Annual Financial Report
THE EUROPEAN INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 September 2014
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 6.4%, compared with FTSE All-World
Europe ex UK Index total return 5.3%.
- Share price discount to net asset value per share narrowed from 10.9% to 6.5%.
Share price total return 12.1%.
- Proposed final dividend of 14.0p and special dividend of 1.0p, a total of
15.0p.
- Initiated a move to a more defensive portfolio strategy. Significant increase
in Switzerland from 8.5% to 17.4% of net assets. Reduction in the periphery of
Europe, the most notable in Spain from 11.2% to 5.2%.
- European equities are trading at more demanding valuations. However, in view of
the current accommodative stance being pursued by the European Central Bank and
the potential for economic recovery in Europe, we remain fully invested.
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 Strategic Report below.
Shareholders' funds
£336,729,000 at 30 September 2014.
Market capitalisation
£314,994,000 at 30 September 2014.
Capital structure
As at 30 September 2014 and at the date of this report, the Company had
42,069,371 ordinary shares of 25p each in issue.
Investing in the Company
The Company's ordinary shares are traded on the London Stock Exchange and the
New Zealand Stock Exchange and can be bought or sold through a stockbroker or
financial adviser. The ordinary shares are eligible for inclusion in New ISAs,
Junior ISAs and SIPPs. These are available through Alliance Trust Savings, who
also offer the opportunity to invest in the Company through a Dealing Account.
The Company's shares are also available on other share trading platforms.
AIC
The Company is a member of the Association of Investment Companies ("AIC").
Alternative Investment Fund Manager
Edinburgh Partners AIFM Limited (the "AIFM").
Investment Manager
The AIFM has delegated the function of managing the Company's investment
portfolio to Edinburgh Partners Limited ("Edinburgh Partners" or "Investment
Manager").
Management fee
0.55% per annum of the Company's equity market capitalisation payable monthly
in arrears.
Ten Year Record
Performance (rebased to 100 at 30 September 2004)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NAV per share 100.0 129.0 150.9 185.2 123.7 130.9 134.3 115.6 126.0 158.6 165.2
Share price 100.0 134.3 159.4 194.8 124.2 132.9 130.7 110.9 121.8 164.1 179.6
Earnings per share 100.0 136.4 170.8 157.3 279.8 259.1 269.9 332.1 301.0 352.6 290.6
Dividends per share 100.0 138.9 166.7 153.7 275.9 251.9 259.3 296.3 296.3 333.3 277.8
Retail price index 100.0 102.7 106.4 110.6 116.1 114.5 119.8 126.5 129.8 133.9 136.9
FINANCIAL SUMMARY
Results for year 30 September 2014 30 September 2013 Change
Shareholders' funds £336.73m £323.22m 4.2%
Net asset value per ordinary share ("NAV") 800.41p 768.31p 4.2%
Share price per ordinary share 748.75p 684.50p 9.4%
Share price discount to NAV 6.5% 10.9%
Year to Year to
30 September 2014 30 September 2013
Revenue return per ordinary share* 14.85p 18.02p
Capital return per ordinary share* 35.26p 156.05p
Total return per ordinary share* 50.11p 174.07p
Final dividend per ordinary share** 14.00p 14.00p
Special dividend per ordinary share** 1.00p 4.00p
Total dividend per ordinary share** 15.00p 18.00p
* Based on the weighted average number of shares in issue during the year.
** Proposed dividend for the year.
Year to Year to
Year's high/low 30 September 2014 30 September 2013
NAV - high 870.31p 784.91p
- low 777.76p 604.41p
Share price - high 794.50p 700.00p
- low 690.00p 500.00p
Share price discount to NAV
- low 6.4% 9.7%
- high 12.4% 18.6%
Year to Year to
Performance 30 September 2014 30 September 2013
NAV Total Return 6.4% 28.9%
FTSE All-World Europe ex UK Index
Total Return* 5.3% 27.1%
* In sterling.
