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RNS
Henderson Eurotrust PLC   -  HNE   

Annual Financial Report

Released 11:47 04-Oct-2019

RNS Number : 8394O
Henderson Eurotrust PLC
04 October 2019
 

HENDERSON INVESTMENT FUNDS LIMITED

 

HENDERSON EUROTRUST PLC

 

LEGAL ENTITY IDENTIFIER:  213800DAFFNXRBWOEF12

 

 

 

HENDERSON EUROTRUST PLC

Annual Financial Results for the year ended 31 July 2019

 

This announcement contains regulated information

 

Investment objective

Henderson EuroTrust plc ("the Company") aims to achieve a superior total return from a portfolio of high quality European (excluding the UK) investments.

 

Performance highlights

 

•           The net asset value ("NAV") per share total return (including dividends reinvested and excluding transaction costs) was 6.6% compared to a total return from the benchmark index, the FTSE World Europe (ex UK) Index of 4.7%.

•           Increased proposed annual dividend: final dividend 23.0p, (2018: 22.5p) producing a total dividend to be paid from revenue and revenue reserves for the year of 31.0p (2018: 30.5p).

•           As at 31 July 2018 the Company's shares were trading at a discount to NAV of 10.0%, in comparison to trading at a discount of 8.2% at the prior year end.

 

Total return performance

 

1 year

%

3 years

%

5 years

%

10 years

%

NAV1

6.6

41.4

80.2

232.2

Share Price2

4.7

39.2

64.7

236.3

Peer Group NAV3

3.2

39.5

72.5

232.3

Benchmark Index4

4.7

38.1

62.0

152.3



1 Net asset value total return per ordinary share (including dividends reinvested and excluding transaction costs)

2 Share price total return (including dividends reinvested and excluding transaction costs) using mid-market closing price

3 Arithmetic average net asset value total return for the AIC Europe Sector

4 FTSE World Europe (ex UK) Index expressed on a total return basis and in Sterling terms

 

Source: Morningstar for the AIC

 

Year ended

31 July 2019

Year ended

31 July 2018

NAV per share at year end

£12.94

£12.47

Share price at year end

£11.65

£11.45

Dividend for year5

31.0p

30.5p

Dividend yield6

2.4%

2.7%

Ongoing Charge7

0.81%

0.81%

Gearing at year end

£1.6m

£nil

Number of investments at year end8

40

46

Net assets

£274.1m

£264.1m

Discount at year end9

10.0%

8.2%

 

5 Including the 8.0p interim dividend paid on 26 April 2019 and the 23.0p final dividend which will be put to shareholders for approval at the Annual General Meeting on 13 November 2019

6 Based on the share price at the year end

7 Ongoing charge includes performance fee. The ongoing charge excluding the performance fee is 0.81% (2018: 0.81%). The performance fee was removed with effect from 1 January 2019

8 Excluding the nil value position in OW Bunker (2018: excluding OW Bunker and one option)

9 Calculated using published daily NAVs including current year revenue

 

Sources: Morningstar for the AIC, Janus Henderson, Datastream

 

 

 

Financial Information

 

 

 

  31 July 2019

pence per share

  31 July 2018

pence per share

Net Asset Value

1,293.9

1,246.7

 

 

 

Revenue Return

29.0

33.1

 

 

 

Dividends

31.0

30.5

 

 

CHAIRMAN'S STATEMENT

 

Performance

The last year has been another good one for performance, and I am pleased to report that the net assets of the Company rose by 6.6% on a total return basis, outperforming our benchmark, the FTSE World Europe (ex UK) by 1.9% in Sterling terms, net of all fees and costs. This is particularly welcome given the transition of the management of the portfolio to Jamie Ross from Tim Stevenson on his retirement. Jamie was the Company's Joint Fund Manager prior to Tim's departure. As was the case last year, in the last ten years net asset performance has exceeded the index benchmark in all but one year.

 

The share price total return, including dividends, was 4.7%. This was less than the increase in the Net Asset Value ("NAV"), as the discount to NAV again widened, from 8.2% to 10.0% at the year end. The share price total return of 4.7% was ahead of the 3.2% return for the peer group (the AIC Europe Sector).

 

Dividends

I commented last year that the Fund Manager was of the opinion that the pace of growth in the dividends produced by the Company was likely to moderate when compared to the last few years. This has proved to be the case. The Board proposes a final dividend of 23.0p, taking the total distribution for the year to 31.0p - an increase of 0.5p on last year. After contributing £1.8m to the revenue reserve in the previous three years, the Board has decided to use some of this reserve to increase the dividend in the current year. The Board considers the dividend in the light of circumstances each year, but is committed to a progressive dividend policy.

 

Demand for the Company's shares

The Company's shares traded at a discount to NAV of nearly 10% over the year, a higher discount than the peer group average of circa 7%. With only eight constituents, the peer group is relatively small, and includes companies which also invest in the UK; however, it is clear that our wider discount is not due to investment performance, which continues to be strong. Nor does the Board believe that the discount is due to lack of confidence in the overall investment approach; on the contrary, we have been delighted with the favourable response to Jamie Ross's clearly articulated investment process. The Board believes that enthusiasm for European equities has been limited due to adverse political sentiments around Europe and Brexit and, in relative terms, the Company is still under-owned by retail investors.

