Annual Financial Report
The European Investment Trust plc
Annual Financial Report for the year ended 30 September 2011
The full Annual Report and Financial Statements can be accessed via the
Company's website at www.theeuropeaninvestmenttrust.com or by contacting the
Company Secretary by telephone on 0131 270 3800.
HIGHLIGHTS
- Net asset value total return for the year -12.1%, outperforming FTSE
All-World Europe ex UK Index total return -13.6%
- Proposed ordinary dividend of 12.0p and special dividend of 4.0p, a total of
16.0p, an increase of 14.3%
- Recent market weakness used as an opportunity to buy high quality companies
on low valuations
- Three year borrowing facility of Euro 30m available for investment
opportunities
Company Summary
Investment objective
To achieve long-term capital growth through a diversified portfolio of
Continental European securities. A detailed description of the Company's
investment policy is set out in the Extracts from the Directors' Report.
Shareholders' funds
£237,350,000 at 30 September 2011.
Market capitalisation
£196,103,000 at 30 September 2011.
Capital structure
As at 30 September 2011 and at the date of this report, the Company had
42,400,748 ordinary shares of 25p each in issue.
Savings plans
The Company's ordinary shares are eligible for inclusion in ISAs, Junior ISA's
and SIPPs. Savings Plans and ISAs are available through the BNP Paribas -
Edinburgh Partners Savings Scheme and ISA, both for lump sum investments and
regular contributions. Details may be obtained from Edinburgh Partners or
through the Company's website www.theeuropeaninvestmenttrust.com.
AIC
The Company is a member of the Association of Investment Companies.
Investment Manager
Edinburgh Partners Limited ("Edinburgh Partners")
Investment management fee
0.55% per annum of the Company's market capitalisation payable quarterly in
arrears.
Financial Summary
30 September 2011 30 September Change
2010
Results for year
Shareholders' funds £237.35m £277.85m (14.6)%
Net asset value per ordinary share 559.78p 650.69p (14.0)%
("NAV")
Share price per ordinary share 462.50p 545.00p (15.1)%
Share price discount to NAV 17.4% 16.2%
Year to Year to
30 September 2011 30 September
2010
Revenue return per ordinary share* 16.97p 13.79p
Capital return per ordinary share* (94.35)p 7.60p
Total return per ordinary share* (77.38)p 21.39p
Final dividend per ordinary share** 12.00p 11.00p
Special dividend per ordinary share 4.00p 3.00p
**
Total dividend per ordinary share** 16.00p 14.00p
* Based on the weighted average number of shares in issue during the year.
** Proposed dividend for the year.
Year to Year to
30 September 2011 30 September 2010
Year's high/low
NAV - high 733.11p 673.28p
- low 544.58p 559.84p
Share price - high 621.00p 576.00p
- low 450.13p 465.50p
Share price discount to NAV
- low 11.0% 11.3%
- high 18.7% 18.4%
Year to Year to
30 September 2011 30 September 2010
Performance
NAV Total Return (12.1)% +4.8%
FTSE All-World Europe ex UK Index Total (13.6)% +2.3%
Return*
* In sterling.
The NAV Total Return is sourced from Edinburgh Partners and includes dividends
reinvested. Prior to 1 February 2010, the investment manager was F&C Management
Limited ("F&C") and NAV returns were sourced from F&C. The index performance
figures are sourced from Thomson Reuters Datastream. Past performance is not a
guide to future performance.
Year to Year to
30 September 2011 30 September 2010
Cost of running the Company
Total expense ratio* 0.60% 0.64%
* Based on total expenses for the year and average net asset value.
Chairman's Statement
Results
In the year to 30 September 2011, a difficult period for European equity
markets, the net asset value per share ("NAV") of your Company fell by 14.0%
from 650.7p to 559.8p. After taking account of dividends paid in the year of
14.0p, the total return was -12.1%. While it was disappointing to see a
negative return it represented an outperformance of 1.5% when compared with the
total return of -13.6% from the FTSE All-World Europe Index, excluding the UK
and adjusted to sterling. The Company's share price fell by 15.1% from 545.0p
to 462.5p and the discount to net asset value widened from 16.2% to 17.4%.
Since the appointment of Edinburgh Partners as Investment Manager on 1 February
2010 the NAV total return in the twenty month period to 30 September 2011 was
-4.9%. This was an outperformance of 2.6% when compared with the total return
of -7.5% from the FTSE All-World Europe Index, excluding the UK and adjusted to
sterling.
Revenue
I am pleased to report that there was a very significant increase in the
revenue return per share which rose by 23.2% from 13.8p to 17.0p in the year to
30 September 2011. This increase was principally achieved as a result of the
portfolio strategy of moving to higher yielding stocks, which was detailed in
last year's report. There was a marginal reduction in total expenses when
compared with last year and the Company also benefited from a reduction in the
Company's overall tax rate from 11% to 10%.
It was good to note in a recent study by the Association of Investment
Companies ("AIC") that your Company has one of the lowest expense ratios of all
Investment Trusts and the lowest in the AIC European sector. The total expense
ratio fell from 0.64% to 0.60% in the financial year.
Dividend
As a result of the increased income generation from the portfolio in the year
to 30 September 2011, the Board is recommending a final dividend of 12.0p per
share and a special dividend of 4.0p per share, a total of 16.0p per share.
This year's dividend compares with dividends in 2010 of 14.0p per share, which
consisted of a final dividend of 11.0p per share and a special dividend of 3.0p
per share. Overall the total dividend of 16.0p represents an increase of 14.3%
on the previous year's total dividend.
Subject to the approval of shareholders at the Annual General Meeting on 17
January 2012, the final dividend of 12.0p and special dividend of 4.0p will be
paid on 31 January 2012 to shareholders on the register at the close of
business on 6 January 2012. The ex-dividend date will be 4 January 2012.
Share buybacks
The Company bought back and cancelled 300,000 shares during the financial year
at a total cost of £1.7m. The shares bought back represented 0.7% of the share
capital in issue at the beginning of the Company's financial year on 1 October
2010. Over the past two years the Company has bought back a total of 3,352,000
shares, over 7% of the shares in issue at the start of the period.
The Directors will propose at the Annual General Meeting on 17 January 2012
that the Company's powers to make further purchases of up to 14.99% of its
shares in issue be renewed.
Portfolio activity
While the Investment Manager's investment strategy remains focussed on
individual stock selection, with an emphasis on dividend generation and balance
sheet strength, the principal sector changes made during the year were to
increase exposure to the consumer goods, consumer services and industrials
sectors. These moves were offset by reductions in the basic materials and
technology sectors. The principal geographic changes were to increase the
Company's exposure to Switzerland, Italy and the Netherlands to 19.8%, 10.4%
and 16.2% of net assets respectively (2010: 10.9%, 7.2% and 13.4%). These
increases were offset by a reduction in the investment in France to 14.3%
(2010: 20.5%) and smaller reductions in a number of other European countries,
including a full disposal of the Company's Austrian investment. The number of
investments increased marginally from 39 to 42.
Gearing
Following the recent fall in equity markets, the Board, on the recommendation
of the Investment Manager, considered it would be appropriate to have the
ability to borrow monies on behalf of the Company. Shortly before the year end,
in September 2011, the Company entered into a Euro 30m secured multicurrency
revolving loan facility agreement with Scotiabank Europe PLC. The facility is
available for three years and interest will be payable on amounts drawn down at
the rate of 1.55% per annum above the British Bankers' Association Interest
Settlement Rate. If fully utilised it would result in a gearing level of
approximately 10% of net assets. To date no amount has been drawn under this
facility.
Savings Scheme
The Company's ordinary shares are eligible for inclusion in ISAs, Junior ISAs
and SIPPs. Savings Plans and ISAs are available through the BNP Paribas -
Edinburgh Partners Savings Scheme and ISA, both for lump sum investments and
regular contributions. Details may be obtained from the Investment Manager,
Edinburgh Partners, or through the Company's website
www.theeuropeaninvestmenttrust.com.
Association of Investment Companies
We continue to support the activities of the AIC, including their input on
proposals made by the UK Government and the European Union in relation to the
political and regulatory framework in which your Company operates.