The NAV Total Returns are sourced from Edinburgh Partners and include dividends
reinvested. The index performance figures are sourced from Thomson Reuters
Datastream. Past performance is not a guide to future performance.
Year to Year to
Cost of running the Company 30 September 2014 30 September 2013
Ongoing charges* 0.61% 0.59%
* Based on total expenses, excluding finance costs and certain non-recurring
items, for the year and average monthly net asset value.
PORTFOLIO OF INVESTMENTS
as at 30 September 2014
% of % of
Net Net
Rank Rank Company Sector Country Valuation Assets Assets
2014 2013 £'000 2014 2013
1 9 Danske Bank Financials Denmark 10,910 3.2 2.7
2 - Roche Health Care Switzerland 10,819 3.2 -
3 23 BNP Paribas Financials France 10,739 3.2 2.4
4 3 Gerresheimer Health Care Germany 10,621 3.2 3.0
5 - Novartis Health Care Switzerland 10,482 3.1 -
6 7 PostNL Industrials Netherlands 10,438 3.1 2.8
7 - BB Biotech Health Care Switzerland 10,242 3.0 -
8 - Sanofi Health Care France 9,858 2.9 -
9 - Delta Lloyd Financials Netherlands 9,835 2.9 -
10 4 ENI Oil & Gas Italy 9,747 2.9 2.9
11 - Royal Dutch Shell* Oil & Gas Netherlands 9,608 2.9 -
12 26 Valeo Consumer Goods France 9,191 2.7 2.3
13 18 Ryanair Consumer Services Ireland 9,036 2.7 2.5
14 14 Prysmian Industrials Italy 9,002 2.7 2.6
15 19 BBVA Financials Spain 8,923 2.7 2.5
16 27 Volkswagen** Consumer Goods Germany 8,855 2.6 2.3
17 - GAM Financials Switzerland 8,820 2.6 -
18 - United Internet Technology Germany 8,704 2.6 -
19 6 Indra Sistemas Technology Spain 8,520 2.5 2.8
20 34 Fresenius Medical
Care Health Care Germany 8,450 2.5 2.1
21 25 GEA Industrials Germany 8,276 2.5 2.4
22 12 Piaggio Consumer Goods Italy 8,185 2.4 2.6
23 35 Heineken Consumer Goods Netherlands 8,111 2.4 1.9
24 2 Orange Telecommunications France 8,101 2.4 3.2
25 - Unipol Gruppo
Finanziario Financials Italy 7,880 2.3 -
26 - KPN Telecommunications Netherlands 7,778 2.3 -
27 32 Total Oil & Gas France 7,480 2.2 2.1
28 33 Swedbank Financials Sweden 7,214 2.1 2.1
29 40 SAP Technology Germany 7,020 2.1 1.6
30 30 ABB Industrials Switzerland 6,920 2.1 2.3
31 - Hexagon Industrials Sweden 6,895 2.1 -
32 - Portugal Telecom Telecommunications Portugal 6,773 2.0 -
33 - Pirelli Consumer Goods Italy 6,656 2.0 -
34 15 Aryzta Consumer Goods Switzerland 6,597 2.0 2.5
35 8 Nutreco Consumer Goods Netherlands 6,141 1.8 2.7
36 42 TDC Telecommunications Denmark 6,078 1.8 1.2
37 - Outotec Industrials Finland 5,958 1.8 -
38 - Leoni Industrials Germany 5,162 1.5 -
39 31 Ipsos Consumer Services France 4,941 1.5 2.3
40 41 Feintool
International Industrials Switzerland 4,695 1.4 1.3
41 13 Vivendi Consumer Services France 4,035 1.2 2.6
Prior year investments sold during the year 38.1
Total equity investments 333,696 99.1 99.8
Cash and other net assets 3,033 0.9 0.2
Net assets 336,729 100.0 100.0
*The investment is in Class A ordinary shares.