 

In our view, the changing nature of the shareholder base, in particular the continued amalgamation of wealth management firms, is reducing the ability of such firms to invest in medium-sized, mainstream investment trusts. Seven of our top ten holders are wealth management firms; these firms hold approximately 39% of the Company's shares, a proportion which has been gradually declining. Good investment performance is essential if there is to be demand for the Company's shares, but the Board realises that this is a necessary, but not sufficient condition. Over the last two years in particular, we have therefore sought to develop a greater understanding of the retail market, including platforms through which individuals can invest directly. These holdings have been increasing and remain a key area of focus for the Board.

 

A new generation of investors

Our research also suggests that there is a bigger challenge - how to ensure that a new generation of investors is aware of and can learn about investment trusts and the advantages they can offer. Such a challenge cannot be met by the Company alone, but we seek to be in the vanguard of meeting this challenge. We are very supportive of the efforts of our Manager in seeking new ways of reaching potential investors and our Fund Manager, Jamie Ross, is committed to producing relevant information for use online and via social media, as well as speaking in person at a range of events, to access both our traditional and new audiences. We have also urged the AIC to press platforms to make it more practical for shareholders to vote in respect of their holdings in securities, such as the Company; not only is this important for good governance, but we also believe a new generation of investors will want to be engaged shareholders.

 

In many respects we feel that the Company is very well placed to appeal to potential new investors. The investment approach followed by our Fund Manager - Seeking growth, quality and consistency - focuses on sustainable performance over the longer term, and has resulted in a portfolio which achieves favourable scores on most widely used rating systems for environmental, social and governance ("ESG") factors. The Board and the Manager have reviewed a number of these rating systems to make sure that we understand what they actually measure; whilst the Fund Manager does not target any specific scores, and may for a variety of reasons invest in individual companies which do not have favourable ratings, we expect the overall portfolio to continue to score well on most ESG metrics (see the Fund Manager's Report for more detail).

 

Gearing

Day to day decisions in respect of gearing are delegated to the Fund Manager, whose neutral position is to be modestly geared (low-to-mid single digits). However, the key driver of gearing at any given time is the net appeal of the stock ideas at his disposal, rather than a macro view of markets. It should not be surprising that opportunities are less compelling after a period of market strength. At the start of the current financial year in August 2018, the Company had no gearing in place and, indeed, a modest cash balance; this was followed by a sharp downturn in equity markets in the fourth quarter, with the FTSE World Europe (ex UK) index falling 14.1% between the start of the financial year and the low point on 27 December 2018. By January 2019, a modest level of gearing had been re-introduced as our Fund Manager was able to build on existing positions at attractive valuations and introduce new holdings. Over the year as a whole, gearing and cash contributed 0.5% to NAV total return.

 

The Board keeps the issue of long term gearing under review; although long term borrowing rates are still low in a historical context, short term borrowing costs remain exceptionally low, whilst also offering greater flexibility than is the case with longer term borrowing. At the moment, the Fund Manager has access to £25m of borrowing, on demand.

 

An active approach

In last year's report, Fund Manager Tim Stevenson set out the different types of company which make up the portfolio, with the main emphasis on "Compounders" and "Improvers". In this year's Report, Jamie has included additional detail on his investment process, which we hope will give shareholders a better idea of how potential holdings are identified and evaluated versus existing holdings and versus each other. Risk models confirm that, to an even greater extent than previously, performance is driven by individual stock selection rather than factors such as style (e.g. growth or value) exposure. At a time when "closet indexing" (charging fees for actively managing a portfolio, but not taking sufficient risk to have a reasonable probability of outperforming the relevant benchmark index) is rightly condemned, the Company's portfolio remains very actively managed, and this approach has continued to be rewarded.

 

I also wanted to remind shareholders that current portfolio holdings are predominantly in highly liquid, large and medium sized listed securities and, whilst permitted by the Company's investment policy to a limited extent, we do not usually invest in unlisted stocks or those listed on junior markets. Hence we expect the portfolio to remain highly liquid, and believe that there is no conflict between liquidity and achieving the Company's performance objectives.

 

Board

As part of the Board's succession plan, we announced on 26 September 2019 that Stephen King will be joining the Board with effect from 1 December 2019.  Having been HSBC chief economist for 17 years until 2015, Stephen King is currently senior economic adviser to HSBC on a part time basis. He has written three books Losing Control: The Emerging Threats to Western Prosperity (2010), When the Money Runs Out: The End of Western Affluence (2013) and Grave New World: The End of Globalization, the Return of History (2017).  Stephen has held senior economist positions at the Treasury.  Stephen will stand for election at the Annual General Meeting ("AGM") in November 2020. 

 

There is a rolling programme of refreshment of the Board.  However, at the same time the Board wishes to maintain the culture of purpose that currently exists between the Board, the Manager and the shareholders.  Therefore, a period of "bedding in" to introduce new non-executive members to the Board is followed. 

 

David Marsh will be retiring as a Director at the AGM in November 2020 having completed the maximum permitted term of nine years under the Board's tenure policy.

 

Governance

The governance landscape continues to change. In 2018, the Financial Reporting Council issued a revised UK Corporate Governance Code which places greater emphasis on relationships between companies, shareholders and stakeholders. It also promotes the importance of establishing a corporate culture that is aligned with the Company's purpose and business strategy, and which promotes integrity and values diversity. As a result, the Association of Investment Companies ("AIC") issued a revised Code of Corporate Governance ("AIC Code") which sets out additional provisions on issues that are of specific relevance to investment companies as well as removing provisions which are not relevant.