Annual General Meeting
We hope that as many shareholders as possible will attend the Annual General
Meeting which will be held at 11.00 am on Tuesday, 17 January 2012 at Brewers'
Hall, Aldermanbury Square, London EC2V 7HR. We look forward to meeting all
shareholders who are able to attend.
Outlook
Whilst the economic outlook is uncertain and will remain so until the Eurozone
debt crisis is resolved, the portfolio strategy being pursued is clear. The
valuation of many high quality European companies fell sharply during the final
quarter of our financial year, providing the opportunity to buy a number of
companies on low valuations. The common characteristic of these purchases was
that a significant proportion of their forecast earnings derives from emerging
economies where we expect higher levels of long-term growth. Portfolio sales
were companies with lower long-term growth prospects and higher risk profiles,
trading on similar or higher valuations. The net effect of the activity should
be to increase the long-term growth prospects of the portfolio.
Douglas McDougall
Chairman
28 November 2011
Investment Manager's Report and Portfolio Analysis
Economic and Investment Overview
It has been an eventful year for financial markets and in particular for
European equities. Macroeconomic uncertainty is to the fore and the European
sovereign debt crisis has weighed heavily on markets.
The European Union has brought many benefits to its participants. It has also
brought imbalances. The financial fault lines in Europe emanate from monetary
union without fiscal union and the region now needs to decide if further
political and fiscal integration is a long-term objective it genuinely desires.
The much debated austerity programmes, bank recapitalisations and rescue funds
are all important parts of the solution, but are only part of a larger
framework. Given the history of Europe and the high stakes, it is far more
likely a solution will evolve over time than appear overnight. With the markets
applying pressure, this could mean we stumble from one mini-crisis to another
as the situation develops.
The Eurozone crisis is obviously not the only issue of macroeconomic relevance.
Government bond prices have been telling us for some time that deflation is
likely. However, if history is any guide, the most likely outcome following a
financial crisis is that inflation will provide the least painful route out of
the problem. If the outturn is inflation, is this good for equities? As with
many economic questions, the answer is yes and no. Yes, in that during
inflationary periods equities tend to deliver the best risk adjusted returns
when compared to the other main asset classes. However, the negative side of
unanticipated inflation would be a likely de-rating of corporate profits.
Despite the uncertainties detailed above, the outlook is not all negative.
Developing economies are likely to grow at a faster pace than developed
economies and this will be of benefit to many European companies. One outcome
of the current economic uncertainty could be the removal of structural
hindrances in European economies. This is certainly not something the market is
focusing on but could provide for a very positive long-term investment
environment.
Portfolio Strategy
Against what has been a very difficult investment backdrop we have found the
positive features to inform our portfolio strategy. Many European companies
with strong internationally recognised brands have spent recent decades
diversifying from their home markets and building promising positions in
emerging markets. Many of these companies are at, or close to, a tipping point,
where profit growth from emerging markets will make a more significant
contribution to overall profits than growth from their mature markets.
Unilever is a good example. It is the Anglo-Dutch food and personal care group
with household brand names such as Flora, Magnum, Hellmann's, PG Tips, Dove and
Persil. Unilever currently generates approximately 50% of its profit from
emerging markets and this is forecast to grow to over 70%. Even if there is no
growth in the next five years in developed markets, the group should be able to
grow its profits in the mid single digit range. This profit growth alone can
justify the valuation.
Other portfolio investments which are similarly positioned are: Julius Baer
(private banking), Pernod Ricard (spirits), Adidas (sporting goods), Heineken
(beer), Swatch (Omega and Breguet luxury brands), and Michelin (tyres).
Even if the outlook for European economies is one of pedestrian growth, there
are potential investment opportunities to be found in companies exposed to
emerging markets. Many of these companies trade on lower valuation multiples
than their global peers simply because of their listing on a European stock
exchange.
Where we do have exposure to companies which rely on developed European markets
for their profits, these companies display sector leadership, visible or
structural growth, or very low valuations.
Examples of the first two types of company include:
â— D'Ieteren - This Belgian company's main asset is Belron, the leading vehicle
glass repair and replacement company in the world, trading as Autoglass in the
UK. There is no global peer to Belron. Insurance companies are happy to refer
customers to Autoglass as their vans can repair a chipped windscreen rather
than automatically replacing it, thus making a considerable saving. The
resultant benefits of scale and market share gains are leading to strong cash
flow generation, with low sensitivity to the economic situation.
â— SAP - This German company is a leading global provider of enterprise resource
software. Whilst most of its profits are from the developed world, the
visibility of its revenue and profits comes from the `mission-critical' nature
of its product. The company has experienced a 99% renewal rate from customers
and is in the process of rolling out new products.
The third category referred to above relates to companies trading on very low
valuations. In uncertain times it is tempting to invest only in companies
perceived to have `high quality' characteristics. The problem with this
strategy is that many other investors come to the same conclusion and
valuations are rarely cheap.
Your portfolio has followed a balanced strategy. We have invested in some
higher quality companies where volatile markets have given good entry
valuations. The portfolio also contains a number of companies that fit into the
unloved category. Whilst we have no holdings in Greece or Portugal at present,
approximately 20% of the Company's assets are invested in Irish, Italian and
Spanish companies. The majority of the positions here are in international
companies that have suffered valuation compression, not because of their profit
delivery but because their countries of domicile have been the subject of
seemingly endless negative newsflow.
A good example is the Italian listed company Prysmian, which is a leading
provider of cable to the energy and telecommunications sectors. It is a
beneficiary of an increasing demand for bandwidth (optical fibre) as well as
much needed infrastructure spending to upgrade power transmission and
distribution networks. Having acquired one of its main competitors, Draka, the
company should deliver acquisition synergies as well as steady underlying
growth.
Outlook
One could be quite dispirited when looking at the current range of
macroeconomic issues facing European economies and stock markets. However, we
are fortunate that we can invest in companies that can operate successfully
notwithstanding the challenging backdrop. Following recent stock market falls,
current valuations are attractive, although we do have to acknowledge that they
could stay so for some time. With at least some of the issues discounted in
valuations, we will remain fully invested in a portfolio of undervalued
European equities. The strengths of our investment process include experienced
people, an appropriate time horizon and a strong valuation discipline. In
current market conditions these qualities will be necessary to achieve the
Company's objective of achieving long-term capital growth for shareholders.
We were pleased the Board agreed to take on the gearing facility referred to in
the Chairman's Statement and would anticipate being able to identify additional
good investment opportunities to deploy this facility during its three-year
term.
Dale Robertson
Edinburgh Partners Limited
28 November 2011
Portfolio of Investments
as at 30 September 2011
20 largest equity investments
% of
Company Sector Country Valuation Net Assets
£'000
Ahold Consumer Services Netherlands 7,659 3.2
Imtech Industrials Netherlands 7,417 3.1
Sanofi Health Care France 7,281 3.1
CAF Industrials Spain 6,946 2.9
Telecom Italia Telecommunications Italy 6,845 2.9
DCC Industrials Ireland 6,756 2.8
Total Oil & Gas France 6,574 2.8
Vivendi Consumer Services France 6,412 2.7
Unilever Consumer Goods Netherlands 6,387 2.7
Royal Dutch Shell Oil & Gas Netherlands 6,371 2.7
Ryanair Consumer Services Ireland 6,323 2.7
Swedbank Financials Sweden 6,320 2.6
ENI Oil & Gas Italy 6,193 2.6
Intesa Sanpaolo Financials Italy 6,103 2.6
Banque Cantonale Financials Switzerland 6,100 2.6
Vaudoise
SAP Technology Germany 5,984 2.5
Gazprom Oil & Gas Russia 5,975 2.5
ABB Industrials Switzerland 5,847 2.5
GEA Group Industrials Germany 5,774 2.4
Belgacom Telecommunications Belgium 5,697 2.4
Total - 20 largest equity investments 128,964 54.3
Other investments
Gerresheimer Health Care Germany 5,608 2.4
Heineken Consumer Goods Netherlands 5,580 2.4
Nokia Technology Finland 5,552 2.3
Kabel Deutschland Consumer Services Germany 5,491 2.3
Deutsche Post Industrials Germany 5,362 2.3
Gategroup Consumer Services Switzerland 5,361 2.3
Novartis Health Care Switzerland 5,349 2.3
Prysmian Industrials Italy 5,331 2.3
Pernod Ricard Consumer Goods France 5,271 2.2
Banco Bilbao Vizcaya Financials Spain 5,097 2.1
Argentaria
Reed Elsevier Consumer Services Netherlands 5,088 2.1
UBS Financials Switzerland 5,084 2.1
Actelion Health Care Switzerland 5,010 2.1
Adidas Consumer Goods Germany 4,887 2.1
Swatch Consumer Goods Switzerland 4,875 2.1
Julius Baer Financials Switzerland 4,834 2.0
D'Ieteren Consumer Services Belgium 4,757 2.0
Michelin Consumer Goods France 4,355 1.8
Syngenta Basic Materials Switzerland 4,276 1.8
Teleperformance Consumer Services France 3,940 1.7
Amadeus Industrials Spain 3,881 1.6
Aixtron Technology Germany 2,727 1.1
Total - 42 equity i 236,680 99.7
nvestments
Cash and other net 670 0.3
assets
Net assets 237,350 100.0
The geographic distribution is based on each investment's principal stock
exchange listing, except in instances where this would not give a proper
indication of where its activities predominate.