**The investment is in non-voting shares.
Of the ten largest portfolio investments as at 30 September 2014, the
valuations at the previous year end, 30 September 2013, were Danske Bank
£8,655,000; BNP Paribas £7,854,000; Gerresheimer £9,804,000; PostNL £9,012,000;
and ENI £9,391,000. Roche, Novartis, BB Biotech, Sanofi and Delta Lloyd were
all new purchases made during the year ended 30 September 2014.
Distribution of Investments
as at 30 September 2014 (% of net assets)
Sector distribution
Sector %
Financials 19.0
Health Care 17.9
Industrials 17.2
Consumer Goods 15.9
Telecommunications 8.5
Oil & Gas 8.0
Technology 7.2
Consumer Services 5.4
Cash and other net assets 0.9
100.0
Geographical distribution
Country %
Switzerland 17.4
Germany 17.0
France 16.1
Netherlands 15.4
Italy 12.3
Spain 5.2
Denmark 5.0
Sweden 4.2
Ireland 2.7
Portugal 2.0
Finland 1.8
Cash and other net assets 0.9
100.0
DIRECTORS
All of the Directors are non-executive and independent of the AIFM and the
Investment Manager.
Douglas C P McDougall OBE (Chairman)
William D Eason
Michael B Moule (Senior Independent Director)
Dr Michael T Woodward
STRATEGIC REPORT
The Strategic Report has been prepared in accordance with Section 414A of the
Companies Act 2006 (the "Act"). Its purpose is to inform members of the Company
and help them assess how the Directors have performed their legal duty under
Section 172 of the Act to promote the success of the Company.
CHAIRMAN'S STATEMENT
Results
In the year to 30 September 2014, the net asset value per share of your Company
increased by 4.2% from 768.31p to 800.41p. After taking account of dividends
paid in the year of 18.0p, the net asset value total return was 6.4%. This
compares with the total return of 5.3% from the FTSE All-World Europe ex UK
Index, adjusted to sterling.
During the year, the Company's share price increased by 9.4% from 684.50p to
748.75p. As a consequence of the share price increase being above the net asset
value per share increase, the share price discount to net asset value narrowed
from 10.9% to 6.5%. The share price total return, taking account of the 18.0p
dividend paid in the year, was 12.1%.
From the appointment of Edinburgh Partners as Investment Manager on 1 February
2010, the net asset value total return to 30 September 2014 was 46.3%. This
compares with the total return of 39.3% from the FTSE All-World Europe ex UK
Index, adjusted to sterling.
Revenue
As a consequence of changes in the portfolio of investments and the strength of
sterling against the euro, there was a decrease in revenue per share in the
year to 30 September 2014 from 18.02p to 14.85p. The Company continues to have
a low ongoing charges ratio. For the year to 30 September 2014, the ongoing
charges ratio was 0.61%, a marginal increase on the previous year's ratio of
0.59%.
Dividends
The Board recommends a final dividend of 14.0p per share and a special dividend
of 1.0p per share, a total of 15.0p per share. The proposed total dividend of
15.0p compares with the prior year total dividend of 18.0p. For the prior year
the final dividend was 14.0p and the special dividend was 4.0p. Our aim is to
pay a final dividend which we regard as likely to be sustainable and to
distribute any further earnings by way of a special dividend.
Subject to the approval of shareholders at the forthcoming Annual General
Meeting, these dividends will be paid on 30 January 2015 to shareholders on the
register at the close of business on 9 January 2015. The ex-dividend date will
be 8 January 2015.
Share buybacks
The Board continually monitors the discount or premium at which the shares
trade relative to net asset value per share. As detailed above in the Results
section, there was a further reduction in the share price discount to net asset
value per share during the year under review. No share buybacks were made
during the year.
The Directors will propose at the forthcoming Annual General Meeting that the
Company's powers to make purchases of up to 14.99% of its shares in issue be
renewed.
