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Correction - Final Results

Released 15:10 14-Mar-2017

Correction - Final Results

Correction to Final Results Announcement released on 14/03/2017 at 12:58:29. The original announcement stated a dividend rate of 4.14 pence per share instead of 4.17 pence per share in the Financial Highlights. The correct final dividend recommended by the Board is 4.17 pence per share.

Fidelity European Values PLC

Final Results for the year ended 31 December 2016

Financial Highlights:

Contacts

For further information, please contact:

Bonita Guntrip

Senior Company Secretary, FIL Investments International

01737 837320

“Aiming to capture the diversity of Europe, across a range of countries and sectors, Fidelity European Values PLC looks beyond the noise of market sentiment and concentrates on the real-life progress of European listed businesses. It researches and selects stocks that can grow their dividends consistently, irrespective of the economic environment.”

Vivian Bazalgette, Chairman

Chairman’s Statement

This is my first year as Chairman of Fidelity European Values PLC and I am pleased to present your Company’s Annual Report as at 31 December 2016.

Aiming to capture the diversity of Europe, across a range of countries and sectors, Fidelity European Values PLC looks beyond the noise of market sentiment and concentrates on the real-life progress of European listed businesses. It researches and selects stocks that can grow their dividends consistently, irrespective of the economic environment.

Performance

For the year ended 31 December the net asset value (“NAV”) total return per ordinary share was 17.6%, underperforming the Benchmark Index, the FTSE World Europe (ex-UK) Index, which returned 19.7%. The share price total return, however, lagged the NAV return at 7.6%, as a result of the level of discount (ex-income) widening from 2.9% at the start of the year to 11.1% at the end. In spite of the year under review proving challenging, it is reassuring to note that the three and five year returns are ahead of the Benchmark Index, as shown in the table below (all figures are in UK sterling terms and are on a total return basis).

The reporting year was marked by a series of largely unexpected political outcomes, including the Brexit vote held in June, and Donald Trump’s victory in the US presidential elections in November. Whilst the markets have so far reacted positively to these events, there remains considerable uncertainty. Nevertheless it is worth noting that the NAV return was in absolute terms very healthy, boosted by the post-Brexit weakness of sterling.

European equities rose in sterling terms over the twelve month reporting period. Expectations of fiscal stimulus were latterly encouraged by Mr Trump’s election victory and for this reason the markets anticipated an economic boost. This in turn led to a sharp rotation away from defensive stocks in favour of the more cyclical – and mainly lower quality – sectors of the markets. Such cyclical rotations occur periodically, creating challenging conditions for your Portfolio Manager who remains focused on investing in attractively valued companies with sound long term fundamentals. After all, fundamentally strong companies tend to outperform over extended time periods.

Performance over one, three and five years and since launch to 31 December 2016 (on a total return basis) (%)

NAV Share
price
FTSE
World
Europe
(ex UK)
Index
One year +17.6 +7.6 +19.7
Three years +32.1 +27.8 +26.3
Five years +97.7 +102.7 +86.3
Since launch (1991) +2,607.8 +2,300.2 +808.0
-------------- -------------- --------------

Sources: Fidelity and Datastream

Past performance is not a guide to future returns

Outlook

Eurozone growth gained some momentum towards the end of 2016, with private consumption remaining a significant contributor. In addition credit conditions continue to ease and fiscal policies are becoming more supportive at the margin, with further easing likely in 2017. A friendlier global growth backdrop is also a helpful factor. Nevertheless, there are downside risks to this positive outlook. In politics, Mr Trump’s presidency, the repercussions of the Italian referendum and a packed election calendar in 2017 are some of the influences which could inhibit investment decisions. It is also likely that import demand in the UK will suffer as a result of a significantly weaker sterling. This may have an adverse effect on trade in the Eurozone.

The Portfolio Manager seeks to invest in attractively valued companies exhibiting long term structural growth prospects, proven business models, strong balance sheets and disciplined use of their capital. Such an approach seems well suited to the uncertain backdrop outlined above.

OTHER MATTERS

Gearing

The Company continues to gear through the use of long contracts for difference (“CFDs”). As at 31 December 2016, the Company’s level of gearing was 3.0% (2015: 2.8%). The Manager has flexibility to gear within parameters set by the Board. Gearing levels are discussed at every Board meeting and between meetings when necessary. Gearing made a very small positive contribution to performance in the reporting year, as can be seen from the attribution analysis table in the Annual Report.

Discount Management and Treasury Shares

The Board continues to adopt an active discount management policy. Whilst the primary purpose of this policy is to reduce share price volatility in relation to NAV, buying in shares at a discount also results in an enhancement to the NAV per share. In order to assist in managing the discount, the Board has shareholder approval to hold in Treasury ordinary shares repurchased by the Company, rather than cancelling them altogether. These shares are then available to re-issue should the share price come to stand at a premium to NAV, facilitating the management of and enhancing liquidity in our shares. The Board is seeking shareholder approval to renew this authority at the forthcoming Annual General Meeting.

As a result of the widening of the discount, the Company has repurchased 1,095,733 ordinary shares into Treasury in the year ended 31 December 2016 which represented 0.3% of the Company’s issued share capital. Since the end of the reporting period and as at the date of this report, the Company has not repurchased any further ordinary shares.

Dividends

The Board is continuing with its practice of largely paying out revenue in full. The objective is one of long term capital growth and we have not sought to influence the Portfolio Manager by imposing any income requirement in any particular year.

The Board recommends a final dividend of 4.17 pence per share for the year ended 31 December 2016 for approval by the shareholders at the Annual General Meeting (“AGM”) on 15 May 2017. The dividend will be payable on 19 May 2017 to shareholders who appear on the register as at close of business on 24 March 2017 (ex-dividend date 23 March 2017).