Of the ten largest portfolio investments as at 30 September 2011 the valuations
at the previous year end, 30 September 2010, were Ahold £8,640,000; Sanofi £
7,253,000; DCC £6,585,000; Total £6,687,000; Vivendi £8,433,000 and Royal Dutch
Shell £7,478,000. The remaining four investments, Imtech, CAF, Telecom Italia
and Unilever were new purchases made during the year ended 30 September 2011.
Distribution of Investments
as at 30 September 2011 (% of net assets)
Sector distribution
Sector %
Industrials 19.9
Consumer Services 19.0
Financials 14.0
Consumer Goods 13.3
Oil & Gas 10.6
Health Care 9.9
Technology 5.9
Telecommunications 5.3
Basic Materials 1.8
Cash and other net 0.3
assets
100.0
Geographical distribution
Country %
Switzerland 19.8
Netherlands 16.2
Germany 15.1
France 14.3
Italy 10.4
Spain 6.6
Ireland 5.5
Belgium 4.4
Sweden 2.6
Russia 2.5
Finland 2.3
Cash and other net 0.3
assets
100.0
The geographic distribution is based on each investment's principal stock
exchange listing, except in instances where this would not give a proper
indication of where its activities predominate.
Directors
All of the Directors are non-executive and independent of the Investment
Manager.
Douglas C P McDougall OBE (Chairman)
William D Eason
Ralph Kanza
Michael B Moule (Senior Independent Director)
Extracts from the Directors' Report
The Directors present their Annual Report and Audited Financial Statements for
the year to 30 September 2011.
Business review
Financial reporting requirements direct that the Company is required to provide
a business review within the Directors' Report. The business review must
contain a review of the Company's business, the principal risks and
uncertainties it faces, an analysis of its performance during the financial
year, the position at the year end and the future business plans of the
Company. It must also provide information about the Company's environmental,
social and ethical policy and about persons with whom the Company has
contractual or other arrangements essential to the business of the Company. To
aid understanding of these areas the Board is required to include analysis
using appropriate Key Performance Indicators.
Forward looking statements
This business review contains "forward looking statements" with respect to the
Company's plans and its current goals and expectations relating to its future
financial condition, performance and results. By their nature, all forward
looking statements involve risk and uncertainty because they relate to future
events that are beyond the Company's control. Factors that could cause actual
results to differ materially from those estimated by the forward looking
statements include, but are not limited to:
• Continental European economic conditions and equity market performance and
prices.
• Changes in Continental European Government policies and monetary and interest
rate policies.
• Changes to regulations and taxes, both in the UK and Continental Europe.
• Changes to consumer spending or saving habits and the impact of inflation and
deflation.
• European currency exchange rates.
• The Company's success in managing its assets and business to manage the above
factors and use of gearing.
As a result, the Company's actual future condition, performance and results may
differ materially from the plans set out in the Company's forward looking
statements. The Company undertakes no obligation to update the forward looking
statements contained within this review or any other forward looking statements
it makes.
Business and status of the Company
The Company is registered as a public limited company and is an investment
company within the terms of Section 833 of the Companies Act 2006. The Company
has received approval from HM Revenue & Customs as an approved investment trust
under Section 842 of the Income and Corporation Taxes Act 1988 for the period
from inception to 30 September 2008 and for the two years to 30 September 2010
under Sections 1158 and 1159 of the Corporation Tax Act 2010 ("CTA"). This
approval is subject to there being no subsequent enquiry under corporation tax
self-assessment. In the opinion of the Directors, the Company has subsequently
directed its affairs so as to enable it to continue to qualify for such
approval and the Company will continue to seek approval each year.
The Company's shares are listed on the Official List of the UK Listing
Authority and traded on the main market of the London Stock Exchange. The
Company has a secondary listing on the New Zealand Stock Exchange.
A review of the Company's activities during the year is given in the Chairman's
Statement and in the Investment Manager's Report and Portfolio Analysis.
Objective
The objective of The European Investment Trust plc is to achieve long-term
capital growth through a diversified portfolio of Continental European
securities.
Investment policy
The Board believes that investment in the diverse and increasingly accessible
markets of this region provides opportunities for capital growth over the
long-term. At the same time it considers the structure of the Company as a UK
listed investment trust, with fixed capital and an independent Board of
Directors, to be well suited to investors seeking longer-term returns.
The Board recognises that investment in some European countries can be riskier
than in others. Investment risks are diversified through holding a wide range
of securities in different countries and industrial sectors. No more than 10%
of the value of the portfolio in aggregate may be held in securities in those
countries which are not included in the FTSE All-World European indices.
The Board has the authority to hedge the Company's exposure to movements in the
rate of exchange of currencies, principally the euro, in which the Company's
investments are denominated, against sterling, its reporting currency. However,
it is not generally the Board's practice to do this and the portfolio is not
currently hedged.
No investments in unquoted stocks can be made without the prior approval of the
Board. The level of gearing within the portfolio is agreed by the Board and
should not exceed 20% in normal market conditions.
No more than 10% of the total assets of the Company may be invested in other
listed investment companies (including investment trusts) except in such other
investment companies which themselves have stated that they will invest no more
then 15% of their total assets in other listed investment companies, in which
case the limit is 15%.
The Manager's compliance with the limits set out in the investment policy is
monitored by the Board.
Investment strategy
Investments are selected for the portfolio only after extensive research which
the Investment Manager believes to be key. The whole process through which an
equity must pass in order to be included in the portfolio is very rigorous.
Only a security where the Investment Manager believes that the price will be
significantly higher in the future will pass the selection process. The
Company's Investment Manager believes the key to successful stock selection is
to identify the long-term value of a company's shares and to have the patience
to hold the shares until that value is appreciated by other investors.
Identifying long-term value involves detailed analysis of company's earning
prospects over a five-year time horizon. The portfolio will normally consist of
40 to 50 investments.
Portfolio analysis
The Company has observed and intends to observe the investment restrictions
necessary to achieve and maintain approved investment trust status in the
United Kingdom and to comply with the Listing Rules of the Financial Services
Authority ("FSA"). No single investment will represent more than 15% of the
Company's gross assets at the time of its acquisition.
A detailed review of how the Company's assets have been invested is contained
in the Investment Manager's Report and Portfolio Analysis. A detailed list of
all the Company's investments is contained in the Portfolio of Investments
above. The Portfolio of Investments details that the Company held 42
investments, excluding cash and other net assets, as at 30 September 2011, with
the largest representing 3.2% of net assets, thus ensuring that the Company has
a suitable spread of investment risk. A sector and geographical distribution of
investments is shown above.
Principal risks and uncertainties
The Board considers that the following are the principal risks associated with
investing in the Company: investment and strategy risk, discount volatility
risk, market risk (comprising interest rate risk, currency risk and other price
risk), liquidity risk, credit risk and gearing risk. An explanation of these
risks and how they are managed and the policy and practice with regard to
financial instruments are contained in note 18.