Portfolio activity
In the year under review, the most significant changes were the increase in
exposure to the health care sector from 5.1% of net assets at the prior year
end to 17.9%, and the reduction in the consumer services sector exposure from
19.3% to 5.4%. Partly as a consequence of the increase in exposure to the
health care sector, there was a significant increase in the Company's
investment in Switzerland from 8.5% to 17.4%. During the year, new holdings
were established in a number of Swiss health care stocks, including Roche,
Novartis and BB Biotech, and as at 30 September 2014 these stocks were the
second, fifth and seventh largest stocks in the portfolio. In contrast, there
was a reduction in the Company's investments in the periphery of Europe, with
the most notable being the reduction in Spain from 11.2% to 5.2% as a move to a
more defensive portfolio strategy was implemented.
Following the substantial increase in the Company's exposure to the telecoms
sector in the prior year, there continued to be high exposure, with 8.5% of net
assets invested in the sector at the year end. The Investment Manager continues
to believe that regulatory and corporate developments will continue to be
positive for companies in the sector. During the year under review, there were
a number of changes in the Company's holdings in the telecoms sector. While the
Company continued to hold its investments in Orange and TDC, there were
disposals of Belgacom in Belgium and Ziggo in the Netherlands. Portugal Telecom
and KPN, based in the Netherlands, were purchased during the year.
The Company remained almost fully invested throughout the year and cash and
other net assets remained at low levels, marginally increasing from 0.2% to
0.9% of net assets at the year end. There was a marginal reduction in the
number of investments held, from 42 to 41.
Gearing
The Company entered into a three-year euro 30 million secured multi-currency
revolving loan facility agreement with Scotiabank Europe PLC in September 2011.
The facility was not utilised and it was decided to cancel it with effect from
3 July 2014. The Directors, in conjunction with the AIFM and the Investment
Manager, will continue to assess whether they believe it is in the best
interests of shareholders to put in place a new gearing facility.
Alternative Investment Fund Managers' Directive ("AIFMD")
In order to comply with the AIFMD, which was conceived to provide additional
protection to investors, in July 2014 the Company appointed Edinburgh Partners
AIFM Limited to act as its Alternative Investment Fund Manager ("AIFM"). The
Investment Management Agreement between the Company and Edinburgh Partners,
which is not authorised as an AIFM, has been terminated, but the AIFM has
delegated the function of managing the Company's investment portfolio to
Edinburgh Partners, the manager of the Company's assets since 1 February 2010.
There has been no change to the arrangements in respect of the management fee
and the notice period.
The Company has appointed Northern Trust Global Services Limited as its
Depositary. Custody services, which were previously supplied by JPMorgan Chase
Bank, are now being provided by The Northern Trust Company, as a delegate of
the Depositary.
Further details about the management and depositary agreements for the Company
are set out below in the Strategic Report.
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, 20 January 2015 at Brewers'
Hall, Aldermanbury Square, London EC2V 7HR. We look forward to meeting all
shareholders who are able to attend.
Outlook
Following the substantial rise in share prices seen in the previous financial
year and the slower than expected recovery in corporate earnings in the year
under review, European equities are trading at more demanding valuations. Like
other equity markets, those of Europe face wider geopolitical and economic
uncertainties. However, in view of the current accommodative stance being
pursued by the European Central Bank and the potential for economic recovery in
Europe, we remain fully invested.
Douglas McDougall
Chairman
27 November 2014
INVESTMENT MANAGER'S REPORT
Economic and Investment Overview
The recovery from the combined impact of the global financial crisis and the
Eurozone crisis was always likely to be protracted and fragile. At the start of
the financial year, equity markets expected European economies to deliver
growth and companies to report a strong progression in their earnings. Equity
markets are always more vulnerable to disappointments when aggregate stock
market valuations are above average. As the year progressed and these
expectations failed to materialise, equity markets responded with a period of
volatility, both prior to the Company's year end and immediately thereafter.
