The Board has taken into account an assessment of the liquidity
of the portfolio and considered the viability of the Company under
various scenarios. Using historic market crashes and economic
crises as base cases, the tests modelled the effects of severe
stock market volatility on the Company's NAV and its ability to
meet its liabilities. Based on the results of the tests, the Board
concluded that the schedule of investment limits and restrictions
put in place by the Board and the mitigating actions for the
principal risks would protect the value of the Company's assets to
a sufficient degree.
The Board has noted that:
* The Company holds a highly liquid portfolio invested
predominantly in listed equities;
* European equities remain an attractive opportunity
for investors;
* 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 Company's ongoing charges and operational
expenses are well covered by the expected levels of
return and revenue and no significant increase to
ongoing charges or operational expenses is
anticipated; and
The Board has also considered the Company's prospects over the
next five years, the predicted demand for the Company's shares as
well as market outlook, both for equity shares and investment
trusts. These considerations assume:
* The Investment Manager's compliance with the
Company's investment objective, its investment
strategy and asset allocation;
* That the portfolio comprises sufficient readily
realisable securities which can be sold to meet
funding requirements if necessary;
* The implementation of the Board's discount management
policy; and
* The ongoing processes for monitoring operating costs
and income which are considered to be reasonable in
comparison to the Company's total assets.
The Board has concluded that there is a reasonable expectation
that the Company will be able to continue in operation and meet its
liabilities as they fall due over the next five years.
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 key performance indicators used to
measure the performance of the Company over time are as
follows:
Share price total return
to 31 May 2022 1 year (%) 3 years (%) 5 years (%)
---------------------------------------------------- ----------- ------------ ------------
The Company (0.3) (7.1) 11.3
MSCI Europe Index, total return in GBP (Benchmark) 2.4 25.2 28.8
AIC Europe peer group(1) (7.8) 24.8 33.5
---------------------------------------------------- ----------- ------------ ------------
Net asset value total return
to 31 May 2022 1 year (%) 3 years (%) 5 years (%)
---------------------------------------------------- ----------- ------------ ------------
The Company 3.4 4.8 22.8
MSCI Europe Total Return Index in GBP (Benchmark) 2.4 25.2 28.8
AIC Europe peer group(1) (3.7) 28.2 38.9
---------------------------------------------------- ----------- ------------ ------------
(Discount)/premium
as at 31 May 2022 (%) 2021 (%) 2020 (%)
---------------------------------------------------- ----------- ------------ ------------
The Company (12.3) (9.0) (7.9)
AIC Europe peer group(1) (10.3) (5.1) (8.7)
---------------------------------------------------- ----------- ------------ ------------
Ongoing charges
for the year ending 31 May 2022 (%) 2021 (%) 2020(%)
---------------------------------------------------- ----------- ------------ ------------
The Company 1.02 0.99 0.99
AIC Europe peer group 0.85 0.85 0.88
---------------------------------------------------- ----------- ------------ ------------
Long-term performance is also monitored.
There were 8 investment trusts in the AIC Europe sector as at 31
May 2021. The Board monitors the Company's performance in relation
to both the sector as a whole and the companies within the sector
which the Board considers to be its peer group.
Discount to net asset value
The Company's Discount Management Policy is set out in the
Chairman's Statement above.
Under the Listing Rules, the maximum price that may currently be
paid by the Company on the repurchase of any ordinary shares is
105% of the average of the middle market quotations for the
ordinary shares for the five business days immediately preceding
the date of repurchase. The minimum price is the nominal value of
the ordinary shares.
The Board is proposing that its authority to repurchase up to
approximately 14.99% of its issued share capital should be renewed
at the Annual General Meeting. The new authority to repurchase will
last until the conclusion of the Annual General Meeting of the
Company in 2023 (unless renewed earlier). 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 Model Code.
Treasury Shares
In accordance with the Companies (Acquisition of Own Shares)
(Treasury Shares) Regulations 2003, any ordinary shares
repurchased, pursuant to the above buy back authority, may be held
in treasury. These ordinary 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 ordinary shares that it
purchases pursuant to the share buyback authority granted by
shareholders. During the financial year the Company repurchased
4,052,000 ordinary shares to be held in treasury at an average
discount of 11%.