In addition, the Board also considers the following as principal risks:
Regulatory risk
Relevant legislation and regulations which apply to the Company include the
Companies Act 2006, the Corporation Tax Act 2010 ("CTA") and the FSA Listing
Rules. A breach of the CTA could result in the Company losing its status as an
investment trust and becoming subject to capital gains tax, whilst a breach of
the Listing Rules might result in censure by the FSA. The Company has noted the
recommendations of the UK Corporate Governance Code, the AIC Code of Corporate
Governance ("AIC Code") and the relevant AIC Corporate Governance Guide for
Investment Companies. Its statement of compliance appears in the full Annual
Report and Financial Statements for the year ended 30 September 2011.
At each Board meeting the status of the Company is considered and discussed, so
as to ensure that all regulations are being adhered to by the Company and its
service providers.
The Board is not aware of any breaches of laws or regulations during the year
under review and up to the date of this report.
Operational risk
In common with most other investment companies the Company has no employees;
the Company therefore relies upon the services provided by third parties. There
are a number of operational risks associated with the fact that third parties
undertake the Company's administration and custody. The main risk is that the
third parties may fail to ensure that statutory requirements, such as
compliance with the Companies Act and FSA Listing Rules, are met.
The Board regularly receives and reviews management information from third
parties which the Secretary compiles. In addition, each of the third parties
provides a copy of its report on internal controls (SAS 70, AAF or equivalent)
to the Board each year.
Financial risk
Inappropriate accounting policies or failure to comply with current or new
accounting standards may lead to a breach of regulations.
The Investment Manager employs independent administrators to prepare all
Financial Statements and the Audit and Management Engagement Committee meets
with the independent Auditor at least once a year to discuss all financial
matters including appropriate accounting policies.
The Company is a member of the AIC, a trade body intended to promote investment
trusts which also develops best practice for all its members.
The Board undertakes an annual assessment and review of all the risks stated
above and in note 18, together with a review of any new risks which may have
arisen during the year. These risks are formalised within the Company's risk
assessment matrix.
Performance
Net asset value
The net asset value per ordinary share ("NAV") at 30 September 2011 was 559.78p
(2010: 650.69p).
Results
The results for the year are set out in the Income Statement and the
Reconciliation of Movements in Shareholders' Funds below.
Dividends
The Directors recommend a final dividend of 12.0p per ordinary share and a
special dividend of 4.0p per ordinary share (2010: final dividend of 11.0p and
special dividend of 3.0p), making a total dividend of 16.0p per ordinary share
(2010: 14.0p). If approved by shareholders, these dividends will be payable on
31 January 2012 to shareholders on the register at the close of business on 6
January 2012. The ex-dividend date will be 4 January 2012.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objective. The key performance
indicators used to measure progress and performance of the Company over time
are established industry measures and are as follows:
• Net asset value per ordinary share total return compared to the FTSE
All-World Europe ex UK Total Return Index adjusted to sterling.
• Share price premium/discount to net asset value per share.
• Total expense ratio.
The records of the key performance indicators are shown in the Financial
Summary above and in the Ten Year Record in the full Annual Report and
Financial Statements.
The Board also takes into consideration how the Company performs compared to
other investment trusts investing in Europe.
Share capital
During the year ended 30 September 2011 the Company purchased 300,000 ordinary
shares (with a nominal value of £75,000) for cancellation, representing 0.70%
of the issued share capital at 30 September 2010, for an aggregate amount of £
1,735,000. The shares were required in line with the Board's policy to purchase
shares at below net asset value per share and when in the interests of
shareholders.
The Company made no share issues during the year ended 30 September 2011. As at
30 September 2011 and as at the date of this report, the Company had 42,400,748
ordinary shares of 25p each in issue.
At general meetings of the Company, one vote is attached to each ordinary share
in issue.
Current and future developments
A review of the main features of the year and the outlook for the coming year
is to be found in the Chairman's Statement and the Investment Manager's Report
and Portfolio Analysis above. The Board's main focus is on the investment
return and approach. Attention is paid to the integrity and success of the
investment approach and on factors which may have an impact on this approach.
Due regard is paid to the promotion of the Company including communication with
shareholders and other external parties. The Board is regularly updated on
wider investment trust industry issues. Detailed papers are presented to the
Board which lead to extensive discussion on development and strategy.
Social, environmental and ethical policy
The Company seeks to invest in companies that are well managed, with high
standards of corporate governance as the Directors believe this creates the
proper conditions to enhance long-term value for shareholders. The Company
adopts a positive approach to corporate governance and engagement with
companies.
In pursuit of the above objective, the Directors believe that proxy voting is
an important part of the corporate governance process and considers seriously
its obligation to manage the voting rights of companies in which it is
invested, for which it has delegated responsibility to its Investment Manager.
It is the policy of the Company to vote, as far as is practicable, at all
shareholder meetings of investee companies. The Company follows the relevant
applicable regulatory and legislative requirements in the UK, with the guiding
principles being to make proxy voting decisions which favour proposals that
will lead to maximising shareholder value while avoiding any conflicts of
interest. Voting decisions are based on an agreed policy framework, with the
key issues on which the Investment Manager focuses being corporate governance,
including disclosure and transparency, board composition and independence,
control structures, remuneration and social and environmental issues.
The Company itself has no employees and all the Directors are non-executive.
The day-to-day management of the Company's business has been delegated to the
Company's Investment Manager, Edinburgh Partners, who have an Environmental,
SRI and Corporate Governance ("ESG") policy in place, which can be found on
their website www.edinburghpartners.com.
Investment Management Agreement
The Company's investments are managed by Edinburgh Partners under an Investment
Management Agreement dated 29 January 2010. The Investment Manager receives a
management fee of 0.55% per annum of the Company's market capitalisation,
payable quarterly in arrears. The Investment Management Agreement may be
terminated by either party giving three months written notice. No additional
compensation is payable to Edinburgh Partners on the termination of this
agreement other than the fees payable during the notice period. No performance
fee is payable. The costs of the Company's share savings scheme are initially
invoiced by the scheme's administrator to the Investment Manager and are
subsequently re-imbursed by the Company. Further details relating to the
Investment Management Agreement are detailed in note 3.
Appointment of the Investment Manager
The Board keeps the performance of the Investment Manager under review through
the Audit and Management Engagement Committee. The Company appointed Edinburgh
Partners as Investment Manager with effect from 1 February 2010. It is the
opinion of the Directors that the continuing appointment of Edinburgh Partners
on the terms agreed is in the interests of shareholders as a whole. The reasons
for this view are that the investment performance is satisfactory relative to
that of the markets in which the Company invests and because the remuneration
of the Investment Manager is reasonable both in absolute terms and compared to
that of managers of comparable investment companies. The Directors believe that
by paying the investment management fee calculated on a market capitalisation
basis, rather than a percentage of assets basis, the interests of the
Investment Manager are more closely aligned with those of shareholders.
The full Annual Report contains the following statements regarding
responsibility for the Annual Report and Financial Statements (references in
the following statements are to pages in the Annual Report).
Management Report and Statement of Directors' Responsibilities in Relation to
the Annual Report and the Financial Statements
Management report
Listed companies are required by the FSA's Disclosure and Transparency Rules
(the "Rules") to include a management report within their Annual Report and
Financial Statements.
The information required to be included in the management report for the
purpose of these Rules is included in the Chairman's Statement, the Investment
Manager's Report and Portfolio Analysis and the Business Review contained in
the Directors' Report. Therefore no separate management report has been
included.
Statement of Directors' responsibilities in relation to the Annual Report and
Financial Statements
The Directors are responsible for preparing the Annual Report, the Directors'
Remuneration Report and the Financial Statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare Financial Statements for each
financial year. Under that law the Directors have prepared the Financial
Statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable law). Under
company law the Directors must not approve the Financial Statements unless they
are satisfied that they give a true and fair view of the state of affairs of
the Company and of the profit or loss of the Company for that period. In
preparing these Financial Statements, the Directors are required to:
â— select suitable accounting policies and then apply them consistently;
â— make judgements and accounting estimates that are reasonable and prudent;
â— state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the Financial Statements
respectively; and
â— 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 keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the Financial Statements and the Directors'
Remuneration Report 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.
Each of the Directors, whose names and functions are listed in the Directors'
Report confirm that, to the best of their knowledge:
• the Financial Statements, which have been prepared in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law), give a true and fair view of the assets,
liabilities, financial position and loss of the Company; and
• the Directors' 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 that it faces.