 

The Board welcomed the changes brought by this governance reform and, whilst reporting as required under the 2016 AIC Code, has made additional disclosures which reflect the new AIC Code provisions.

 

Annual General Meeting ("AGM")

Our meeting will be held on Wednesday 13 November 2019 at 2.30pm at Janus Henderson Investors' offices at 201 Bishopsgate, London EC2M 3AE. I hope as many shareholders as possible will be able to attend to take the opportunity to meet the Board and to hear a presentation from the Fund Manager. Full details are set out in the Notice which has been sent to shareholders with this report, and are also available online at www.hendersoneurotrust.com.

 

Outlook

The portfolio we hold at the moment is relatively concentrated, with 40 holdings in the portfolio. Although the performance of the European equity index as a whole inevitably has a major influence on our performance in absolute terms, performance relative to the index is driven by the stocks our Fund Manager chooses to hold. In recent weeks, there has been a resurgence in "value" stocks, which are generally - and somewhat crudely - defined as securities which trade on a valuation lower than the market average. It is very possible that this will continue, as "value" stocks have been out of favour for a considerable period.  We are not concerned about this, as the focus of the Company is on the consistency of performance and the ability to compound earnings over time, rather than to capture a short term rebound due to a change in valuation. We do not want to buy securities which we consider to be valued more highly than their prospects justify, but to find companies which can deliver attractive returns through a variety of economic and political circumstances in a consistent manner. Whilst we have to make judgements about which companies can best do this at any one time, and do so with a suitable degree of diversification, this focus will not change.

 

We will also continue to put our efforts into marketing the Company and, in addition to meeting the needs of our current shareholders, finding ways of reaching the shareholders of the future. The Board is clear that investment performance is a necessary, but not sufficient, condition for the Company to be successful in the long term.

 

Nicola Ralston

Chairman

 

 

FUND MANAGER'S REPORT

 

Continuity and change

This is the first annual fund manager's report that I have had the pleasure of writing. As mentioned in the last annual report, the Board, having been notified of Tim Stevenson's intention to retire, appointed me as Joint Fund Manager in October 2018. Since Tim's retirement at the end of February 2019, I have been the Company's sole manager and I am very pleased to be now reporting on what has been another strong period of performance for the Company. Over the full financial year, the Company produced a total return of 6.6% (after all fees), comfortably beating the index total return of 4.7%.

 

My investment process

My investment process is based around the thorough analysis of a relatively small number of companies. My intention is to have a narrow but deep understanding of the market, rather than a broad but shallow understanding; I don't try to analyse a very large number of companies, but I make sure that I fully understand the 40 companies in the portfolio and another 10-15 that will be on the watchlist at any one time. The watchlist is refreshed with new ideas when I find them.

 

The most important part of my analysis is that which focuses on Return on Invested Capital ("ROIC"). Understanding ROIC and its drivers is crucial to the identification of excellent businesses, or those with the potential to become excellent businesses; and it is these two types of companies that I strive to identify. I generally refer to the former category as "Compounders" and the latter as "Improvers" and I split the portfolio (and the watchlist) down into these categories. There is a third category of investment which I refer to as "Special Opportunities". The table below shows the current split of the portfolio into these three categories. It also shows some features of each category. There are no set weightings for each category; instead, the weightings will change over time reflecting the investment opportunity set at any point in the cycle.

 

• "Compounders" are defined as companies which, in our view, have been and look set to continue to be reliable and consistent high return companies;

• "Improvers" are on the way, in our view, to achieving "Compounder" status; and

• "Special Opportunities" are as the name implies, but often include being a source of income.

 

Classification of holdings as at 31 July 2019

 

 

Compounders Average

Improvers Average

Special Opportunities

Company Average

Index Average

Average

Market Capitalisation (£m.)

48,512

39,811

29,740

43,487

16,220

Price/book (x)

6.3

1.5

2.1

4.7

2.9

Trailing 12 month dividend yield (%)

2.3

4.9

4.1

3.1

3.2

Trailing 12 month price/earnings (x)

26.4

13.7

38.4

26.3

25.2

Forward 2020 price/earnings (x)

20.2

11.6

17.1

18.1

17.0

Return on equity (%)

23.1

11.2

6.8

18.0

13.6

Operating margin (%)

22.4

15.4

15.4

19.9

15.3

Long Term Debt to Capital (%)

28.6

35.4

41.3

32.1

31.4

Number of Securities

25

8

7

40

501

Weight (%*)

61.4

23.1

 

 

Source: Factset/Fundamentals in Sterling using arithmetic averages. Cash is omitted in the summary table

* Cellnex Telecom fundamentals are omitted from the Company and index averages due to large distortions

 

For every company that I invest in, or am seriously considering investing in, I will produce a standardised financial model, a detailed piece of research that focuses on the same broad areas for each company ("Investment Thesis") and a weighted average score for each of the areas of analysis. This standardised approach fulfils two functions. First, it acts as a checklist which helps to minimise avoidable errors or omissions in my analysis and second, it enables like-for-like comparison of competing investment opportunities. The diagram in the Annual Report shows the six areas of analysis that I focus on. One important point to note is the emphasis on more than just the valuation of a company; the quality of the business and management are also very important. The focus of my analysis reflects a bias towards wanting to own good quality companies; a bias that has long been synonymous with the Company.