Ordinary shares held in treasury may only be reissued by the
Company at prices representing a premium to the net asset value per
ordinary 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 area.
Principal Risks and Uncertainties Management of risks through Mitigation & Controls
Investment Strategy
Key risks and uncertainties include: poor investment The Board reviews the Company's investment objective
performance over an extended period relative and policies and the Investment Manager's
to Benchmark; the sudden departure of Alexander Darwall investment approach in the context of past performance
and/or a key staff member; or the (relative to Benchmark), shareholder
development of a significant discount to net asset value feedback and broader market and economic conditions.
in the Company's shares. The Board sets mandate restrictions as
necessary.
The Board reviews the succession plans prepared by the
Investment Manager and takes into consideration
the availability of suitably experienced personnel to
manage the Company's portfolio in the
event of an emergency.
The Board has established a discount management policy
and regularly considers its ongoing
appropriateness in light of market conditions. In
addition to seeking annual shareholder approval
to its share buy-back authority, the Board also puts a
continuation vote to every third AGM
of the Company (the next in 2023).
----------------------------------------------------------
Market
Key risks and uncertainties include: the impact of The Board considers the economic and geopolitical risks
macroeconomic and geopolitical conditions and uncertainties that the Company
on the Company's investments; or volatility in the is exposed to through regular reviews of the Investment
market prices of the Company's investments. Manager's positions and commentary.
Microeconomic factors that have affected the Company's The Company does not take active positions in
investments include the recently increased currencies, nor does it invest in fixed income
sanctions. securities.
The Investment Manager reduces liquidity risk by
investing in a diversified portfolio of highly
liquid, exchange-traded equities and by adhering to the
Board's limits on individual holdings.
The Board has set a policy that the Company will not
invest in unlisted securities. The Investment
Manager does not invest in countries which are subject
to sanctions or exposed to significant
political risk.
----------------------------------------------------------
Operational Risks
Key risks and uncertainties include: a cybercrime event The Board relies on the cyber security and IT risk
or an IT systems failure which compromises management tools implemented by the Investment
the Company's data or the Investment Manager's ability Manager, the AIFM and the Custodian to prevent
to manage the Company's portfolio; cyber-attacks. The Investment Manager uses
inadequacy of disaster recovery planning to ensure a well- established third-party IT system (Bloomberg)
continuity of the Investment Manager's for all trading activity on behalf of
operations; or the inadequacy of the oversight and the Company.
controls undertaken by the Custodian, the
AIFM or the Investment Manager in relation to the The Board is reliant on the Investment Manager and its
Company. key third party service providers to
ensure that appropriate measures are in place in order
that critical operations can be maintained
at all times. The Investment Manager is aligned with
the Operational Resilience requirements
set out by the FCA and regularly tests its business
continuity capabilities.
The Board considers the internal controls of the
Investment Manager and all key third party
service providers on at least an annual basis.
System-enforced controls are in place in each
case which alert staff in oversight and compliance
roles of any breaches.
Similarly, 'Four eye' checks are mandated for all
manual controls to ensure there is sufficient
oversight over actions taken.
----------------------------------------------------------
Legal and regulatory
Key risks and uncertainties include: the risk of The Board relies on the services of its Investment
non-compliance with existing regulatory or Manager, its broker and J.P. Morgan to
legal requirements, including resultant negative PR report changes in and to ensure compliance with all
implications; adverse implications of applicable laws
regulatory change; or changes to the Company's policies and regulations including the Companies Act 2006, the
and reporting obligations in relation UKLA Listing Rules and the Alternative
to sustainability and ESG risks. Investment Fund Managers Regulations.
The Audit & Risk Committee reviews the performance of
the external auditor and the effectiveness
of the independent audit process on an annual basis. The
experience of the auditor in financial
accounting and auditing standards is reviewed to ensure
that changes in audit standards are
anticipated, understood and complied with.
The Board is reliant on the Investment Manager to ensure
that appropriate measures are in
place so that its approach to ESG investing is
appropriately defined and adhered to.