The increase in the proposed final dividend for 2016 over the 3.33 pence paid for 2015 is 25.2%. Whilst we emphasise that the increase is a function of stock selection and cannot be extrapolated into the future, Sam Morse, the Portfolio Manager, continues to focus on companies which are able to grow their dividends.

It should be added that the Board has elected under the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies, not to charge any management fees or finance costs to capital, thereby enhancing the Company’s capital return. This is a matter for judgement and the Board periodically reviews its charging policy. Total return is not affected whichever route is followed, though relative rates of taxation of income and capital gains may be a consideration for investors.

Board of Directors

Humphrey van der Klugt stepped down from the Board on 12 May 2016, and I succeeded him as Chairman. After fifteen years serving as a Director, Simon Fraser will be stepping down from the Board at the conclusion of the forthcoming AGM. I would like to take this opportunity to thank them both on behalf of the Board, shareholders and the team at Fidelity for their commitment to the Company, their hard work and their shrewd judgement. We shall miss them.

Turning to Board appointments, I am pleased to say that Paul Yates joined us earlier this month as a non-executive Director and will stand for election at the AGM. Paul has many years of experience in the asset management industry. He held a number of positions at UBS, covering management, portfolio management, pensions, strategy and client service and was CEO of UBS Global Asset Management (UK) Ltd between 2001 and 2005. After undertaking a number of global roles at UBS he retired in 2007. He is currently a non-executive Director of The Merchants Trust plc and Aberdeen UK Tracker Trust plc. I am confident that his deep understanding of the investment process, the markets and investment trusts will be an asset to the Board.

I am also pleased to say that, as previously announced, Fleur Meijs will be joining the Board later this year. As well as being a continental European national, she is a Chartered Accountant and a former Financial Services Partner at PricewaterhouseCoopers LLP. She is currently a non-executive Director of Invesco Asia Trust plc, a Director of Bridge to the Future, a member of the Advisory Council for British Museum Friends and a member of the Dutch Parliamentary committee for the structure of banks in the Netherlands. Fleur will join the Board on 1 September 2017 and will I am sure make a valuable contribution.

We continue to review Board composition and Director succession on a regular basis to ensure that we have a Board with a mix of tenures and which provides diversity of perspective together with the range of appropriate skills and experience for your Company. In accordance with the UK Corporate Governance Code and being a FTSE 350 Company, all Directors are subject to annual election and re-election by shareholders and, with the exception of Simon Fraser, put themselves forward for election and re-election at the forthcoming AGM. Biographical details of each Director are shown in the Annual Report.

Continuation Vote

In accordance with the Company’s Articles of Association, the Company is subject to a continuation vote every two years. The next such vote is at this year’s AGM. The Company’s performance record has been very strong since launch in November 1991 with a NAV total return of 2,607.8% compared to the Benchmark Index return of 808.0%. The share price total return since launch is 2,300.2%. Although the Company’s NAV total return underperformed the Benchmark Index for the year ended 31 December 2016, the return was still healthy in absolute terms. As mentioned previously, both the Company’s NAV and share price total returns have outperformed the Benchmark Index over three and five years, as reflected in the table above. In addition, the prospects for the Company over a five year investment horizon can be found in the Viability Statement below. Accordingly, your Board recommends that shareholders vote in favour of the continuation resolution.

Annual General Meeting

The AGM of the Company will be held on Monday 15 May 2017 at midday at Fidelity’s offices at 25 Cannon Street, London EC4M 5TA (St Paul’s or Mansion House tube stations). Full details of the meeting are given in the Annual Report.

This is our opportunity to meet as many shareholders as possible, and I hope therefore that you are able to join us. In addition to the formal business of the meeting Sam Morse, your Portfolio Manager, will be making a presentation on the year’s results and the outlook for 2017.

Vivian Bazalgette
Chairman
14 March 2017

Portfolio Manager’s Review

Performance Review

As shown in the Financial Summary in the Annual Report, the net asset value (“NAV”) total return, in the year to 31 December 2016, was 17.6% compared to a total return of 19.7% for the FTSE World Europe (ex UK) Index which is the Company’s Benchmark Index. The share price total return was 7.6%, which is considerably less than the NAV total return as a consequence of a significant widening in the share price discount. The discount widened from 2.9% at the beginning of the year to 11.1% at the end of the reporting period, based on the NAV excluding income (all figures in UK sterling). The widening of the discount is disappointing but reflects a general pattern seen in the European investment trust sector which may reflect a growing anxiety about the future of the European Union and the Eurozone following the Brexit referendum result.

Market Background

2016 will be remembered as a year of political “shocks” with three outcomes which, at the beginning of the year, might have been considered major risks to the progress of continental European stock markets: a yes to Brexit, Trump’s election and Renzi’s resignation following the rejection of his proposals for constitutional reform. Despite all this, continental European stock markets actually made modest, if bumpy, progress in euro terms but made strong gains in sterling terms, mainly owing to a devaluation in sterling which accelerated post the Brexit vote. Why did the markets rise despite these “shocks”? Well, with apologies to former President Bill Clinton: “It’s the economy stupid!” While the year began with investors fretting about the outlook for the Chinese economy and its potential negative impact on global growth, it ended with a tidal wave of optimism that Trump’s policies would re-inflate the US economy thereby re-invigorating global growth and the earnings and dividend growth of companies.