 

Environmental, social and governance ("ESG") considerations

My investment process focuses on two key elements: the quality of a business and the long term approach of management. When thinking about those two things and the analytical work that goes behind identifying high quality business with a long term mind set, there is naturally a high degree of overlap between my analysis and that of an "ESG-driven" approach.

 

Such investment process tends to lead me towards investing in companies that have an attractive ESG profile. However, I go beyond this bias. I mentioned earlier the six areas that my analysis focuses on. One of these six areas, as can be seen above, is ESG; in other words, I explicitly consider issues relevant to a company's ESG profile and this forms a quantitative part of my overall investment view of each company that I look at. I am well aware that as a fund manager and as an allocator of shareholders' capital, I have a responsibility to invest in a long term, socially and environmentally responsible way. I will continue to invest with this mind-set and, with the continued support and guidance of the Company's Board, I will continue to consider how I can do more.

 

In a recent piece of analysis by Kepler Trust Intelligence, the Company was identified as the highest ranking of all investment trusts in terms of our level of exposure to companies that scored well on ESG criteria. I was extremely pleased by this, especially as it was an outcome of our investment process, and not an objective. I am aware that any external "ESG score" is subject to the specifics of the process, but this provides support for my opinion that shareholders are not forced to make a choice between a financially successful investment and having an ESG conscience.

 

My approach to gearing

I see the ability to use leverage as a key advantage of the Investment Trust structure. Over the long term, good quality businesses tend to be able to grow their book value per share and, all else being equal, this should result in their share prices going up over time. By taking on gearing, I am able to increase our exposure to the high quality business that I favour.

 

For the reason outlined above, I will maintain some level of gearing in most conditions. I see a normal level of gearing as being somewhere between 2% and 6% of NAV, but at times I may be above or below these levels. What I will not try to do is to use gearing in an attempt to time prospective market moves. Instead, the Company's gearing will increase when I see attractive, stock specific, opportunities to deploy capital and will reduce when I am a net seller of existing positions, again for stock specific reasons.

 

The year under review

The table below shows the top 10 contributors and bottom 10 stock detractors over the last year.

 

Data illustrating the top ten contributors to absolute performance is set out below:

 

 

%

Koninklijke Philips

0.47

Nestlé

0.35

Koninklijke DSM

0.29

ams AG

0.23

Grifols

0.22

ASSA Abloy

0.16

Epiroc

0.16

Vivendi

0.16

Osram

0.15

Partners Group

0.15

 

Data illustrating the bottom ten detractors from absolute performance is set out below:

 

 

%

UBS

-0.04

Bayer

-0.05

Novo-Nordisk

-0.05

Orange

-0.05

Knorr-Bremse

-0.07

Renault

-0.07

Total

-0.12

Equinor

-0.14

Getlink

-0.16

SAP

-0.26

 

Starting with the strongest contributors, I will begin by mentioning a couple of stand-out performances from amongst the Improvers in the portfolio. Koninklijke DSM ("DSM") was historically a poor, polymer-focused business with average ROIC and unpredictable end markets. DSM has since transformed itself into a business that is now >75% exposed to much more profitable, higher ROIC and less volatile ingredients end markets. This transition has resulted in a material re-rating of the equity valuation of the company and I see scope for a further re-rating over the coming years.

 

Philips was originally focused on light bulbs and then on consumer electronics. Both of these markets became heavily commoditised over time and the business began to transition towards some niche, high value-add areas of healthcare equipment. Philips is now a global leader in these areas and, as with DSM, it has seen a material re-rating as it has transitioned.

 

Within the Compounders, Hermès and SAP both performed well. Hermès is reaping the rewards from a consistently long term capital allocation focus and the classic timeliness of its brands. This is an expensive company, but one that I am more than willing to run with given their well entrenched market position, exceptional ROIC profile and exposure to structural growth. SAP has been a business the Company has owned for a while and has been, at times, a source of frustration. However, towards the end of the period under review, management came out with some new medium term targets that implied a 400bps improvement in operating margins and this was taken well by the market.

 

From amongst our detractors, Equinor, the Norwegian oil & gas company, suffered from weak end markets, a higher-than-peers exposure to European gas markets and from a generally weak operational performance. Novartis, a company that I sold during the period, rallied strongly after our sale causing its negative contribution. This was disappointing, but I sold for long term fundamental reasons and I will never time every sale (or purchase) right. Finally, UBS has suffered from an underperforming Wealth Management business.

 

New additions

During the year, I sold 14 of our existing holdings and added eight new positions leading to the overall number of positions reducing from 46 to 40. This is reflective of my desire to run what I would describe as a relatively concentrated portfolio. In my view, 40 holdings provides more-than-ample diversification.

 

I initiated a position in Bawag, an Austrian bank, largely focused on retail markets. Bawag is a high Return on Tangible Equity ("ROTE") bank due to cost efficiency and its sensible capital allocation. The valuation is low and the company are seeking approval to return a significant amount of excess capital through a large share buyback program.