----------------------------------------------------------
Emerging Risks
The fluctuations of the COVID-19 pandemic, the rise in the price
of energy, inflation and sanctions pursuant to the war in Ukraine
each poses emerging risks to the Company beyond the risks described
above.
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 date of approval of the
Annual Report and Accounts. Further information on the principal
risks the Company faces in its portfolio management activities is
disclosed in Note 18 of the 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 four male Directors and two 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 2015 and
therefore no slavery and human trafficking statement is included in
the Annual Report.
Environmental, Social and Governance ('ESG') matters
Devon's stated overriding philosophy is to act in the collective
interest of its clients. They measure 'collective interest' under
the singular criterion of maximising investment returns. To deliver
on this aim, identifying investee companies with sustainable
business models and returns is essential.
Devon's investment process looks for companies with distinctive
characteristics which they expect to yield substantial benefits to
shareholders over the long term. This assessment of long-term
prospects necessarily takes political, environmental, and social
issues into account since they are likely to have a material impact
on future financial performance.
The rise in popularity of investing within explicitly defined
ESG parameters formalises questions of sustainability which have
been at the core of the investment process employed by Alexander
Darwall and the investment team at Devon for over two decades. To
provide some context, over the past 23 years funds managed by
Alexander Darwall have invested in commodity related companies and
banks extremely rarely. These two sectors have been structural
underweights because Alexander and his team have long questioned
the sustainability of these industries and elements of their
business practices.
Devon believes that their lengthy holding periods play an
important role in formulating their view of sustainable businesses.
Investee companies which depend on unsustainable business practices
are unlikely to meet the threshold required for investment. For
example, the Investment Manager places great emphasis on corporate
culture and the integrity of management (and undertake extensive
research in this area prior to any investment). A strong corporate
culture demands a high level of employee satisfaction, and is
unlikely to tolerate exploitative labour, uneconomic wages,
negligent or dangerous business practices. Similarly, we believe
the end consumer of goods or services to be a powerful arbiter. If
an investee company compromises on raw material quality, abuses
their supply chain, or underinvests in their workforce, product
and/or service quality is likely to suffer. This would have the
effect of turning consumers away from the product, damaging the
brand, and lowering future growth prospects. Such considerations
are central to Devon's investment process.
Devon recognises that certain industries and countries with weak
environmental or governance structures present additional business
risks for prospective investee companies. As part of its diligence
process, Devon will be aware of where and how such risks exist. If
such activities change Devon's risk perception of an industry or
company, it may preclude an investment.
Devon is a signatory of the UN PRI and is compliant with the UK
Shareholder Code. In both cases, the active engagement is closely
aligned with the investment philosophy of Devon. Devon's
concentrated, long-term approach affords ample scope to engage with
management teams on issues relating to culture, governance, and
enduring sustainability.
SFDR
The EU Sustainable Finance Disclosure Regulation ('SFDR') is a
regulatory framework which applies to the Company in its capacity
as an alternative investment fund (AIF) under derivative law in the
UK. The Board has therefore made the following sustainability
related disclosures in accordance with Article 6(1) of SFDR:
The Company is not considered an 'ESG financial product' since
it does not promote and does not maximise portfolio alignment with
Sustainability Factors (as defined in SFDR). However, the Company
is exposed to Sustainability Risks due to the nature of the
securities in which it invests.
Sustainability Risks
The Company does not have specific sustainability objectives and
the Board does not require the Investment Manager to employ
negative screens. However, sustainability risks are integrated into
investment decision making and risk monitoring to the extent that
they represent potential or actual material risks and/or
opportunities for maximising long-term risk- adjusted returns.
Devon considers Sustainability Risks as part of its broader
analysis of potential investments and the factors considered will
vary depending on the security in question, but typically include
ownership structure, board structure and membership, capital
allocation track record, management incentives, labour relations
history and material climate-related matters including the risks of
Climate Change and transitional risks associated with the goals of
the Paris Agreement.
Measurement and engagement
Devon consults third party ESG research and opinion on current
and prospective investments. Their aim is to identify risks they
might have overlooked or underestimated in their proprietary
research.