The Directors confirm that, so far as they are each aware, there is no relevant
audit information of which the
Company's Auditors are unaware; and each Director has taken all the steps that
ought to have been taken as a Director to make himself aware of any relevant
audit information and to establish that the Company's Auditors are aware of
that information.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website. The work
carried out by the Auditors does not include consideration of these matters
and, accordingly, the Auditors accept no responsibility for any changes that
may have occurred to the Financial Statements since they were initially
presented on the website. Legislation in the UK governing the preparation and
dissemination of Financial Statements may differ from legislation in other
jurisdictions.
On behalf of the Board
Douglas McDougall
Chairman
28 November 2011
Non-Statutory Accounts
The financial information set out below does not constitute the Company's
statutory Financial Statements for the year ended 30 September 2011 but is
derived from those Financial Statements. Statutory Financial Statements for the
year ended 30 September 2011 will be delivered to the Registrar of Companies in
due course. The Auditors have reported on those Financial Statements; their
report was (i) unqualified, (ii) did not include a reference to any matters to
which the Auditors drew attention by way of emphasis without qualifying their
report and (iii) did not contain a statement under Section 498 (2) or (3) of
the Companies Act 2006. The text of the Auditors' report can be found in the
Company's full Annual Report and Financial Statements on the Company's website
at www.theeuropeaninvestmenttrust.com and on the Edinburgh Partners' website at
www.edinburghpartners.com.
Income Statement
for the year ended 30 September 2011
2011 2010
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on 9 - (40,182) (40,182) - 3,616 3,616
investments at fair
value
Foreign exchange (7) 158 151 (10) (287) (297)
(losses)/gains
Income 2 9,734 - 9,734 8,554 - 8,554
Investment management 3 (1,311) - (1,311) (1,199) - (1,199)
fee
Other expenses 4 (381) - (381) (531) 2 (529)
Net return before 8,035 (40,024) (31,989) 6,814 3,331 10,145
finance costs and
taxation
Finance costs 5 (31) - (31) - - -
Net return before 8,004 (40,024) (32,020) 6,814 3,331 10,145
taxation
Tax on ordinary 6 (806) - (806) (772) - (772)
activities
Net return attributable 7,198 (40,024) (32,826) 6,042 3,331 9,373
to shareholders
pence pence pence pence pence pence
Return per ordinary 8 16.97 (94.35) (77.38) 13.79 7.60 21.39
share*
* Based on the weighted average number of shares in issue during the year.
All revenue and capital items in the above statement derive from continuing
operations.
The total column of this statement is the Profit and Loss Account of the
Company. The revenue and capital return columns are prepared under guidance
published by the Association of Investment Companies ("AIC").
A separate Statement of Total Recognised Gains and Losses has not been prepared
as all such gains and losses are included in the Income Statement.
The notes form part of these Financial Statements.
Balance Sheet
as at 30 September 2011
2011 2010
Note £'000 £'000
Fixed assets investments:
Investments at fair value through profit 9 236,680 268,944
or loss
Current assets:
Debtors 11 1,454 4,474
Cash at bank and short-term deposits 5,294 9,789
6,748 14,263
Creditors: amounts falling due within one 12 6,078 5,360
year
Net current assets 670 8,903
Net assets 237,350 277,847
Capital and reserves:
Called up share capital 13 10,600 10,675
Share premium account 123,749 123,749
Capital redemption reserve 8,211 8,136
Capital reserve 83,426 125,185
Revenue reserve 11,364 10,102
Total shareholders' funds 237,350 277,847
pence pence
Net asset value per ordinary share 14 559.78 650.69
These Financial Statements were approved and authorised for issue by the Board
of Directors on 28 November 2011 and were signed on its behalf by:
Douglas McDougall
Chairman
The notes form part of these Financial Statements.
Reconciliation of Movements in Shareholders' Funds
for the year ended 30 September 2011
Called Share Capital
up
share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Year ended 30
September 2011
At 1 October 2010 10,675 123,749 8,136 125,185 10,102 277,847
Net return after - - - (40,024) 7,198 (32,826)
taxation for the year
Dividends paid 7 - - - - (5,936) (5,936)
Shares purchased and 13 (75) - 75 (1,735) - (1,735)
cancelled
At 30 September 2011 10,600 123,749 8,211 83,426 11,364 237,350
Year ended 30
September 2010
At 1 October 2009 11,438 123,749 7,373 137,330 10,265 290,155
Net return after - - - 3,331 6,042 9,373
taxation for the year
Dividends paid 7 - - - - (6,205) (6,205)
Shares purchased and (763) - 763 (15,476) - (15,476)
cancelled
At 30 September 2010 10,675 123,749 8,136 125,185 10,102 277,847
The notes form part of these Financial Statements.
Cash Flow Statement
for the year ended 30 September 2011
2011 2010
Note £'000 £'000
Operating activities:
Investment income received 10,522 7,855
Interest received - 10
Investment management fees paid (1,317) (1,164)
Other cash payments (348) (493)
Net cash inflow from operating activities 15 8,857 6,208
Serving of finance:
Interest paid (31) (21)
Taxation:
UK tax paid - (863)
Overseas tax paid (1,292) (801)
Overseas tax recovered 372 39
Total taxation paid (920) (1,625)
Capital expenditure and financial
investment:
Purchases of investments (121,735) (225,428)
Sales of investments 116,848 251,252
Exchange gains on settlement 425 406
Net cash (outflow)/inflow from capital and (4,462) 26,230
financial investment
Equity dividends paid 7 (5,936) (6,205)
Net cash (outflow)/inflow before financing (2,492) 24,587
Financing:
Payment for own shares purchased and (1,735) (16,306)
cancelled
(Decrease)/increase in cash 16 (4,227) 8,281
The notes form part of these Financial Statements.
Notes to the Financial Statements
at 30 September 2011
1. Accounting policies
Basis of accounting
The Financial Statements are prepared on a going concern basis, under the
historical cost convention (modified to include fixed assets investments at
fair value), in accordance with the Companies Act 2006, UK Generally Accepted
Accounting Practice ("UK GAAP") and with the AIC Statement of Recommended
Practice issued in January 2009 relating to the Financial Statements of
Investment Trust Companies and Venture Capital Trusts. All the Company's
activities are continuing. The Financial Statements have been prepared in
accordance with the applicable accounting standards.
Income recognition
Dividend and other investment income is included as revenue (except where in
the opinion of the Directors, its nature indicates it should be recognised as
capital) on the ex-dividend date or, where no ex-dividend date is quoted, when
the Company's right to receive payment is established. Income arising on
holdings of fixed income securities is recognised on a time apportionment basis
so as to reflect the effective interest rate on that security. Deposit interest
is included on an accruals basis.
Dividends are accounted for in accordance with Financial Reporting Standard 16:
"Current Taxation" on the basis of income actually receivable, without
adjustment for the tax credit attaching to the dividends. Dividends from
overseas companies are shown gross of withholding tax.
Where the Company has elected to receive its dividends in the form of
additional shares rather than in cash (scrip dividends), the amount of the cash
dividend foregone is recognised as income. Any excess in the value of the
shares received over the amount of the cash dividend foregone is recognised in
the capital reserve.
Borrowings
Loans and overdrafts are recorded at the proceeds received, net of issue costs,
irrespective of the duration of the instrument.
Finance costs, including interest, are accrued using the effective interest
rate method. See below for allocation of finance costs within the Income
Statement.
Expenses and finance costs
All expenses are accounted for on an accruals basis. All operating expenses
including finance costs and investment management fees are charged through
revenue in the Income Statement except costs that are incidental to the
acquisition or disposal of investments, which are charged to capital in the
Income Statement. Transaction costs are included within the gains and losses on
investment sales, as disclosed in the Income Statement. No performance fees are
charged by the Investment Manager.
Investments
All investments held by the Company are classified as `fair value through
profit or loss'. Investments are initially recognised at cost, being the fair
value of the consideration given. Interest accrued on fixed interest rate
securities at the date of purchase or sale is accounted for separately as
accrued income, so that the value or purchase price or sale proceeds is shown
net of such items.