The changing sentiment regarding economic growth resulted in a lot of volatility through the year in terms of sector performance. Economy-sensitive sectors, such as energy, started the year very poorly but recovered from mid-February, led by the oil price, as China introduced measures to boost its economy. This stronger performance of the more ‘cyclical’ sectors continued when evidence of economic improvement gathered pace and following Trump’s election. The financial sector had a roller-coaster ride in 2016. Banks performed very poorly in the first half of the year with investors worrying, in particular, about the capital position of Italian banks, given high levels of non-performing loans. These concerns were compounded by the Brexit vote and the expectation of a concerted response from the European Central Bank in terms of more quantitative easing which would continue to pressure banks’ income and, therefore, earnings and dividends. The financial sector saw a big turnaround in the second half, however, as investors saw banks as major potential beneficiaries of an improving global economy and rising bond yields. The healthcare sector, in contrast, was weak throughout the year with mounting evidence of price pressure in the US pharmaceutical market compounded by strong threats of further action on drug pricing.

Portfolio Review

The Company’s NAV recorded strong returns of 17.6% for 2016 as some of our high conviction holdings performed strongly. However, on a relative basis, the NAV underperformed the Benchmark Index by 2.1%. It performed strongly relative to the Benchmark in the first half of the year but, frustratingly, gave up all those relative gains, and more, in the second half of the year. This was due to a combination of poor stock selection, particularly in the healthcare sector, and a change in the market environment with a sharp rotation into more risky economy-sensitive stocks, which often do not meet the stock selection criteria of your Portfolio Manager. However, the absolute return in sterling terms appears impressive largely owing to the devaluation of sterling. Gearing, achieved through the use of contracts for difference, added little to performance owing to the low level of leverage employed through the year. Gearing is low because the Portfolio Manager remains cautious about the prospects for continental European stock markets given generally high levels of valuation.

The Company’s underperformance against the Benchmark this year was partly due to companies in the pharmaceutical sector. The shares of Novo-Nordisk were hit when management downgraded earnings expectations owing to pricing pressures in the company’s diabetes franchise in the US. The announcement that the well-respected CEO was retiring at the end of the year also added to the uncertainty. The company, which has a strong long-term record of dividend growth, is now selling on a healthy dividend yield of over three percent. The insulin market continues to see strong volume growth given the growing incidence of diabetes and the company also has an exciting pipeline of new products. 2017 is, however, likely to be a transition year for Novo-Nordisk as Eli Lilly’s biosimilar, called Basaglar, continues to put pressure on pricing in the US market for basal insulin. The Company’s other holdings in the pharmaceutical sector, Roche and Sanofi, both also suffered from the more general concerns around pricing pressure in the US and the threat of additional action by both Presidential candidates. Given the Republicans, who control Congress, have typically been supportive of the industry, recognising its record on innovation and its contribution to restraining hospital costs, we expect these companies to be able to continue to grow their dividends from increasingly attractive levels of yield.

Holdings in the energy sector, by contrast, contributed very positively to the Company’s performance as it became clear that both Shell and Total have begun to address their operating and capital expenditures, in light of the lower oil price, to improve returns. These companies have high dividend yields but are not currently growing their dividends. The prospects for future dividend growth improved as the year progressed and as the oil price doubled from its lows in the early part of the year. This has resulted in higher share prices and your Portfolio Manager still thinks there is the potential for further gains as both companies start to generate enough cash to cover and, indeed, increase those dividends.

Finally, 3i Group, one of the few UK-listed companies in the portfolio, delivered a very strong performance during the year largely due to a revaluation of their largest portfolio company, Action, a Benelux-based discount retailer, which is rapidly and successfully expanding into France and Germany.

Outlook

Earnings and dividend forecasts have been downgraded consistently such that continental European companies have, in aggregate, delivered little in the way of earnings and dividend growth in recent years. The second half of 2016, however, saw an end to this cycle of downgrades and analysts are now confidently predicting (again) double digit earnings growth for 2017 (and 2018). The hope now is that the global economy will be given additional impetus by Trump’s reflationary policies (fiscal spending, a reduction in taxes, etc.) and that this will lead to acceleration in European earnings, particularly in sectors that have struggled to grow earnings for many years, such as the banks. Strong earnings and dividend growth is, indeed, needed to support valuations that are high relative to historic ranges, especially given that one of the crutches for high valuations - low bond yields - is slowly being removed. There is the potential for more political shocks to come, especially given the heavy load of elections in Europe in 2017. The main risk, however, would be any hiatus in the current economic improvement. The uglier aspects of Trump’s agenda, such as protectionism, may have an impact here or a monetary squeeze, if inflation starts to get out of control, and may also slow any recovery.

Your Portfolio Manager remains focused on attractively-valued companies, with strong balance sheets and a track record in cash generation, which have the potential to grow dividends consistently on a three to five year view. These types of companies should outperform the Benchmark over the long term.

Twenty-five Years

On Guy Fawkes’ day, last year, the Company celebrated the 25th anniversary of its launch. Your Portfolio Manager is not sure if that date was chosen intentionally but certainly the performance of the Company, since then, has been quite explosive. Investors at launch, who have reinvested their dividends, will have multiplied their money over twenty-five times. That’s turning ten thousand pounds into almost a quarter of a million. Much has changed since November 1991. For instance, few would have expected interest rates, which were so high then, to have fallen over the period to the point that bond investors, last year, were being asked to pay companies for the privilege of lending to them (negative interest rates). Some things, however, have stayed the same: although during its life the Company has had four different portfolio managers, each with their own investment style, all the portfolio managers have stuck to the same Fidelity principle of staying focused on stock-picking while avoiding the macro “noise” and, at times, negative headlines about Europe. Each portfolio manager has, also, been able to draw on the same strong research resource: Fidelity’s in-house team of analysts, who are the real heroes of this celebration. So what about the next twenty-five years? Well, your Portfolio Manager will take Peter Lynch’s advice and will not try to “predict the future direction of interest rates, the economies or the stock markets but will focus on the companies in which the Company invests”. There will always be some great stock-picking opportunities and your Portfolio Manager is confident that, with the invaluable help of Fidelity’s research team, the Company will continue to be able to identify those winning investments in the next twenty-five years.