 

I also bought a position in Vivendi, a French media conglomerate. Vivendi, with its diverse array of controlling and minority investments, is a complex business to analyse properly, however, I see a significant undervaluation of one of its key assets, the 100% owned Universal Music Group ("UMG"). There are several positive aspects to UMG, but I am primarily attracted by its oligopolistic market position in a music market that has returned to growth and its huge long term potential for further growth as paid streaming services increase their penetration of emerging markets. Tencent has recently agreed to buy 10% of UMG, with an option to purchase a further 10% and others may come in. This process should highlight to the market the significant undervaluation of UMG and Vivendi itself.

 

Markets and outlook

As the last year has progressed, there has been a clear weakening in end market demand in several areas of the market, for example autos, semi-conductors and chemicals as three of the most obvious of these areas. All three are exposed to the vagaries of Chinese demand (and supply) as well as being exposed to sentiment around global trade; it is these two features that likely account for a large degree of their observed weakness. There are also areas of the market where demand is holding up very well: software, certain consumer staples and many areas of healthcare. These observations really sum up current market conditions; we have seen pockets of weakness, but no widespread collapse in demand. We also have to remember that the current sluggish demand environment is happening at a time of ultra loose monetary policy. This should prove supportive, especially when combined with currently inexpensive equity valuations.

 

I am finding opportunities to add to existing holdings and new positions for the watchlist. Over the past year, the Company has moved from a position of a net cash balance to a position of modest leverage. I will continue to spend my time trying to identify the best Compounders and Improvers from across Continental Europe. I look forward to updating you in my next report.

 

Jamie Ross

Fund Manager

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. In carrying out this assessment, the Board considered the market uncertainty arising from the result of the UK's negotiations to leave the European Union.

 

With the assistance of the Manager, the Board has drawn up a risk map facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The Board monitors the Manager, its other suppliers and the internal and external environments in which the Company operates to identify new and emerging risks. The Board's policy on risk management has not materially changed from last year. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

 

·      Investment activity and performance

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may result in underperformance against the Company's benchmark index and the companies in its peer group. The Board monitors investment performance at each Board meeting and regularly reviews the extent of its borrowings.

 

·      Portfolio and market

Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully, or fail entirely. A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds. The Board reviews the portfolio at each meeting and mitigates risk through diversification of investments in the portfolio.

 

·      Regulatory

A breach of Section 1158 could lead to a loss of investment trust status, resulting in capital gains realised within the portfolio being subject to corporation tax. A breach of the FCA's Listing Rules could result in suspension of the Company's shares, while a breach of the Companies Act 2006 could lead to criminal proceedings, or financial or reputational damage. The Manager is contracted to provide investment, company secretarial, administration and accounting services through qualified professionals. The Board receives internal controls reports produced by Janus Henderson on a quarterly basis, which confirm regulatory compliance.

 

·      Operational and cyber

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Company is also exposed to the operational risk that one or more of its service providers may not provide the required level of service.  The Company may also be exposed to the risk of cyber attack. The Board monitors the services provided by the Manager and its other suppliers and receives reports on the key elements in place to provide effective internal control. During the year the Board receives reports on the Manager's approach to information security and cyber attack. The Board considers the loss of the Fund Manager as a risk but this is mitigated by the experience of the team at Janus Henderson.

 

It is the Board's view that the changing nature of the institutional (non-retail) shareholder base, demographical changes (needing to make sure there is demand from the younger generation), technological changes (primarily artificial intelligence) and environmental sustainability (shareholder expectations and regulation affecting portfolio companies/stock selection and the Company's performance and demand for its shares) are emerging risks. The Board pro-actively monitors all of these factors and has a strong focus on continuing to educate itself about any relevant issues.

  

Details of how the Board monitors the services provided by Janus Henderson and its other suppliers, and the key elements designed to provide effective internal control, are explained further in the internal controls section of the Corporate Governance Statement in the Annual Report. Further details of the Company's exposure to market risk (including market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk and how they are managed are contained in the Notes to the Financial Statements within the Annual Report.

 

BORROWINGS

The Company has in place an unsecured loan facility which allows it to borrow as and when appropriate. £25 million is available under the facility (2018: £25 million). The maximum amount drawn down in the year under review was £12.6 million (2018: £20.3 million), with borrowing costs for the year totalling £35,000 (2018: £52,000). £3.6 million of the facility was in use at the year end (2018: none). Actual gearing at 31 July 2019 was 0.6% (2018: nil) of net asset value.

 

VIABILITY STATEMENT

The Company is a long term investor. The Board believes it is appropriate to assess the Company's viability over a five year period in recognition of the Company's long term horizon and what the Board believes to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented in the Strategic Report contained in the Annual Report.

 

The assessment has considered the potential impact of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark (whether from asset allocation or the level of gearing) and market risk, materialising in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

 

The Directors took into account the liquidity of the portfolio and the borrowings in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's borrowing facilities and how a breach of any covenants could impact on the Company's net asset value and share price.

 

The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period, as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment. Whilst there is currently uncertainty in the markets due to the UK's negotiations to leave the European Union, the Board does not believe that this will have a long term impact on the viability of the Company and its ability to continue in operation.

 

Based on this assessment, the Board has 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 year period.

 

RELATED PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with its Directors and the Manager. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the Annual Report.

 

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there have been no material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in the Notes to the Financial Statements within the Annual Report.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

 

(a) the Company's Financial Statements, which have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

 

(b) the Strategic Report and Financial Statements include 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 that it faces.

