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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September 22, 2022 02:01 ET (06:01 GMT)

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