Where sustainability risk is considered high, Devon conducts
additional due diligence to understand the drivers, and consider
(i) whether these deficiencies represent a material risk to the
investment case and (ii) whether the management team have a
credible strategy to improve in key areas.
Where Devon considers shortcomings to be within the control of
the investee company (rather than due to a quirk or technical flaw
in third party research), they will engage directly with the
management team of the investee company to address the issues.
Their engagement has two aims:
-- to understand why a given company currently falls short on certain performance metrics; and
-- to learn of the remedial measures that company has in place to address these shortcomings.
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 promote:
-- the success of the Company weighing the likely consequences of any decision in the long term,
-- the need to foster the Company's business relationships with
our stakeholders which includes our shareholders, service providers
such as the Investment Manager, AIFM and other relevant parties as
listed below;
-- the need to act independently by exercising reasonable skill and judgement;
-- the impact of the Company's operations on the community and the environment,
-- the requirement to avoid a conflict of interests;
-- the desirability of the Company maintaining a reputation for
high standards of business conduct;
-- the need to act fairly between members of the Company; and
-- the need to declare any interests in proposed transactions.
As an investment trust, the Company has no employees, customers
or physical assets; our stakeholders include our shareholders and
our service providers, including our Investment Manager, our former
AIFM, Depositary, Custodian, Lender, Registrar, Auditors, Broker
and Administrator, each as identified in the Annual Report and
Accounts.
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.
Relations with the Investment Manager
Alexander Darwall, CIO of Devon, continues to be responsible for
the portfolio management of the Company, supported by Luca Emo
Capodilista, Charlie Southern and James Bird within Devon's
investment team.
Devon was appointed as the Company's AIFM with effect from 1
July 2022. The Board thanks FundRock Partners Ltd for their service
as outsourced AIFM up to that date.
As AIFM, Devon now 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 set out 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.
Relations with other service providers
The Board also receives regular reports from its other key
service providers and evaluates them each on an ongoing basis to
ensure that the Board's expectations on service delivery are
met.
Engagement with shareholders
The Directors value 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 factsheets are published
monthly on the Company's website,
www.europeanopportunitiestrust.com. Key decisions are announced to
the London Stock Exchange through a Regulatory News Service.
The Company holds an Annual General Meeting. In normal
circumstances 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 UK Code, in the event that votes of 20
per cent or more have been cast against a resolution at a General
Meeting the Company will announce the actions it intends to take to
consult Shareholders to understand the reasons behind the result. A
further update will be published within six months. No such votes
were received during the year ended 31 May 2022.
The Board regularly reviews shareholder feedback to ensure that
shareholder views are taken into consideration as part of any
decisions taken by the Board. The Chairman actively seeks to engage
with shareholders and has attended a number of meetings with
investors during the year.
The Investment Manager also engages with the Company's larger
shareholders and the outcome of these discussions are reported to
the Board and the Company's brokers. Shareholders are invited to
communicate with the Board through the Chairman or the Company
Secretary. Alternatively, issues can be discussed with the
Company's Senior Independent Director, who can be contacted at the
Company's registered office.
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 Board has set the parameters
within which the Investment Manager operates and these are set out
under the terms of agreements with Devon 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 the principal decisions taken by the Board during
the year under review (and post year-end) are as follows:
* Internal controls: During the reporting year the
Board undertook a due diligence exercise into Devon's
suitability to act as AIFM to the Company in place of
FundRock Partners Limited. That appointment was made
subsequent to the financial year end on 1 July 2022.
* COVID-19, Ukraine and the economy: The impact of
COVID-19, the war in Ukraine, inflation and rising
energy prices and the public policy responses to
these events have created unprecedented investment
challenges. The Board has had frequent contact with
the Investment Manager where matters such as
investment strategy, risk, gearing and discount
management have been discussed. These meetings have
confirmed the Board's view that the Investment
Manager has applied the Company's stated investment
policies consistently throughout the period under
review. The Board continues to review emerging risks
that could have a potential impact on the operational
capability of the Investment Manager and other key
service providers.