When confidence is fragile it does not take much for markets to take fright,
and this proved to be the case. Although not the only geopolitical concern, the
main risk for much of the year has been centred in Ukraine. Despite leaving the
Russian economy vulnerable to recession, President Putin pressed on with his
annexation strategy. The eventual outcome in the Ukraine is difficult to
predict, but this had a clear detrimental impact on economic confidence
throughout Europe.
Europe's updated post-crisis report card shows a wide range of results. Growth
is projected to be strongest in Spain, Ireland and Portugal as these countries
have taken on much of the recommended advice and made structural changes to
their economies. At the other end of the spectrum, reforms are badly needed in
Italy and France in order to lift moribund growth rates.
The current economic uncertainty brings risks. As we look forward to 2015, a
combination of falling oil prices, a declining euro exchange rate and an
accommodative monetary policy pursued by the European Central Bank should see
economic growth rates recover. Whilst it is our belief that European economic
recovery is only delayed, we should not overlook the fact that this is not a
normal economic recovery and achievable growth rates, both within and outside
Europe, are likely to be below levels delivered for much of the last 15 years.
This is a consequence of the need for there to be a gradual reduction in what
are still elevated levels of total debt.
Portfolio Strategy
Towards the end of 2013 and at the start of 2014, as economic recovery was
starting to be priced into share valuations, we started to reduce the risk
profile of the portfolio. Amongst the positions sold were A.P. Moller–Maersk
(shipping conglomerate), Azimut (Italian asset manager) and Gazprom (Russian
gas operator). The largest increase was made in the health care sector, where
the combination of improving sales growth prospects alongside reasonable
valuations provided attractive investment opportunities. Investments were made
in Novartis, Roche, Sanofi and BB Biotech, adding to existing positions in
Fresenius Medical Care (kidney dialysis and care) and Gerresheimer
(pharmaceutical packaging).
Most of the subsequent activity in the portfolio has been stock specific.
Examples of two recent additions to the portfolio are Hexagon and United
Internet.
Hexagon is a Swedish company and a global leader in measurement technologies.
The measurement technology market can be segmented by the level of precision
required. The macro/geospatial market segment measures large objects such as
bridges, dams and roads. The micro market segment, where precision is down to
0.3 micrometres, has more industrial applications, such as ensuring drilling
measurements on production lines conform to CAD drawings. Hexagon's technology
can provide substantial cost savings to their customers. Precision measurement
and visualisation technology is a growth sector, albeit with some cyclicality.
Hexagon's strategy is transitioning the company from a provider of hardware to
one where increasing revenues are being generated from a more recurring
software business model. This should lead to increasing earnings over time. We
also expect a continuation of the company's acquisition strategy to augment
organic growth.
United Internet is a provider of telecom and internet services, primarily in
Germany. Its telecom business has a strong position in both the provision of
fixed line and mobile services to the German consumer. The internet business is
the leading provider of web hosting, cloud and related services to the domestic
SME sector. These core businesses share the characteristics of steady growth
and visible cash generation. The company's strong balance sheet has allowed it
to make some interesting investments outside its core business, and earning a
return on these investments is also a part of our investment case.
Our investments in Portugal proved to be something of a curate's egg, providing
both our best and worst contributing stocks for the year under review. Banco
Espirito Santo was purchased as a potential beneficiary of the recovery in the
Portuguese economy and appreciated materially prior to disposal, at a time when
we considered the shares were fully valued. Portugal Telecom was in the process
of merging with Brazilian company Oi when the company disclosed that the cash
held on its balance sheet was not in fact cash but an investment in short-dated
commercial paper of a just declared bankrupt financial holding company. The
company's share price fell sharply as merger terms were renegotiated. This type
of event would normally invalidate our investment case and result in a
disposal, however, in this instance we decided to remain invested. The company
is negotiating the sale of its Portuguese business and is likely to use these
funds to participate in the consolidation in the Brazilian telecoms market. Our
expectation is this process will give us a better selling opportunity.