 

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

For and on behalf of the Board

Nicola Ralston

Chairman

4 October 2019

 

 

 

 

TWENTY LARGEST INVESTMENTS AS AT 31 JULY 2019

 

 

Company

 

Country

 

Sector

Market Value 2019

£'000

 

Percentage of Portfolio

2019

1

Koninklijke DSM

Netherlands

Specialist Nutrition and Materials Supplier

14,956

5.42

2

Nestlé

Switzerland

Food Producer

14,633

5.31

3

Novo-Nordisk

Denmark

Pharmaceuticals and Biotechnology

12,409

4.50

4

Munich Re.

Germany

Insurance

12,217

4.43

5

SAP

Germany

Enterprise Software

11,491

4.17

6

Roche

Switzerland

Pharmaceuticals and Biotechnology

11,131

4.04

7

Koninklijke Philips

Netherlands

Medical Equipment

11,013

3.99

8

Total

France

Oil and Gas Producers

10,482

3.80

9

Deutsche Telekom

Germany

Telecommunications

9,223

3.35

10

Orange

France

Telecommunications

8,371

3.04

Top 10

115,926

42.05

11

RELX

Netherlands

Data Provider

8,031

2.91

12

Vivendi

France

Media

7,941

2.88

13

Equinor

Norway

Oil and Gas Producers

7,596

2.76

14

Legrand

France

Electrical Installations

7,222

2.62

15

Partners Group

Switzerland

Private Equity Asset Manager

7,191

2.61

16

Brenntag

Germany

Chemicals

6,875

2.49

17

Getlink

France

Industrial Transportation

6,739

2.44

18

Linde

Germany

Industrial Gases

6,512

2.36

19

ASSA Abloy

Sweden

Construction and Materials

6,478

2.35

20

Deutsche Börse

Germany

Financial Services

6,437

2.34

Top 20

186,948

67.81

             

 

 

Market capitalisation of the portfolio at 31 July 2019

 

Market cap

% Portfolio weight

% Benchmark weight

>€20bn

64.8

65.9

€10bn - €20bn

24.8

17.9

€5bn - €10bn

6.2

10.8

€1bn - €5bn

4.2

5.4

 

 

Performance drivers over the year ended 31 July 2019

 

 

%

Benchmark Return

4.7

Sector Allocation

-0.5

Stock Selection

2.6

Currency Movements (relative to index)

0.1

Effect of Cash and Gearing

0.5

Effect of Ongoing Charge (including performance fee)

-0.8

NAV Total Return

6.6

 

Source: Morningstar for the AIC, Janus Henderson Investors

 

 

AUDITED INCOME STATEMENT

 

 

Year ended 31 July 2019

Year ended 31 July 2018

 

Revenue

return

£'000

Capital

return

£'000

 

Total

return

£'000

Revenue

return

£'000

Capital

return

£'000

 

Total

return

£'000

Gains on investments held

at fair value through profit or loss

(note 2)

-

11,687

11,687

-

11,264

11,264

Investment income (note 3)

7,830

-

7,830

8,758

-

8,758

Other income

10

-

10

3

-

3

 

---------

----------

---------

---------

----------

---------

 

 

 

 

 

 

 

Gross revenue and capital

gains

7,840

11,687

19,527

8,761

11,264

20,025

 

 

 

 

 

 

 

Management and performance fees

(329)

(1,318)

(1,647)

(331)

(1,325)

(1,656)

 

 

 

 

 

 

 

Other administrative expenses

(468)

-

(468)

(491)

-

(491)

 

---------

----------

---------

---------

----------

---------

Net return before finance costs and taxation

7,043

10,369

17,412

7,939

9,939

17,878

 

 

 

 

 

 

 

Finance costs

(7)

(28)

(35)

(10)

(42)

(52)

 

---------

----------

---------

---------

----------

---------

Net return before taxation

7,036

10,341

17,377

7,929

9,897

17,826

 

 

 

 

 

 

 

Taxation on net return

(904)

-

(904)

(912)

-

(912)

 

---------

----------

---------

---------

----------

---------

Net return after taxation

6,132

10,341

16,473

7,017

9,897

16,914

 

=====

=====

=====

=====

=====

=====

 

 

 

 

 

 

 

Return per ordinary share -

basic and diluted (note 4)

29.0p

48.8p

77.8p

33.1p

46.7p

79.8p

 

=====

=====

=====

=====

=====

=====

 

The total return column of this statement represents the Income Statement of the Company.

 

All revenue and capital items in the above statement derive from continuing operations. 

 

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the AIC. 

 

The Company had no recognised gains or losses other than those disclosed in the Income Statement.