* Succession planning: The Board, acting on
recommendations from the Nomination Committee and an
independent search agent, appointed two new
independent non-executive Directors, Matthew Dobbs
and Jeroen Huysinga on 1 September 2021. The Board
have agreed that Matthew Dobbs will succeed Andrew
Sutch as Chairman at the forthcoming AGM. Virginia
Holmes was appointed Senior Independent Director and
Jeroen Huysinga was appointed chair of the Management
Engagement Committee in June 2022.
* Gearing: After discussion with the Investment Manager,
on 6 September 2022 the Board entered into a new
GBP100 million loan facility with The Bank of Nova
Scotia, London Branch. The new loan facility will
enable the Investment Manager to implement the
Company's stated gearing policy, as further described
in the section entitled 'Borrowing limits' in the
Annual Report and Accounts. It is hoped that through
the careful use of gearing, the Investment Manager
can increase shareholder returns.
* Discount management: During the year under review,
the Board has continued to monitor the Company's
share price discount to NAV. When necessary, the
Investment Manager has bought back shares from the
market in order to narrow the discount.
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.
Capital Gains Tax information
The closing middle market price of ordinary shares on the first
date of dealing (20 November 2000) for Capital Gains Tax purposes
was 101.5p.
For and on behalf of the Board
Andrew Sutch
Chairman
21 September 2022
Income Statement
for the year ended 31 May 2022
Year ended Year ended
31 May 2022 31 May 2021
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gain on investments 8 - 25,056 25,056 - 2,047 2,047
Other exchange (loss)/gain - (270) (270) - 38 38
Income from investments 2 14,370 - 14,370 12,435 - 12,435
Total income 14,370 24,786 39,156 12,435 2,085 14,520
Investment management fee (8,404) - (8,404) (7,694) - (7,694)
Other expenses 3 (1,035) - (1,035) (999) - (999)
Total expenses (9,439) - (9,439) (8,693) - (8,693)
Net return before finance costs and
taxation 4,931 24,786 29,717 3,742 2,085 5,827
Finance costs 4 (961) - (961) (496) - (496)
Return on ordinary activities
before taxation 3,970 24,786 28,756 3,246 2,085 5,331
Taxation 5 (1,233) - (1,233) (907) - (907)
Net return after taxation* 2,737 24,786 27,523 2,339 2,085 4,424
Return per ordinary share 6 2.62p 23.69p 26.31p 2.12p 1.89p 4.01p
* 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 2022
2022 2021
GBP'000 GBP'000
----------------------------------------------- -------- --------
Fixed Assets
----------------------------------------------- -------- --------
Investments 951,753 936,972
----------------------------------------------- -------- --------
Current assets
----------------------------------------------- -------- --------
Debtors 3,532 3,942
----------------------------------------------- -------- --------
Cash and cash equivalents 5,973 9,892
----------------------------------------------- -------- --------
9,505 13,834
----------------------------------------------- -------- --------
Total assets 961,258 950,806
----------------------------------------------- -------- --------
Current liabilities
----------------------------------------------- -------- --------
Creditors - amounts falling due within 1 year (88,641) (71,817)
----------------------------------------------- -------- --------
Total assets less current liabilities 872,617 878,989
----------------------------------------------- -------- --------
Capital and reserves
----------------------------------------------- -------- --------
Called up share capital 1,129 1,129
----------------------------------------------- -------- --------
Share premium 204,133 204,133
----------------------------------------------- -------- --------
Special reserve 33,687 33,687
----------------------------------------------- -------- --------
Capital redemption reserve 45 45
----------------------------------------------- -------- --------
Reserves 633,623 639,995
----------------------------------------------- -------- --------
Total Shareholders' funds 872,617 878,989
----------------------------------------------- -------- --------
Net asset value per ordinary share 850.64p 824.29p
----------------------------------------------- -------- --------
Statement of Changes in Equity
For the year ended 31 May 2022
For the year ended 31 Share capital Share premium Special reserve Capital redemption Reserves Total
May 2022 GBP,000 GBP,000 GBP,000 reserve GBP,000 GBP,000
GBP,000
--------------------- ------------- ------------- --------------- ------------------- ------------- ----------
Balance as at 1 June
2021 1,129 204,133 33,687 45 639,995 878,989
--------------------- ------------- ------------- --------------- ------------------- ------------- ----------
Net return after
taxation - - - - 27,523 27,523
--------------------- ------------- ------------- --------------- ------------------- ------------- ----------
Repurchase of
ordinary shares into