Since our appointment to manage the Company's investments on 1 February 2010,
European markets have seen strong gains and the portfolio has outperformed the
relevant stock market index against which it is measured. Portfolio strategy
for much of this period has been geared towards the prospect of economic
recovery. As this is eventually priced into equity market valuations, it is
likely that the portfolio will continue to travel in a more defensive
direction.
Outlook
With global growth at 2.5%, minimal inflation and a debt overhang in developed
economies, the current accommodative monetary policy stance is likely to
continue. Our expectation is for European economic growth to recover in 2015,
albeit at more modest rates. From a global equity perspective, we anticipate
that we should see reasonable returns from equities over the next few years,
although this could be punctuated by periods of correction. As a consequence of
all the above factors, your portfolio continues to be fully invested.
Dale Robertson
Edinburgh Partners
27 November 2014
Other Statutory Information
Objective
The objective of the Company is to achieve long–term capital growth through a
diversified portfolio of Continental European securities.
Strategy and business model
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
than 15% of their total assets in other listed investment companies, in which
case the limit is 15%.
The Investment Manager's compliance with the limits set out in the investment
policy is monitored by the Board and the AIFM.
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 a company's earning
prospects over a five-year time horizon. The portfolio will normally consist of
40 to 50 investments.
Business and status of the Company
The principal activity of the Company is to carry on business as an investment
trust.
The Company is registered as a public limited company and is an investment
company within the terms of Section 833 of the Act. The Company has been
approved by HM Revenue & Customs ("HMRC") as an investment trust under Sections
1158 and 1159 of the Corporation Tax Act 2010 ("CTA") for each accounting
period, subject to there being no subsequent serious breaches of the
regulations. 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.
The Company's shares have a premium listing on the Official List of the UK
Listing Authority and are traded on the main market of the London Stock
Exchange. The Company has a secondary listing on the New Zealand Stock
Exchange.
The Company is a member of the AIC, a trade body which promotes investment
companies and also develops best practice for its members.
Portfolio analysis
A detailed review of how the Company's assets have been invested is contained
in the Investment Manager's Report above. 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 41 investments, excluding cash and
other net assets, as at 30 September 2014, 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.
Results and dividends
The results for the year are set out in the Income Statement and the
Reconciliation of Movements in Shareholders' Funds below.
For the year ended 30 September 2014, the net revenue return attributable to
shareholders was £6.2 million (2013: £7.6 million) and the net capital return
was £14.8 million (2013: £65.6 million). Total shareholders' funds increased by
4.2% to £336.7 million (2013: £323.2 million).
Details of the dividends recommended by the Board are set out above in the
Chairman's Statement and below.
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
In the year to 30 September 2014, the net asset value per share increased by
4.2% from 768.31p to 800.41p. After taking account of dividends paid in the
year of 18.0p, the net asset value total return was 6.4%. This compares with
the total return of 5.3% from the FTSE All-World Europe ex UK Index, adjusted
to sterling.
The net asset value total return since the appointment of Edinburgh Partners as
Investment Manager on 1 February 2010 to 30 September 2014 was 46.3%. This
compares with the total return of 39.3% from the FTSE All-World Europe ex UK
Index, adjusted to sterling.
Share price
In the year to 30 September 2014, the Company's share price increased by 9.4%
from 684.50p to 748.75p. The share price total return, taking account of the
18.0p dividend paid in the year, was 12.1%.
Share price premium/discount to net asset value per share
The share price discount to net asset value per share narrowed from 10.9% to
6.5% in the year to 30 September 2014.
Revenue return per ordinary share
There was a decrease in the revenue per share in the year to 30 September 2014
of 17.6% from 18.02p to 14.85p.
Dividends per ordinary share
The Directors are recommending a final dividend of 14.0p per ordinary share and
a special dividend of 1.0p per ordinary share, making a total dividend of 15.0p
per ordinary share. This compares with a prior year total dividend of 18.0p.