After initial recognition, investments are measured at fair value, with changes
in the fair value of investments and impairment of investments recognised in
the Income Statement and allocated to capital. Gains and losses on investments
sold are calculated as the difference between sales proceeds and cost.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the Balance Sheet date, without adjustment for
transaction costs necessary to realise the asset. Investments which are not
quoted or which are not frequently traded are stated at Directors' best
estimate of fair value, using the guidelines on valuation published by the
International Private Equity and Venture Capital Association. This represents
the Directors' view of the amount for which an asset could be exchanged between
knowledgeable willing parties in an arm's length transaction. This does not
assume that the underlying business is saleable at the reporting date or that
its current shareholders have any intention to sell their holding in the near
future. Where no reliable fair value can be estimated, investment may be
carried at cost less any provision for impairment.
Foreign currency
The functional and presentational currency of the Company is sterling because
that is the currency of the primary economic environment in which the Company
operates.
Transactions denominated in foreign currencies are converted to sterling at the
actual exchange rate as at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the year end are reported at
the rate of exchange to sterling at the Balance Sheet date. Any gain or loss
arising from a change in exchange rate subsequent to the date of the
transaction is included as an exchange gain or loss in the capital reserve or
in revenue depending on whether the gain or loss is of a capital or revenue
nature.
Taxation
The charge for taxation is based on the net return for the year and takes into
account taxation deferred or accelerated because of timing differences between
the treatment of certain items for accounting and taxation purposes. Full
provision for deferred taxation is made under the liability method, without
discounting, on all timing differences that have arisen but not been reversed
by the Balance Sheet date, unless such provision is not permitted by Financial
Reporting Standard 19: "Deferred Tax". This is subject to deferred tax assets
only being recognised if it is considered more likely than not that there will
be suitable profits from which the future reversal of the underlying timing
differences can be deducted. Timing differences are differences arising between
the Company's taxable profits and its results as stated in the Financial
Statements which are capable of reversal in one or more subsequent years.
Capital redemption reserve
The nominal value of ordinary share capital purchased and cancelled is
transferred out of called-up share capital and into the capital redemption
reserve on the relevant trade date.
Capital reserve
Capital reserve - arising on investments sold
The following are accounted for in this reserve:
- gains and losses on the realisation of investments;
- realised foreign exchange differences of a capital nature;
- costs of professional advice (including related irrecoverable VAT) relating
to the capital structure of the Company;
- other capital charges and credits charged or credited to this account in
accordance with the above policies; and
- costs of purchasing ordinary share capital.
Capital reserve - arising on investments held
The following are accounted for in this reserve:
- increases and decreases in the valuation of investments held at the year end;
and
- unrealised foreign exchange differences of a capital nature.
Dividends payable to shareholders
Under Financial Reporting Standard 21: "Events after the Balance Sheet Date",
final and special dividends are recognised as a liability in the year in which
they have been approved by shareholders in a general meeting.
2. Income
2011 2010
£'000 £'000
Income from investments:
Overseas dividends 9,734 8,527
UK net dividend income - 17
9,734 8,544
Other income:
Bank interest - 10
- 10
Total income 9,734 8,554
3. Investment management fee
2011 2010
Total Total
£'000 £'000
Investment management fee 1,311 1,199
Edinburgh Partners Limited was appointed to provide investment management,
marketing and general administrative services to the Company with effect from 1
February 2010. Under the agreement Edinburgh Partners Limited is entitled to a
fee paid quarterly in arrears, at the rate of 0.55% per annum of the market
capitalisation of the Company. No performance fee will be paid.
During the year ended 30 September 2011 the investment management fees payable
to Edinburgh Partners Limited totalled £1,311,000 (2010: Edinburgh Partners
Limited: £497,000 and F&C Management Limited: £702,000).
At 30 September 2011 there was £301,000 outstanding payable to Edinburgh
Partners Limited (2010: £307,000 payable to Edinburgh Partners Limited).
4. Other expenses
2011 2010
£'000 £'000
Auditors' remuneration for:
Audit services 18 28
Other services - 35
Directors' remuneration* 78 78
Other 285 390
381 531
* See the Directors' Remuneration Report in the full Annual Report and
Financial Statements for the year ended 30 September 2011.
5. Finance costs
2011 2010
£'000 £'000
Loan arrangement fee 26 -
Loan non-utilisation fee 5 -
31 -
On 19 September 2011 the Company entered into a €30,000,000 secured
multicurrency revolving loan facility agreement with Scotiabank Europe PLC for
the purpose of pursuing its investment objective. The facility is available for
three years and interest will be payable on amounts drawn down at the rate of
1.55% above the British Bankers' Association Interest Settlement Rate.
As at 30 September 2011, this facility had not been utilised. A non-utilisation
fee of 0.5% per annum is payable.
6. Tax on ordinary activities
a) Analysis of charge for 2011 2010
the year
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Current tax:
UK corporation tax - - - - - -
Overseas tax suffered 806 - 806 801 - 801
Additional tax credits - - - (29) - (29)
Current tax charge for the 806 - 806 772 - 772
year
Deferred tax:
Timing differences - - - - - -
Total tax charge for the 806 - 806 772 - 772
year
b) The current taxation charge for the year ended 30 September 2011 is lower
than the standard rate of corporation tax in the UK of 27% (2010: 28%) (NB. The
standard rate of corporation tax was 28% to 31 March 3011 and 26% from 1 April
2011). The differences are explained below:
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before 8,004 (40,024) (32,020) 6,814 3,331 10,145
taxation
Theoretical tax at UK 2,161 (10,806) (8,645) 1,908 933 2,841
corporation tax rate of
27% (2010: 28%)
Effects of:
- UK dividends that are - - - (5) - (5)
not taxable
- Foreign dividends that (2,195) - (2,195) (2,030) - (2,030)
are not
taxable
- Non-taxable investment - 10,806 10,806 - (933) (933)
gains
- Disallowed expenses 13 - 13 15 - 15
- Unrelieved excess 21 - 21 133 - 133
expenses
- Overseas tax suffered 806 - 806 801 - 801
- Additional tax credits - - - (29) - (29)
- Double taxation relief - - - (21) - (21)
806 - 806 772 - 772
c) Factors that may affect future tax charges
At 30 September 2011 the Company had unrelieved management expenses of £552,000
(2010: £476,000). It is unlikely that the Company will generate sufficient
taxable income in the future to use these expenses to reduce future tax charges
and therefore no deferred tax asset has been recognised.
In addition due to the Company's status as an investment trust and the
intention to continue meeting the conditions required to obtain approval in the
foreseeable future, the Company has not provided deferred tax on any capital
gains and losses arising on the revaluation or disposal of investments.
7. Dividends
2011 2010
Declared and paid Payment date £'000 £'000
Final dividend for the year ended 30 September 31 January 2011 4,664 -
2010 of 11.0p
Special dividend for the year ended 30 31 January 2011 1,272 -
September 2010 of 3.0p
Final dividend for the year ended 30 September 25 January 2010 - 4,654
2009 of 10.2p
Special dividend for the year ended 30 25 January 2010 - 1,551
September 2009 of 3.4p
5,936 6,205
The Directors recommend a final dividend in respect of the year ended 30
September 2011 of 12.0p and a special dividend of 4.0p payable on 31 January
2012 to all shareholders on the register at close of business on 6 January
2012, a total of 16.0p (2010: 14.0p). The ex-dividend date will be 4 January
2012. The recommended final dividend and special dividend are subject to
approval by shareholders at the Annual General Meeting to be held on 17 January
2012. Based on 42,400,748 ordinary shares in issue at the date of this report,
the total dividend payment will amount to £6,784,000. In accordance with
Financial Reporting Standard 21: "Events after the Balance Sheet date", final
dividends and special dividends are accounted for in the period in which they
are approved by shareholders. The recommended final dividend and special
dividend have therefore not been included as a liability in these Financial
Statements.
2011 2010
Proposed £'000 £'000
2011 final dividend of 12.0p (2010: 11.0p) per ordinary share* 5,088 4,664
2011 special dividend of 4.0p (2010: 3.0p) per ordinary share* 1,696 1,272
6,784 5,936
* Based on 42,400,748 shares in issue at 28 November 2011.