Sam Morse
Portfolio Manager
14 March 2017

Strategic Report

Principal Risks and Uncertainties

As required by provision C.2.1 of the 2014 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key risks that the Company faces. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

The Alternative Investment Fund Manager, FIL Investment Services (UK) Limited, also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal risks and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the following as the principal risks and uncertainties faced by the Company:

Principal Risks Description and Risk Mitigation
Market Risk The Company’s assets consist mainly of listed securities and the principal risks are therefore market related such as market downturn, interest rate movements, and exchange rate movements. The Portfolio Manager’s success or failure to protect and increase the Company’s assets against this background is core to the Company’s continued success.
Risks to which the Company is exposed and which form part of the market risk category are included in Note 17 to the Financial Statements below together with summaries of the policies for managing these risks.
Performance Risk The achievement of the Company’s performance objective relative to the market requires the application of risk such as strategy, asset allocation and stock selection and may lead to underperformance of the Benchmark Index. The Board reviews the performance of the portfolio against the Company’s Benchmark and that of its competitors and the outlook for the market with the Portfolio Manager at each Board meeting. The Portfolio Manager is responsible for actively monitoring the portfolio selected in accordance with the asset allocation parameters and seeks to ensure that individual stocks meet an acceptable risk/reward profile. The emphasis is on long term results as the Company risks volatility of performance in the shorter term.
Economic and Political Risk The Company may be impacted by economic and political risks, such as Brexit and the US presidential election outcome. As outlined in the Chairman’s Statement, markets have responded positively to these events but the future outlook is uncertain. The Board regularly reviews such risks and the potential implications for the Company.
Discount Control Risk The price of the Company’s shares and its discount to NAV are factors which are not within the Company’s total control. The Board continues to adopt an active discount management policy. Some short term influence over the discount may be exercised by the use of share repurchases at acceptable prices within the parameters set by the Board. The Company’s share price, NAV and discount volatility are monitored daily by the Manager and considered by the Board at each of its meetings.
Gearing Risk The Company has the option to invest up to the total of any loan facilities or to use CFDs to invest in equities. The principal risk is that the Portfolio Manager may fail to use gearing effectively, resulting in a failure to outperform in a rising market or to underperform in a falling market. Other risks are that the cost of gearing may be too high or that the term of the gearing is inappropriate in relation to market conditions. The Company currently has no bank loans and gears through the use of long CFDs which provide greater flexibility and are significantly cheaper than bank loans. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate.
Derivatives Risk Derivative instruments are used to enable both the protection and enhancement of investment returns. There is a risk that the use of derivatives may lead to a higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in place policies and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board.
Further details on derivative instruments risk is included in Note 17 below.
Cybercrime Risk The risk posed by cybercrime is rated as significant. The Board receives regular updates on measures taken by the Manager to mitigate cyber attacks.

Other risks facing the Company include:

Tax and Regulatory Risks

A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status, resulting in the Company being subject to tax on capital gains.

The Company may be impacted by changes in legislation, taxation or regulation. These are monitored at each Board meeting and managed through active lobbying by the Manager.

Operational Risks

The Company relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and compliance with regulatory and legal requirements. They are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers’ own internal controls reports are received by the Board and any concerns investigated.

Although the likelihood of poor governance, compliance and operational administration by third party service providers is low, the financial consequences could be serious, including the associated reputational damage to the Company.

Continuation Vote

A continuation vote takes place every two years. There is a risk that shareholders do not vote in favour of the continuation of the Company during periods when performance is poor. The next continuation vote will take place at this year’s AGM.

Viability Statement

In accordance with provision C.2.2 of the 2014 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long term capital growth. The Board consider long term to be at least five years and accordingly, they believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period. A risk to the Company’s continuation is shareholder dissatisfaction, and therefore in accordance with the Company’s Articles of Association, a continuation vote is held every two years, the next one taking place at this year’s AGM.

In making an assessment on the viability of the Company, the Board has considered the following:

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern statement below.

Going Concern

The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt the going concern basis for at least 12 months from the date of this Annual Report. The prospects of the Company over a period longer than 12 months can be found in the Viability Statement above.

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial period. Under that law they have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice, including FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period.

In preparing these Financial Statements, the Directors are required to:

·          select suitable accounting policies and then apply them consistently;

·          make judgements and estimates that are reasonable and prudent;

·          state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

·          prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Corporate Governance Statement and a Directors’ Remuneration Report that comply with that law and those regulations.

The Directors have delegated responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelityinvestmenttrusts.com to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their own jurisdictions.

The Directors confirm that to the best of our knowledge:

·          The Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

·          The Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy.

Approved by the Board on 14 March 2017 and signed on its behalf by:

Vivian Bazalgette

Chairman

Income Statement

for the year ended 31 December 2016

Year ended 31 December 2016 Year ended 31 December 2015
revenue capital total revenue capital total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Gains on investments 10 114,211 114,211 33,342 33,342
(Losses)/gains on derivative instruments 11 (1,502) (1,502) 3,420 3,420
Income 3 27,006 27,006 22,988 22,988
Investment management fees 4 (6,972) (6,972) (6,344) (6,344)
Other expenses 5 (919) (919) (885) (885)
Foreign exchange gains/(losses) 6 6 (12) (313) (325)
-------------- -------------- -------------- -------------- -------------- --------------
Net return on ordinary activities before finance costs and taxation 19,115 112,715 131,830 15,747 36,449 52,196
Finance costs 6 (339) (339)
-------------- -------------- -------------- -------------- -------------- --------------
Net return on ordinary activities before taxation 19,115 112,715 131,830 15,408 36,449 51,857
Taxation on return on ordinary activities 7 (1,053) (1,053) (1,371) (1,371)
-------------- -------------- -------------- -------------- -------------- --------------
Net return on ordinary activities after taxation for the year 18,062 112,715 130,777 14,037 36,449 50,486
======== ======== ======== ======== ======== ========
Return per ordinary share 8 4.34p 27.10p 31.44p 3.37p 8.75p 12.12p
======== ======== ======== ======== ======== ========

The Company does not have any other comprehensive income. Accordingly the net return on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes form an integral part of these Financial Statements.