treasury - - - - (31,786) (31,786)
--------------------- ------------- ------------- --------------- ------------------- ------------- ----------
Dividends declared
and paid* - - - - (2,109) (2,109)
--------------------- ------------- ------------- --------------- ------------------- ------------- ----------
Balance at 31 May
2022 1,129 204,133 33,687 45 633,623 872,617
===================== ============= ============= =============== =================== ============= ==========
For the year ended 31 Share capital Share premium Special reserve Capital redemption Reserves Total
May 2021 GBP,000 GBP,000 GBP,000 reserve GBP,000 GBP,000
GBP,000
------------------------ ------------- ------------- --------------- ------------------ ------------- ----------
Balance as at 1 June
2020 1,129 204,133 33,687 45 683,923 922,917
------------------------ ------------- ------------- --------------- ------------------ ------------- ----------
Net return after
taxation - - - - 4,424 4,424
------------------------ ------------- ------------- --------------- ------------------ ------------- ----------
Repurchase of
ordinary shares
into treasury - - - - - (44,461) (44,461)
------------------- --- ------------- ------------- --------------- ------------------ ------------- ----------
Dividends declared
and paid* - - - - - (3,891) (3,891)
------------------- --- ------------- ------------- --------------- ------------------ ------------- ----------
Balance at 31 May 2021 1,129 204,133 33,687 45 639,995 878,989
======================== ============= ============= =============== ================== ============= ==========
* Dividends paid during the financial year were paid out of
revenue reserves.
Cash flow statement for the year ended 31 May 2022
Notes 2022 2021
GBP'000 GBP'000
-------------------------------------------------------------- --------- ---------
Cash flows from operating activities
-------------------------------------------------------------- --------- ---------
Investment income received (gross) 15,136 10,972
-------------------------------------------------------------- --------- ---------
Investment management fee paid 19 (8,323) (7,763)
-------------------------------------------------------------- --------- ---------
Other cash expenses (984) (1,137)
-------------------------------------------------------------- --------- ---------
Net cash inflow from operating activities before taxation and
interest 16 5,829 2,072
-------------------------------------------------------------- --------- ---------
Interest paid (834) (444)
-------------------------------------------------------------- --------- ---------
Overseas tax incurred (1,594) (935)
-------------------------------------------------------------- --------- ---------
Net cash inflow from operating activities 3,401 693
-------------------------------------------------------------- --------- ---------
Cash flows from investing activities
-------------------------------------------------------------- --------- ---------
Purchases of investments (204,307) (208,841)
-------------------------------------------------------------- --------- ---------
Sales of investments 215,054 186,203
-------------------------------------------------------------- --------- ---------
Net cash inflow/(outflow) from investing activities 10,747 (22,638)
-------------------------------------------------------------- --------- ---------
Cash flows from financing activities
-------------------------------------------------------------- --------- ---------
Repurchase of ordinary shares into treasury (35,688) (39,813)
-------------------------------------------------------------- --------- ---------
Equity dividends paid 7 (2,109) (3,891)
-------------------------------------------------------------- --------- ---------
Drawdown of loan 17 20,000 50,000
-------------------------------------------------------------- --------- ---------
Net cash (outflow)/inflow from financing activities (17,797) 6,296
-------------------------------------------------------------- --------- ---------
Decrease in cash (3,649) (15,649)
============================================================== ========= =========
Cash and cash equivalents at start of year 9,892 25,503
-------------------------------------------------------------- --------- ---------
Realised (loss)/gain on foreign currency (270) 38
-------------------------------------------------------------- --------- ---------
Cash and cash equivalents at end of year 5,973 9,892
============================================================== ========= =========
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
For further information, please contact:
Devon Equity Management Limited
Investment Managers to
European Opportunities Trust PLC
Richard Pavry
enquiries@devonem.com
020 3985 0445
21 September 2022
www.europeanopportunitiestrust.com
[END]
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(END) Dow Jones Newswires
September 22, 2022 02:01 ET (06:01 GMT)
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