8. Return per ordinary share
2011 2010
Net Ordinary Per Net Ordinary Per
return shares* share return Shares* share
£'000 pence £'000 pence
Net revenue return 7,198 42,420,474 16.97 6,042 43,818,474 13.79
after taxation
Net capital return (40,024) 42,420,474 (94.35) 3,331 43,818,474 7.60
after taxation
Total return (32,826) 42,420,474 (77.38) 9,373 43,818,474 21.39
* Weighted average number of ordinary shares in issue during the year.
9. Listed investments
2011 2010
£'000 £'000
Analysis of investment portfolio
movements
Opening book cost 250,224 247,335
Opening investment holding gains 18,720 42,732
Opening valuation 268,944 290,067
Movements in the year:
Purchases at cost 122,427 229,071
Sales - proceeds (114,509) (253,810)
Sales - realised gains on sales 10,633 27,628
Investment holding losses (50,815) (24,012)
Closing valuation 236,680 268,944
Closing book cost 268,775 250,224
Closing investment holding (losses)/ (32,095) 18,720
gains
236,680 268,944
2011 2010
£'000 £'000
Analysis of capital gains and losses
Gains on sales 10,633 27,628
Investment holding losses (50,815) (24,012)
(Losses)/gains on investments (40,182) 3,616
Fair value hierarchy
In accordance with Financial Reporting Standard 29: "Financial Instruments:
Disclosures", the Company must disclose the fair value hierarchy that
classifies 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 1. All of the Company's financial instruments fall into Level 1, being
valued at quoted prices in active markets.
Transaction costs
During the year ended 30 September 2011 the Company incurred transaction costs
of £237,000 (2010: £384,000) and £191,000 (2010: £255,000) on purchases and
sales of investments respectively. These amounts are included in losses/gains
on investments at fair value, as disclosed in the Income Statement.
10. Significant holdings
The Company had no holdings of 3% or more of the share capital of any portfolio
companies.
11. Debtors
2011 2010
£'000 £'000
Due from brokers 929 3,268
Dividends receivable - 796
Taxation recoverable 501 387
Prepayments and accrued income 24 23
1,454 4,474
12. Creditors: amounts falling due within one year
2011 2010
£'000 £'000
Due to brokers 5,563 4,872
Other creditors and accruals 214 181
Management fee accrued 301 307
6,078 5,360
13. Called up share capital
2011 2010
£'000 £'000
Allotted, called-up and fully paid:
42,400,748 (2010: 42,700,748) ordinary shares of 25p 10,600 10,675
each
During the year to 30 September 2011, 300,000 ordinary shares were purchased
and cancelled at a cost of £1,735,000 (2010: 3,052,000 ordinary shares were
purchased and cancelled at a cost of £15,476,000).
Duration of the Company
The Company does not have a termination date or the requirement for any
periodic continuation votes.
14. Net asset value per ordinary share
30 September 30 September
2011 2010
Net asset value per ordinary share 559.78p 650.69p
The net asset value per ordinary share is based on net assets of £237,350,000
(2010: £277,847,000) and on 42,400,748 (2010: 42,700,748) ordinary shares,
being the number of ordinary shares in issue at the year end.
15. Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
2011 2010
£'000 £'000
Net return before finance costs and taxation (31,989) 10,145
Adjust for returns from non-operating activities:
- Losses/(gains) on investments 40,182 (3,616)
- Foreign exchange (gains)/losses of a capital nature (158) 287
- Non-operating expenses of a capital nature - (2)
Return from operating activities 8,035 6,814
Adjustment for non-cash flow items:
- Decrease/(increase)in debtors and accrued income 795 (679)
- Increase in creditors and accruals 27 73
Net cash inflow from operating activities 8,857 6,208
16. Reconciliation of net cash flows to movement in net cash
2011 2010
£'000 £'000
Movement in net cash resulting from cash flows (4,227) 8,281
Foreign exchange movements (268) (692)
Movement in net cash (4,495) 7,589
Net cash brought forward 9,789 2,200
Net cash carried forward 5,294 9,789
Analysis of net cash
At Foreign At
1 October Cash exchange 30 September
2010 flows movement 2011
£'000 £'000 £'000 £'000
Cash at bank 9,789 (4,227) (268) 5,294
Foreign
At Cash exchange At
1 October flows movement 30 September
2009 2010
£'000 £'000 £'000 £'000
Cash at bank 2,200 8,281 (692) 9,789
17. Analysis of financial assets and liabilities
Interest rate and currency profile
The interest rate and currency profile of the Company's financial assets and
liabilities were:
2011 2010
Cash Cash
No flow No flow
interest interest interest interest
rate rate rate rate
risk risk
Total exposure exposure Total exposure exposure
£'000 £'000 £'000 £'000 £'000 £'000
Equity shares
Euro 177,649 177,649 - 226,073 226,073 -
Swiss franc 46,736 46,736 - 30,155 30,155 -
Swedish krona 6,320 6,320 - 5,651 5,651 -
US dollar 5,975 5,975 - 7,065 7,065 -
Sterling - - - - - -
Cash at bank and short-term
deposits
Euro 4,934 - 4,934 9,716 - 9,716
Sterling 360 - 360 73 - 73
Debtors
Euro 1,316 1,316 - 978 978 -
Swiss franc 114 114 - 133 133 -
Swedish krona - - - 3,268 3,268 -
US dollar - - - 72 72 -
Sterling 24 24 - 19 19 -
NZ dollar - - - 4 4 -
Short-term creditors
Euro (2,715) (2,715) - (4,276) (4,276) -
Swiss franc (1,232) (1,232) - - - -
US dollar (1,616) (1,616) - (596) (596) -
Sterling (515) (515) - (488) (488) -
237,350 232,056 5,294 277,847 268,058 9,789
18. Risk analysis
The Company is an investment company, listed on the London Stock Exchange, and
conducts its affairs so as to qualify in the United Kingdom ("UK") as an
investment trust under the provisions of Sections 1158 and 1159 of the
Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK
from corporation tax on capital gains on its portfolio of investments.
As an investment trust, the Company invests in equities and makes other
investments so as to achieve its investment objective of long-term capital
growth through a diversified portfolio of Continental European securities. In
pursuing its investment objective, the Company is exposed to risks which could
result in a reduction of either or both of the value of the net assets and the
profits available for distribution by way of dividend. The Board, together with
the Investment Manager, is responsible for the Company's risk management, as
set out in detail in the Business Review of the Directors' Report.
The principal risks the Company faces are:
• Investment and strategy risk
• Discount volatility risk
• Market risk (comprising: interest rate risk, currency risk and other price
risk)
• Liquidity risk
• Credit risk
• Gearing risk
The Investment Manager monitors the risks affecting the Company on an ongoing
basis within the policies and guidelines determined by the Board. The Directors
receive financial information, which is used to identify and monitor risk,
quarterly. The Company may enter into derivative contracts to manage risk but
has not done so to date. A description of the principal risks the Company faces
is detailed below and in the Business Review of the Directors' Report.
Investment and strategy risk
There can be no guarantee that the objective of the Company will be achieved
due to poor stock selection or as a result of being geared in a falling market
or ungeared in a rising market.
The Investment Manager meets regularly with the Board to discuss the portfolio
performance and strategy. The Board receives bi-monthly reports from the
Investment Manager detailing all portfolio transactions and any other
significant changes in the market or stock outlooks. Details of the investment
policy are given in the Extracts from the Directors' Report above.
Discount volatility risk
The Board recognises that it is in the long-term interests of shareholders to
reduce discount volatility and believes that the prime driver of discounts over
the longer term is investment performance. The Company is permitted to employ
gearing, a process whereby funds are borrowed principally for the purpose of
purchasing securities should the Board consider that it is appropriate to do
so. The use of gearing can magnify discount volatility.
The Board actively monitors the discount at which the Company's shares trade
but it does not intend to issue a precise discount target at which shares will
be bought back as it believes that the announcement of specific targets is
likely to hinder rather than help the successful execution of a buy-back
policy. Equally, the Company will issue shares in order to meet demand as it
arises.
The Board's commitment to allot or repurchase ordinary shares is subject to the
Directors being satisfied that any offer to allot or to purchase shares is in
the best interests of shareholders of the Company as a whole.