Statement of Changes in Equity

for the year ended 31 December 2016

total
share capital share-
share premium redemption capital revenue holders’
capital account reserve reserve reserve funds
Note £’000 £’000 £’000 £’000 £’000 £’000
Total shareholders' funds at 31 December 2015 10,411 58,615 5,414 664,735 21,129 760,304
Net return on ordinary activities after taxation for the year 112,715 18,062 130,777
Repurchase of ordinary shares (1,862) (1,862)
Dividend paid to shareholders 9 (13,868) (13,868)
-------------- -------------- -------------- -------------- -------------- --------------
Total shareholders' funds at 31 December 2016 10,411 58,615 5,414 775,588 25,323 875,351
======== ======== ======== ======== ======== ========
Total shareholders' funds at 31 December 2014 10,411 58,615 5,414 628,286 22,251 724,977
Net return on ordinary activities after taxation for the year 36,449 14,037 50,486
Dividends paid to shareholders 9 (15,159) (15,159)
-------------- -------------- -------------- -------------- -------------- ---------------
Total shareholders' funds at 31 December 2015 10,411 58,615 5,414 664,735 21,129 760,304
======== ======== ======== ======== ======== ========

The Notes form an integral part of these Financial Statements.

Balance Sheet

as at 31 December 2016

Company number 2638812

2016 2015
Notes £’000 £’000
Fixed assets
Investments held at fair value through profit or loss 10 862,747 746,648
======= =======
Current assets
Derivative instruments 11 61
Debtors 12 3,557 2,670
Amounts held at futures clearing houses and brokers 1,382 3
Fidelity Institutional Liquidity Fund 6,283 8,800
Cash at bank 4,003 4,080
------------ ------------
15,225 15,614
======= =======
Creditors
Derivative instruments 11 (577) (83)
Other creditors 13 (2,044) (1,875)
------------ ------------
(2,621) (1,958)
======= =======
Net current assets 12,604 13,656
======= =======
Net assets 875,351 760,304
======= =======
Capital and reserves
Share capital 14 10,411 10,411
Share premium account 15 58,615 58,615
Capital redemption reserve 15 5,414 5,414
Capital reserve 15 775,588 664,735
Revenue reserve 15 25,323 21,129
------------ ------------
Total shareholders’ funds 875,351 760,304
======= =======
Net asset value per ordinary share 16 210.75p 182.57p
======= =======

The Financial Statements were approved by the Board of Directors on 14 March 2017 and were signed on its behalf by:

Vivian Bazalgette

Chairman

The Notes form an integral part of these Financial Statements.

Notes to the Financial Statements

1 Principal Activity

Fidelity European Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2638812, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 Accounting Policies

The Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), issued by the Financial Reporting Council (“FRC”) and these Financial Statements have been prepared in accordance with FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. The Company has early adopted the amendments to FRS 102: Fair value hierarchy disclosures, issued by the FRC and applicable for accounting periods beginning on or after 1 January 2017. The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”), in November 2014. The Company is exempt from presenting a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investments are highly liquid and are carried at market value.

a) Basis of accounting – The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments.

A resolution proposing the continuation of the Company as an investment trust will be put to shareholders at the Annual General Meeting on 15 May 2017. The Directors are recommending that shareholders vote in favour of this resolution. In accordance with this recommendation and given that the Company’s assets consist mainly of securities which are readily realisable and that the Directors have a reasonable expectation that the Company has adequate resources to continue for the foreseeable future, the Directors believe that it is appropriate to prepare the Financial Statements on a going concern basis. Accordingly the Financial Statements do not include any adjustments that may arise from a reconstruction or liquidation of the Company.

b) Segmental reporting – The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

c) Presentation of the Income Statement – In order to reflect better the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

d) Income – Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex dividend date. UK dividends are accounted for net of any tax credit. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case. Derivative instrument income received from dividends on long contracts for difference (“CFDs”) are accounted for on the date on which the right to receive or make the payment is established, normally the ex dividend date. The net amount is credited to the revenue column of the Income Statement. Interest received on CFDs, bank deposits and money market funds is accounted for on an accruals basis and is credited to the revenue column of the Income Statement.

e) Management fees and other expenses – Management fees and other expenses are accounted for on an accruals basis and are charged in full to the revenue column of the Income Statement.

f) Functional currency and foreign exchange – The Directors, having regard to the Company’s share capital, expenses and the predominant currency in which its investors operate, have determined its functional currency to be UK sterling. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

g) Finance costs – Finance costs represent interest paid on long CFDs which are accounted for on an accruals basis using the effective interest method and dividends paid on short CFDs, which are accounted for on the date on which the obligation to incur the cost is established, normally the ex dividend date. They are charged in full to the revenue column of the Income Statement.

h) Taxation – The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between taxable profit and the accounting profit and is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. It is accounted for using the balance sheet liability method. Deferred taxation liabilities are recognised for all taxable timing differences and deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible timing differences can be utilised.

i) Dividend paid – Dividends payable to equity Shareholders are recognised when the Company’s obligation to make payment is established.

j) Investments – The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Investment income
Overseas dividends 20,708 19,228
Overseas scrip dividends 3,114 1,462
UK dividends 1,379 1,051
UK scrip dividends 458
------------- ------------
25,659 21,741
======== ========
Derivative income
Dividends received on long CFDs 1,284 1,178
Interest received on long CFDs* 26
------------ ------------
1,310 1,178
======== ========
Investment and derivative income 26,969 22,919
======== ========
Other interest
Interest received on bank deposits and money market funds 35 55
Interest received on tax reclaims 2 14
------------ ------------
37 69
======== ========
Total income 27,006 22,988
======== ========

* Due to negative interest rates during the reporting year, the Company received interest on its long CFDs.