Ongoing charges
The Company continues to have low expenses. The ongoing charges ratio was 0.61%
(2013: 0.59%) in the year to 30 September 2014.
The longer–term records of the key performance indicators are shown in the Ten
Year Record above and 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.
Management Agreement
For the period from 1 October 2013 to 16 July 2014, the Company's investments
were managed by Edinburgh Partners under an Investment Management Agreement
dated 29 January 2010. The Investment Manager received a management fee of
0.55% per annum of the Company's equity market capitalisation, payable
quarterly in arrears. No performance fee was payable during this period.
As detailed in the Chairman's Statement above, on 17 July 2014, the Company
appointed Edinburgh Partners AIFM Limited as the Company's AIFM on the terms,
and subject to the conditions, of a new management agreement (the "Management
Agreement") between the Company and the AIFM. Edinburgh Partners AIFM Limited
has been approved as an AIFM by the UK's Financial Conduct Authority ("FCA").
The existing management agreement between the Company and Edinburgh Partners,
which is not authorised as an AIFM, has been terminated. Edinburgh Partners has
been appointed by the AIFM as Investment Manager to the Company pursuant to a
delegation agreement, so there has been no change to the day-to-day management
arrangements.
The arrangements in respect of the management fee and notice period remain
unchanged, except that the management fee which was previously paid on a
quarterly basis is now payable on a monthly basis.
The Management Agreement may be terminated by either party giving three months'
written notice. No additional compensation is payable to the AIFM on the
termination of this agreement other than the fees payable during the notice
period. No performance fee will be paid. Further details relating to the
Management Agreement are detailed in note 3 of the Financial Statements below.
The AIFM is required to make remuneration disclosures in respect of the AIFM's
first relevant reporting period, the year ending 29 February 2016, and these
will be made available in the Company's Annual Reports and Financial Statements
issued after that date. Accordingly, and in line with FCA guidance on reporting
under AIFMD, no remuneration disclosures relating to the AIFM have been
included in this Annual Report and Financial Statements for the year ended
30 September 2014.
Continuing Appointment of the AIFM
The Board keeps the performance of the AIFM under review through the Audit and
Management Engagement Committee. As the AIFM has delegated the investment
management function to Edinburgh Partners, the performance of the Investment
Manager is also regularly reviewed. It is the opinion of the Directors that the
continuing appointment of the AIFM 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 the approach of the Investment Manager is convincing. The
remuneration of the AIFM is reasonable both in absolute terms and compared to
that of managers of comparable investment companies. The Directors believe that
by paying the management fee calculated on a market capitalisation basis,
rather than a percentage of assets basis, the interests of the AIFM are more
closely aligned with those of shareholders.
Depositary Agreement
The Board has appointed Northern Trust Global Services Limited to act as its
depositary (the "Depositary") under an agreement dated 22 July 2014 (the
"Depositary Agreement"). The Depositary is authorised by the Prudential
Regulation Authority, and regulated by the FCA and the Prudential Regulation
Authority. Custody services, which were previously supplied by JPMorgan Chase
Bank, are being provided by The Northern Trust Company (as a delegate of the
Depositary). A fee of 0.01% per annum of the net assets of the Company, plus
fees in relation to safekeeping and other activities undertaken to facilitate
the investment activity of the Company are payable to the Depositary. The
Company and the Depositary may terminate the Depositary Agreement at any time
by giving six months' written notice. The Depositary may only be removed from
office when a new depositary is appointed by the Company.
Principal risks and uncertainties
The Board considers that the following are the principal financial risks
associated with investing in the Company: investment and strategy risk,
discount volatility risk, market risk (comprising interest rate risk, currency
risk and 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 of the Financial
Statements below.