Market Risk
Interest rate risk
The Company's assets and liabilities, excluding short-term debtors and
creditors, may comprise financial instruments which include investments in
fixed interest securities.
Details of the Company's interest rate exposure as at 30 September 2011 are
disclosed in note 17 of these Financial Statements.
The majority of the Company's assets were non-interest bearing as at 30
September 2011. There was limited exposure to interest bearing liabilities
during the year ended 30 September 2011.
If interest rates had reduced by 0.25% (2010: 0.25%) from those obtained as at
30 September 2011 it would have the effect, with all other variables held
constant, of reducing the net revenue return before taxation and therefore
reducing net assets on an annualised basis by £13,000 (2010: £24,000). If there
had been an increase in interest rates of 0.25% (2010: 0.25%) there would have
been an equal and opposite effect in the net revenue return before taxation.
The calculations are based on cash at bank and short-term deposits as at 30
September 2011 and these may not be representative of the year as a whole. This
level of change is considered to be reasonable based on observation of current
market conditions.
Currency risk
The base currency of the Company is sterling. The international nature of the
Company's investment activities gives rise to a currency risk which is inherent
in the performance of its overseas investments. The Company's overseas income
is also subject to currency fluctuations.
It is not the Company's policy to hedge this risk on a continuing basis.
Details of the Company's foreign currency risk exposure as at 30 September 2011
are disclosed in note 17 of these Financial Statements.
If sterling had strengthened by 10% against all other currencies on 30
September 2011, with all other variables held constant, it would have the
effect of reducing the net capital return before taxation and therefore
reducing net assets by £23,750,000 (2010: £27,820,000). If sterling had
weakened by 10% against all other currencies there would have been an equal and
opposite effect on the net capital return before taxation. This level of change
is considered to be reasonable based on observation of current market
conditions.
Other price risk
The Company is exposed to market risk due to fluctuations in the market prices
of its investments. Market 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 Investment Manager monitors the
prices of financial instruments held by the Company on an ongoing basis.
The Investment Manager actively monitors market and economic data and reports
to the Board, which considers investment policy on a regular basis. The net
asset value per share of the Company is issued daily to the London Stock
Exchange and the New Zealand Stock Exchange and is also available on the
Company's website www.theeuropeaninvestmenttrust.com and on the Edinburgh
Partner's website www.edinburghpartners.com.
Fixed asset investments are valued at their fair value. Details of the
Company's investment portfolio as at 30 September 2011 are disclosed above. In
addition an analysis of the investment portfolio by sector and geographical
distribution is also detailed above.
The maximum exposure to other price risk at 30 September 2011 is the fair value
of investments of £236,680,000 (2010: £268,944,000).
If the investment portfolio valuation fell by 20% from the amount detailed in
the Financial Statements as at 30 September 2011 it would have the effect, with
all other variables held constant, of reducing the net capital return before
taxation and therefore reducing net assets by £47,336,000 (2010: £53,789,000).
An increase of 20% in the investment portfolio valuation would have an equal
and opposite effect on the net capital return before taxation. The calculations
are based on the Company's other price risk at 30 September 2011 and may not be
representative of the year as a whole. This level of change is considered to be
reasonable based on observation of current market conditions.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in
meeting obligations associated with financial liabilities. The Company's policy
with regard to liquidity is to ensure continuity of funding. Short-term
flexibility is achieved through cash management and increased borrowing,
including the use of overdraft facilities.
Liquidity risk is not considered significant as the Company's assets comprise
of readily realisable securities which are industrially and geographically
diverse and which can be sold freely to meet funding requirements if necessary.
Securities listed on a recognised stock exchange have been valued at bid prices
and exchange rates ruling at the close of business on 30 September 2011. In
certain circumstances, the market prices at which investments are valued may
not represent the realisable value of those investments, taking into account
both the size of the Company's holding and the frequency with which such
investments are traded. The Company does not normally invest in derivative
products. The Investment Manager reviews liquidity at the time of making each
investment decision. The Board reviews liquidity exposure at each meeting.
Credit risk
Credit risk is the risk of financial loss to the Company if the contractual
party to a financial instrument fails to meet its contractual obligations.
The carrying amounts of financial assets best represent the maximum credit risk
exposure at the Balance Sheet date. There are no financial assets which are
either past due or impaired.
The Company's listed investments are held on its behalf by JPMorgan Chase Bank,
NA acting as the Company's custodian. Bankruptcy or insolvency of the custodian
may cause the Company's rights with respect to securities held by the custodian
to be delayed. The Board monitors the Company's risk by reviewing the
custodian's internal controls reports.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Manager. Transactions are
ordinarily undertaken on a delivery versus payment basis whereby the Company's
custodian ensures that the counterparty to any transaction entered into by the
Company has delivered in its obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable
and of high credit quality.
The maximum exposure to credit risk as at 30 September 2011 was £243,428,000
(2010: £283,207,000). The calculation is based on the Company's credit risk
exposure as at 30 September 2011 and this may not be representative of the year
as a whole.
Gearing risk
The aim of gearing is to enhance long-term returns to shareholders by investing
borrowed funds in equities and other assets. The Company is permitted to employ
gearing should the Board consider it appropriate to do so. The Board's policy
is that the level of gearing should not exceed 20% in normal market conditions.
The use of gearing can cause both gains and losses in the asset value of the
Company to be magnified.
On 19 September 2011 the Company entered into a €30,000,000 loan facility with
Scotiabank Europe PLC. As at 30 September 2011 none of this facility had been
utilised and the Company therefore had no gearing at the year end (2010: £nil).
The Board undertakes an annual assessment and review of all the risks stated
above and in the Extracts from the Directors' Report together with a review of
any new risks which may have arisen during the year. These risks are formalised
within the Company's risk assessment matrix.
19. Capital management policies
The objective of the Company is to achieve long-term capital growth through a
diversified portfolio of Continental European securities. In pursuing this
long-term objective, the Board has a responsibility for ensuring the Company's
ability to continue as a going concern. It must therefore maintain an optimal
capital structure through varying market conditions. This involves the ability
to: issue and buy back share capital within limits set by the shareholders in
general meeting; borrow monies in the short and long-term: and pay dividends to
shareholders out of current year revenue earnings as well as out of brought
forward revenue reserves.
Changes to ordinary share capital are set out in note 13. Dividend payments are
set out in note 7.
The Company's capital comprises:
2011 2010
£'000 £'000
Called-up share capital 10,600 10,675
Share premium account 123,749 123,749
Capital redemption reserve 8,211 8,136
Capital reserve 83,426 125,185
Revenue reserve 11,364 10,102
Total shareholders' funds 237,350 277,847
The capital reserve consists of realised capital reserves of £115,523,000 and
unrealised capital losses of £32,097,000 (2010: realised capital reserves of £
106,473,000 and unrealised capital gains of £18,712,000). The unrealised
capital losses consists of investment holding losses of £32,095,000 (2010:
unrealised investment holding gains of £18,720,000) and unrealised foreign
exchange losses of £2,000 (2010: £8,000).
The Company's objectives for managing capital are the same as the previous year
and have been complied with throughout the year.
20. Transactions with the Investment Manager
Information with respect to transactions with the Investment Manager is
provided in note 3 of these Financial Statements and in the Extracts from the
Directors' Report.
Annual General Meeting
The Company's Annual General Meeting will be held on 17 January 2012 at 11.00
am at Brewers' Hall, Aldermanbury Square, London EC2V 7HR.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly
to the National Storage Mechanism ("NSM") and will be available for inspection
at the NSM, which is situated at: www.hemscott.com/nsm.do.
A copy of the Annual Report and Financial Statements and Notice of Annual
General Meeting will be delivered to shareholders shortly and can also be found
on the Company's website at www.theeuropeaninvestmenttrust.com and on the
Edinburgh Partners' website at www.edinburghpartners.com.
Enquiries:
Dale Robertson
Mhairi Macdonald
Edinburgh Partners
Telephone: 0131 270 3800
The Company's registered office address is:
Beaufort House
51 New North Road
Exeter
EX4 4EP
Neither the contents of the Company's website and the Edinburgh Partners'
website nor the contents of any website accessible from hyperlinks on this
announcement (or any other website) is incorporated into, or forms part of,
this announcement.
ENDS
Friday, 22nd November 2024
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