4 Investment Management Fees

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Investment management fees 6,972 6,344
======== ========

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies. FII charges investment management fees at an annual rate of 0.85% of net assets. Fees are payable quarterly in arrears and are calculated on the last business day of March, June, September and December.

5 Other Expenses

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
AIC fees 21 21
Custody fees 90 123
Depositary fees 62 66
Directors’ fees1 146 138
Legal and professional fees 158 128
Marketing and share plan expenses2 229 153
Printing and publication expenses 91 101
Registrars' fees 70 104
Fees payable to the Independent Auditor for the audit of the Financial Statements3 25 25
Other expenses 27 26
------------- -------------
919 885
======== ========

1 Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

2 The marketing and share plan expenses are lower for 2015 due to an underspend of the marketing budget.

3 The VAT payable on audit fees is included in other expenses.

6 Finance Costs

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Interest paid on long CFDs* 76
Dividends paid on short CFDs 263
------------- -------------
339
======== ========

* Due to negative interest rates during the reporting year, the Company did not pay any interest on its long CFDs.

7 Taxation on Return on Ordinary Activities

Year ended 31 December 2016 Year ended 31 December 2015
revenue capital total revenue capital total
£’000 £’000 £’000 £’000 £’000 £’000
a) Analysis of the taxation charge for the year
Overseas taxation suffered 2,903 2,903 2,629 2,629
Overseas taxation recovered (1,850) (1,850) (1,258) (1,258)
------------- ------------- ------------- ------------- ------------- -------------
Total taxation charge for the year (see Note 7b) 1,053 1,053 1,371 1,371
======== ======== ======== ======== ======== ========

b) Factors affecting the taxation charge for the year

The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 20% (2015: 20.25%). A reconciliation of tax at the standard rate of UK corporation tax to the taxation charge for the year is shown below:

Year ended 31 December 2016 Year ended 31 December 2015
revenue capital total revenue capital total
£’000 £’000 £’000 £’000 £’000 £’000
Return on ordinary activities before taxation 19,115 112,715 131,830 15,408 36,449 51,857
======== ======== ======== ======== ======== ========
Return on ordinary activities before taxation multiplied by the standard rate of UK
corporation tax of 20% (2015: 20.25%)
3,823 22,543 26,366 3,120 7,381 10,501
Effects of:
Gains on investments not taxable1 (22,543) (22,543) (7,381) (7,381)
Income not taxable (4,924) (4,924) (4,355) (4,355)
Excess management expenses 1,101 1,101 1,235 1,235
Overseas taxation suffered 1,053 1,053 1,371 1,371
------------- ------------- ------------- ------------- ------------- -------------
Total taxation charge for the year (see Note 7a) 1,053 1,053 1,371 1,371
======== ======== ======== ======== ======== ========

1 The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxation

A deferred tax asset of £5,443,000 (2015: £5,302,000), in respect of excess management expenses of £26,511,000 (2015: £21,003,000) and excess loan interest of £5,505,000 (2015: £5,505,000), has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

8 Return per Ordinary Share

Year ended 31 December 2016 Year ended 31 December 2015
revenue capital total revenue capital total
Return per ordinary share - basic and diluted 4.34p 27.10p 31.44p 3.37p 8.75p 12.12p
======== ======== ======== ======== ======== ========

The returns per ordinary share are based on, respectively; the net revenue return on ordinary activities after taxation for the year of £18,062,000 (2015: £14,037,000), the net capital return on ordinary activities after taxation for the year of £112,715,000 (2015: £36,449,000) and the net total return on ordinary activities after taxation for the year of £130,777,000 (2015: £50,486,000), and on 415,946,054 ordinary shares (2015: 416,447,910), being the weighted average number of ordinary shares held outside Treasury in issue during the year.

9 Dividends Paid to Shareholders

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Dividends paid
Final dividend of 3.33 pence per Ordinary Share paid for the year ended 31 December 2015 13,868
Final dividend of 3.10 pence per Ordinary Share paid for the year ended 31 December 2014 12,910
Special dividend of 0.54 pence per Ordinary Share paid for the year ended 31 December 2014 2,249
------------- -------------
13,868 15,159
======== ========
Dividend proposed
Final dividend proposed of 4.17 pence per Ordinary Share for the year ended 31 December 2016 17,320
Final dividend of 3.33 pence per Ordinary Share paid for the year ended 31 December 2015 13,868
------------- -------------
17,320 13,868
======== ========

The Directors have proposed the payment of a final dividend for the year ended 31 December 2016 of 4.17 pence per ordinary share which is subject to approval by Shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The dividend will be paid on 19 May 2017 to shareholders on the register at the close of business on 24 March 2017 (ex dividend date 23 March 2017).