 

 

 

AUDITED STATEMENT OF CHANGES IN EQUITY

 

Year ended 31 July 2019

Called up

share

capital

£'000

 

Share

premium

account

£'000

 

Capital

redemption reserve

£'000

 

Capital

reserves

£'000

 

 

Revenue

reserve

£'000

 

Total shareholders'

funds

£'000

 

At 1 August 2018

1,060

41,032

263

213,061

8,700

264,116

Net return after taxation

-

-

-

10,341

6,132

16,473

Final dividend paid in respect of

  the year ended 31 July 2018

  (paid 21 November 2018)

-

-

-

-

(4,767)

(4,767)

Interim dividend paid in respect of

  the year ended 31 July 2018

  (paid 26 April 2019)

-

-

-

-

(1,695)

(1,695)

Refund of unclaimed dividends over 12 years old

-

-

-

-

2

2

 

----------

-----------

----------

-----------

----------

------------

At 31 July 2019

1,060

41,032

263

223,402

8,372

274,129

 

======

======

======

=======

======

=======

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended 31 July 2018

Called up

share

capital

£'000

 

Share

premium

account

£'000

 

Capital

redemption reserve

£'000

 

Capital

reserves

£'000

 

 

Revenue

reserve

£'000

 

Total shareholders'

funds

£'000

 

At 1 August 2017

1,060

41,032

263

203,164

7,191

252,710

Net return after taxation

-

-

-

9,897

7,017

16,914

Final dividend paid in respect of

  the year ended 31 July 2017

  (paid 22 November 2017)

-

-

-

-

(3,813)

(3,813)

Interim dividend paid in respect of

  the year ended 31 July 2018

  (paid 27 April 2018)

-

-

-

-

(1,695)

(1,695)

 

----------

-----------

----------

-----------

----------

------------

At 31 July 2018

1,060

41,032

263

213,061

8,700

264,116

 

======

======

======

=======

======

=======

 

 

 

 

 

 

 

 

 

AUDITED STATEMENT OF FINANCIAL POSITION

 

 

As at 31 July 2019

£'000

As at 31 July 2018

£'000

Fixed assets

Fixed asset investments held at fair value through

profit or loss

 

 

Listed at market value  -  overseas

275,693

255,372

 

----------

----------

 

 

 

Current assets

 

 

Debtors

1,639

1,049

Cash and cash equivalents

1,775

8,372

 

----------

---------

 

3,414

9,421

 

 

 

Creditors: amounts falling due within one year

(4,978)

(677)

 

----------

---------

Net current (liabilities)/assets

(1,564)

8,744

 

----------

---------

Total assets less current liabilities

274,129

264,116

 

----------

---------

Net assets 

274,129

264,116

 

======

======

 

 

 

Capital and reserves

 

 

Called up share capital

1,060

1,060

Share premium account

41,032

41,032

Capital redemption reserve

263

263

Capital reserves

223,402

213,061

Revenue reserve

8,372

8,700

 

-----------

-----------

Total shareholders' funds

274,129

264,116

 

======

======

 

 

 

Net asset value per ordinary share

  (basic and diluted)

1,293.9p

1,246.7p

 

======

======

 

 

NOTES TO THE FINANCIAL STATEMENTS

 

1.

Accounting policies

 

(a)

Basis of preparation

 

 

The Company is a registered investment company as defined in section 833 of the Companies Act 2006 and is incorporated in the United Kingdom. It operates in the United Kingdom and is registered at 201 Bishopsgate, London EC2M 3AE.

 

The Financial Statements have been prepared in accordance with the Companies Act 2006, FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts ("the SORP") issued in November 2014 and updated in February 2018.

 

The principal accounting policies applied in the presentation of these Financial Statements are set out below. These policies have been consistently applied to all the years presented. There have been no significant changes to the accounting policies compared to those set out in the Company's Annual Report for the year ended 31 July 2018.

 

As an investment company the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment company meets all the following conditions: substantially all of the entity's investments are highly liquid, substantially all of the entity's investments are carried at market value, and the entity provides a statement of changes in equity. The Directors have assessed that the Company meets all of these conditions.

 

The Financial Statements have been prepared under the historical cost basis except for the measurement at fair value of investments. In applying FRS 102, financial instruments have been accounted for in accordance with Section 11 and 12 of the standard.

 

All of the Company's operations are of a continuing nature.

 

The preparation of the Company's Financial Statements on occasion requires the Directors to make judgements, estimates and assumptions that affect the reported amounts in the primary financial statements and the accompanying disclosures. These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on circumstance.

 

The Directors do not believe that any accounting judgements or estimates have been applied to this set of Financial Statements that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.

 

 

 

 

(b)

Going concern

The assets of the Company consist of securities that are readily realisable and, accordingly, the Directors believe that the Company has adequate resources to continue in operational existence for at least 12 months from the date of approval of the Financial Statements. Having assessed these factors, the principal risks and other matters discussed in connection with the viability statement, the Board has determined that it is appropriate for the Financial Statements to be prepared on a going concern basis.

 

 

 

 

2.

Gains on investments held at fair value through profit or loss

 

 

 

2019

£'000

2018

£'000

 

 

Gains on sale of investments based on historical cost

9,774

32,850

 

 

Less: Revaluation gains recognised in previous years

(19,857)

(38,236)

 

 

 

------------

------------

 

 

 

 

 

 

 

Losses on investments sold in the year based on carrying value at previous statement of financial position date

(10,083)

(5,386)

 

 

Revaluation of investments held at 31 July

22,210

16,545

 

 

Exchange (losses)/gains

(440)

105

 

 

 

----------

----------

 

 

 

11,687

11,264

 

 

 

======

======

 

 

 

 

3.

Investment income

2019

£'000

2018

£'000

 

 

Overseas dividend income

7,830

8,758

 

 

 

----------

----------

 

 

 

7,830

8,758

 

 

 

=====

=====

 

 

 

 

 

 

4.