10 Investments

2016 2015
£’000 £’000
Investments held at fair value through profit or loss 862,747 746,648
======== ========
Opening book cost 605,272 588,704
Opening investment holding gains 141,376 127,858
------------- -------------
Opening fair value 746,648 716,562
Movements in the year
Purchases at cost 158,302 189,552
Sales – proceeds (156,414) (192,808)
Sales – gains 17,252 19,824
Movement in investment holding gains 96,959 13,518
------------- -------------
Closing fair value 862,747 746,648
======== ========
Closing book cost 624,412 605,272
Closing investment holding gains 238,335 141,376
------------- -------------
Closing fair value 862,747 746,648
======== ========
Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Gains on investments
Gains on sales of investments 17,252 19,824
Investment holding gains 96,959 13,518
------------- -------------
114,211 33,342
======== ========

Investment transaction costs

Transaction costs incurred in the acquisition and disposal of investments, which are included in the gains on investments above, were as follows:

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
Purchases transaction costs 341 291
Sales transaction costs 185 202
------------- -------------
526 493
======== ========

The portfolio turnover rate for the year was 19.7% (2015: 25.0%). The portfolio turnover rate measures the Company’s trading activity. It is calculated by taking the average of the total amount of securities purchased and the total amount of securities sold in the reporting year divided by the average investment portfolio value of the Company.

11 Derivative Instruments

Year ended Year ended
31.12.16 31.12.15
£’000 £’000
(Losses)/gains on long CFDs
(Losses)/gains on long CFD positions closed (947) 2,478
Movement on investment holding (losses)/gains (555) 942
------------- -------------
(1,502) 3,420
======== ========

   

2016 2015
portfolio portfolio
fair value exposure fair value exposure
Derivative instruments £’000 £’000 £’000 £’000
Long CFDs – assets 61 5,607
Long CFDs – liabilities (577) 38,785 (83) 29,478
------------- ------------- ------------- -------------
(577) 38,785 (22) 35,085
======== ======== ======== ========

12 Debtors

2016 2015
£’000 £’000
Taxation recoverable 2,770 2,106
Accrued income 725 520
Other debtors 62 44
------------- -------------
3,557 2,670
======== ========

13 Other Creditors

2016 2015
£’000 £’000
Finance costs payable 3
Amounts payable to the Manager 1,869 1,675
Other creditors and accruals 175 197
------------- -------------
2,044 1,875
======== ========

14 Share Capital

2016 2015
number of number of
shares £’000 shares £’000
Issued, allotted and fully paid
Ordinary shares of 2.5 pence each held outside Treasury
Beginning of the year 416,447,910 10,411 416,447,910 10,411
Ordinary Shares repurchased into Treasury (1,095,733) (27)
------------------ -------------- ----------------- --------------
End of the year 415,352,177 10,384 416,447,910 10,411
========== ======== ========== ========
Ordinary shares of 2.5 pence each held in Treasury*
Beginning of the year
Ordinary Shares repurchased into Treasury 1,095,733 27
------------------ -------------- ----------------- --------------
End of the year 1,095,733 27
========== ======== ========== ========
Total share capital 10,411 10,411
========== ======== ========== ========

* Shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

15 Reserves

The share premium account represents the amount by which the proceeds from the issue of ordinary shares has exceeded the cost of those ordinary shares. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital redemption reserve maintains the equity share capital of the Company and represents the nominal value of shares repurchased and cancelled. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital reserve represents realised gains or losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives held and other income and costs recognised in the capital column of the Income Statement. It can be used to fund share repurchases and it is distributable by way of dividend. The Board have stated that it has no current intention to pay dividends out of capital.

The revenue reserve represents retained revenue surpluses recognised through the revenue column of the Income Statement. It is distributable by way of dividend.

16 Net Asset Value per Ordinary Share

The net asset value per ordinary share is based on net assets of £875,351,000 (2015: £760,304,000) and on 415,352,177 (2015: 416,447,910) ordinary shares, being the number of New Ordinary Shares of 2.5 pence each held outside Treasury in issue at the year end. It is the Company’s policy that shares held in Treasury will only be reissued at a premium to net asset value per share and, therefore, shares held in Treasury have no dilutive effect.

17 Financial Instruments

Management of risk

The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the

Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, performance, discount control, gearing and currency risks. Other risks identified are tax and regulatory and operational risks, including those relating to third party service providers covering investment management, marketing and business development, company secretarial, fund administration and operations and support functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. Risks identified are shown in the Strategic Report above.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

2016 2015
£’000 £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 39,362 35,107
======== ==========
Exposure to financial instruments that earn interest
Amounts held at futures clearing houses and brokers 1,382 3
Fidelity Institutional Liquidity Fund 6,283 8,800
Cash at bank 4,003 4,080
-------------- --------------
11,668 12,883
======== =========
Net exposure to financial instruments that bear interest 27,694 22,224
======== =========

Foreign currency risk

The Company’s net return on ordinary activities after taxation and its net assets can be affected by foreign exchange rate movements because the Company has income, assets and liabilities which are denominated in currencies other than the Company’s functional currency which is UK sterling.

Three principal areas have been identified where foreign currency risk could impact the Company:

2016
investments exposure to
at fair value long CFDs debtors1 cash total
currency £’000 £’000 £’000 £’000 £’000
Danish krone 38,709 162 38,871
Euro 564,407 38,785 2,235 32 605,459
Norwegian krone 31,898 31,898
Swedish krona 15,330 15,330
Swiss franc 158,897 772 159,669
UK sterling 53,506 8,053 3,971 65,530
----------------- ----------------- ----------------- ----------------- -----------------
862,747 38,785 11,222 4,003 916,757
========== ========== ========== ========== ==========

   

2015
investments exposure to
at fair value long CFDs debtors1 cash total
currency £’000 £’000 £’000 £’000 £’000
Danish krone 45,788 29 45,817
Euro 443,817 35,085 1,752 33 480,687
Norwegian krone 27,093 27,093
Swedish krona 18,680 18,680
Swiss franc 178,136 588 178,724
UK sterling 33,134 9,104 4,047 46,285
----------------- ----------------- ----------------- ----------------- -----------------
746,648 35,085 11,473 4,080 797,286
========== ========== ========== ========== ==========

1 Debtors include amounts held at futures clearing houses and brokers and in the Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilities

The Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise the gearing effect of long CFDs and other payables. The currency profile of these financial liabilities is shown below:

 2016
other
creditors total
currency £’000 £’000
UK sterling 2,044 2,044
----------------- -----------------
2,044 2,044
========== ==========

   

 2015
other
creditors total
currency £’000 £’000
Euro 3 3
UK sterling 1,872 1,872
----------------- -----------------
1,875 1,875
========== ==========

Other price risk

Other price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and long CFDs which can be sold easily to meet funding commitments if necessary. Short-term flexibility is achieved by the use of overdraft facilities as required.

Liquidity risk exposure

At 31 December 2016 the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £577,000 (2015: £83,000) and other creditors of £2,044,000 (2015: £1,875,000).

Counterparty risk

The long CFDs in which the Company invests are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. As a result the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Manager employs, this risk is minimised by only entering into transactions with counterparties which it believes to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and evaluates derivative instrument credit risk exposure.

For Over The Counter (“OTC”) derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2016, £1,382,000 (2015: £3,000) was held by the Company in cash, shown as amounts held at futures clearing houses and brokers on the Balance Sheet, in a segregated collateral account on behalf of the broker, to reduce the credit risk exposure of the broker.

Credit risk

Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions, derivative instrument contracts and cash at bank.

Derivative instruments risk

The risks and risk management processes which result from the use of derivative instruments are included within the other risk categories disclosed in this Note. Derivative instruments are used by the Portfolio Manager for the following purposes:

If the UK sterling exchange rate had strengthened by 10% the impact would have been:

2016 2015
currency £’000 £’000
Danish krone (3,534) (4,165)
Euro (51,463) (40,507)
Norwegian krone (2,900) (2,463)
Swedish krona (1,394) (1,698)
Swiss franc (14,515) (16,248)
---------------- ---------------
(73,806) (65,081)
========= =========

If the UK sterling exchange rate had weakened by 10% the impact would have been:

2016 2015
currency £’000 £’000
Danish krone 4,319 5,091
Euro 62,900 49,509
Norwegian krone 3,544 3,010
Swedish krona 1,703 2,076
Swiss franc 17,741 19,858
--------------- ---------------
90,207 79,544
========= =========

Other price risk – exposure to investments sensitivity analysis

Based on the investments held and share prices at 31 December 2016, an increase of 10% in share prices, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £86,275,000 (2015: £74,665,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Other price risk – net exposure to derivative instruments sensitivity analysis

Based on the derivative instruments held and share prices at 31 December 2016, an increase of 10% in the share prices underlying the derivative instruments, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £3,879,000 (2015: £3,509,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Fair Value of Financial Assets and Liabilities

Financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Notes 2(j) and 2(k) above4, investments and long CFDs are shown at fair value. In the case of amounts held at futures clearing houses and brokers, Fidelity Institutional Liquidity Fund and cash at bank, book value approximates to fair value due to the short maturity of the instruments.

Fair Value Hierarchy

The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Classification Input
Level 1 Valued using quoted prices in active markets for identical assets.
Level 2 Valued by reference to valuation techniques using observable inputs other than quoted prices included within level 1.
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Note 2 (j) and (k) above. The table below sets out the Company’s fair value hierarchy:

2016 2015
Financial assets at fair value through
profit or loss
level 1 level 2 total level 1 level 2 total
£’000 £’000 £’000 £’000 £’000 £’000
Investments 862,747 862,747 746,648 746,648
Derivative assets – long CFDs 61 61
Derivative liabilities – long CFDs (577) (577) (83) (83)
-------------- --------------- --------------- --------------- --------------- ---------------
862,747 (577) 862,170 746,648 (22) 746,626
========= ========= ========= ========= ========= =========

18 Capital Resources and Gearing

The Company does not have any externally imposed capital requirements. The capital of the Company comprises its issued share capital and reserves as disclosed in the Balance Sheet above, and its gearing, which is managed by the use of long CFDs. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed in the Strategic Report above.

The Company’s gearing at the end of the year is shown below:

2016 2015
portfolio portfolio
exposure exposure
£’000 £’000
Investments 862,747 746,648
Derivative instruments – long CFDs 38,785 35,085
--------------- ---------------
Total Portfolio Exposure 901,532 781,733
========= =========
Shareholders’ Funds 875,351 760,304
========= =========
Gearing 3.0% 2.8%
========= =========

19 Transactions with the Manager and Related Parties

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies. Details of the fee arrangements are given in the Directors’ Report, in the Annual Report, and Note 4 above. During the year fees for portfolio management services amounted to £6,972,000 (2015: £6,344,000). At the Balance Sheet date, fees for portfolio management services of £1,848,000 (2015: £1,597,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £229,000 (2015: £153,000). At the Balance Sheet date £21,000 (2015: £78,000) for marketing services was accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Directors’ fees and taxable benefits relating to reasonable travel expenses payable to the Directors are given in the Directors’ Remuneration Report in the Annual Report. The Directors received compensation of £148,000 (2015: £139,000). In addition to the fees and taxable benefits disclosed in the Directors’ Remuneration Report, this amount includes £14,000 (2015: £14,000) of employers’ National Insurance Contributions paid by the Company.

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 December 2016 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2015 and 2016 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2015 is derived from the statutory accounts for 2015 which have been delivered to the Registrar of Companies. The 2016 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to shareholders at the end of March 2017 and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelityinvestmenttrusts.com where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

 The Annual General Meeting will be held at 12 noon on 15 May 2017 at 25 Cannon Street, London ECM4 5TA.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

ENDS


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