Return per ordinary share - basic and diluted

 

 

The total return per ordinary share is based on the net return attributable to the ordinary shares of £16,473,000 (2018: £16,914,000) and on 21,185,541 ordinary shares (2018: 21,185,541), being the weighted average number of shares in issue during the year. The total return can be further analysed as follows:

 

 

 

 

 

 

 

 

2019

£'000

2018

£'000

 

 

Revenue return

6,132

7,017

 

 

Capital return

10,341

9,897

 

 

 

----------

----------

 

 

Total return

16,473

16,914

 

 

 

======

======

 

 

Weighted average number of ordinary shares

21,185,541

21,185,541

 

 

 

 

 

 

 

 

2019 Pence

2018

Pence

 

 

Revenue return per ordinary share

29.0

33.1

 

 

Capital return per ordinary share

48.8

46.7

 

 

 

----------

----------

 

 

Total return per ordinary share

77.8

79.8

 

 

 

======

======

 

 

 

 

 

 

 

The Company has no securities in issue that could dilute the return per ordinary share. Therefore the basic and diluted return per ordinary share are the same.

 

 

 

 

 

 

5.

Dividends on ordinary shares

 

 

2019

£'000

 

Revenue available for distribution by way of dividend for the year

6,132

 

Interim dividend of 8.0p paid 26 April 2019

(1,695)

 

Proposed final dividend for the year ended 31 July 2019 of 23.0p

(based on 21,185,541 ordinary shares in issue at 4 October 2019)

(4,873)

 

 

-----------

 

Undistributed revenue for Section 1158 purposes*

(436)

 

 

======

 

*There is no undistributed revenue in the current year. £436,000 will be paid from revenue reserves. In the prior year undistributed revenue comprised 6.3% of the total income of £8,761,000.

 

The proposed final dividend of 23.0p per share for the year ended 31 July 2019 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these Financial Statements. The final dividend will be paid on 20 November 2019 to shareholders on the register of members at the close of business on 18 October 2019. The shares will be quoted ex-dividend on 17 October 2019.

 

All dividends have been paid or will be paid out of revenue profits and revenue reserves.

 

 

 

6.

Net asset value per ordinary share (basic and diluted)

 

The net asset value per ordinary share of 1,293.9p (2018: 1,246.7p) is based on the net assets attributable to ordinary shares of £274,129,000 (2018: £264,116,000) and on 21,185,541 (2018: 21,185,541) ordinary shares in issue at the year end. There were 20,000 shares held in Treasury at the year end (2018: 20,000).

 

 

7.

Called up share capital

 

 

 

 

Number of shares entitled to dividend

 

Total number of shares

Nominal value of shares

£'000

 

Allotted and issued ordinary shares of 5p each at the end of the year ended 31 July 2018

 

21,185,541

21,205,541

1,060

 

 

 

 

 

 

 

 

 

-----------------

----------------

----------

 

At 31 July 2019

 

21,185,541

21,205,541

1,060

 

 

 

=========

=========

=====

 

 

 

 

 

 

 

During the year the Company issued no shares (2018: none).

 

During the year the Company repurchased no shares (2018: none).

 

Shares held in treasury (2019: 20,000; 2018: 20,000) are not entitled to receive a dividend.

 

Since 31 July 2019, no further shares have been repurchased or issued (2018: nil).

 

 

8.

2019 financial information

 

The figures and financial information for the year ended 31 July 2019 are extracted from the Company's Annual Financial Statements for that period and do not constitute statutory financial statements for that period. The Company's Annual Financial Statements for the year ended 31 July 2019 have been audited but have not yet been delivered to the Registrar of Companies. The Independent Auditors' Report on the 2019 Financial Statements was unqualified, did not include a reference to any matter to which the Auditors drew attention without qualifying the report, and did not contain any statements under sections 498(2) and 498(3) of the Companies Act 2006.

 

 

9.

2018 financial information

 

The figures and financial information for the year ended 31 July 2018 are extracted from the Company's Annual Financial Statements for that period and do not constitute statutory financial statements for that period. The Company's Annual Financial Statements for the year ended 31 July 2018 have been audited and delivered to the Registrar of Companies. The Independent Auditors' Report on the 2018 Financial Statements was unqualified, did not include a reference to any matter to which the Auditors drew attention without qualifying the report, and did not contain any statements under sections 498(2) and 498(3) of the Companies Act 2006.

 

 

10.

Annual Report and Annual General Meeting

 

The Annual Report for the year ended 31 July 2019 will be posted to shareholders in October 2019 and copies will be available from the Corporate Secretary at the Company's Registered Office, 201 Bishopsgate, London EC2M 3AE.

 

The Annual General Meeting will be held at the registered office on Wednesday 13 November 2019 at 2.30pm. The Notice of the Annual General Meeting will be posted to shareholders with the Annual Report.

 

 

11.

Website

This document, and the Annual Report for the year ended 31 July 2019, will be available on the following website: www.hendersoneurotrust.com.

                   

 

For further information please contact:

 

Jamie Ross

Fund Manager, Henderson EuroTrust plc

Telephone: 020 7818 5260

 

James de Sausmarez

Director and Head of Investment Trusts,

Janus Henderson Investors

Telephone: 020 7818 3349

 

Laura Thomas

Investment Trust PR Manager

Janus Henderson Investors

Tel: 020 7818 2636 

 

 

 

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.

 

 

 

 


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