In addition, the Board also considers the following as principal risks:
Regulatory risk
Relevant legislation and regulations which apply to the Company include the
Act, the CTA, the Listing Rules of the FCA and the AIFMD. 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 of
the FCA might result in censure by the FCA and suspension of the listing of the
Company's shares on the London Stock Exchange.
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, depositary and custody functions. The
main risk is that the third parties may fail to ensure that statutory
requirements, such as compliance with the Act and the Listing Rules of the FCA,
are met.
The Board regularly receives and reviews management information from third
parties which the Company Secretary compiles. In addition, each of the third
parties provides a copy of its report on internal controls (ISAE 3402, SSAE 16
or equivalent) to the Board, through the Audit and Management Engagement
Committee, each year to ensure that adequate controls are in place and are
operating satisfactorily.
Other financial risk
It is possible that inappropriate accounting policies or failure to comply with
current or new accounting standards may lead to a breach of regulations.
The AIFM employs independent administrators to prepare all financial statements
and the Audit and Management Engagement Committee meets with the independent
auditors at least once a year to discuss annual audit issues, including
appropriate accounting policies.
The Board undertakes an annual assessment and review of all the risks stated
above and in note 18 of the Financial Statements below, 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.
Main trends and future development
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
above. The Board's main focus is on the investment return and approach, with
attention paid to the integrity and success of the investment approach and on
factors which may have an impact on this approach.
Forward looking statements
This Strategic Report 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:
- Global economic conditions and equity market performance and prices,
particularly those in Europe
- Changes in Government policies and monetary and interest rate policies
worldwide, particularly those in Europe
- Changes to regulations and taxes worldwide, particularly in Europe
- Currency exchange rates
- Use of gearing
- The Company's success in managing its assets and business to manage the above
factors.
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.
Employees, human rights and community issues
The Board recognises the requirement under Section 414C of the Act to detail
information about employees, human rights and community issues, including
information about any policies it has in relation to these matters and the
effectiveness of these policies. These requirements do not apply to the Company
as it has no employees, all the Directors are non–executive and it has
outsourced all its functions to third party service providers; the Company has
therefore not reported further in respect of these provisions.
Gender diversity
The Board of Directors of the Company comprised four male Directors during, and
at the end of, the year to 30 September 2014. The appointment of any new
Director is made on the basis of merit.
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. 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. To this end, voting
decisions take into account corporate governance, including disclosure and
transparency, board composition and independence, control structures,
remuneration, social and environmental issues.
The day-to-day management of the Company's business has been delegated by the
AIFM to the Company's Investment Manager, Edinburgh Partners, which has an
Environmental, SRI and Corporate Governance ("ESG") policy in place, which can
be found on its website at www.edinburghpartners.com.
The assessment of the quality of investee companies in relation to
environmental considerations, socially responsible investment and corporate
governance is embedded in the Investment Manager's stock selection process.
Douglas McDougall
Chairman
27 November 2014
EXTRACTS FROM THE DIRECTORS' REPORT
Share capital
The Company made no share issues during the year ended 30 September 2014. As at
30 September 2014, and as at the date of this report, the Company had
42,069,371 ordinary shares of 25p each in issue.
At general meetings of the Company, on a poll, one vote is attached to each
ordinary share in issue.
Going concern
The Company's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the Strategic
Report above. In addition, notes 18 and 19 of the Financial Statements below
include the Company's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its financial
instruments; and its risk exposure. The Company's principal risks are detailed
in the Strategic Report above. The Company's assets consist principally of a
diversified portfolio of listed European equity shares, which in most
circumstances are realisable within a short period of time and exceed its
liabilities to creditors by a significant amount.
The Directors have concluded that the Company has adequate resources to
continue in operational existence for the foreseeable future. For this reason,
they have adopted the going concern basis in preparing the Financial
Statements.
The full Annual Report and Financial Statements contain the following
statements regarding responsibility for the Annual Report and Financial
Statements.
MANAGEMENT REPORT AND STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RELATION TO
THE ANNUAL REPORT AND FINANCIAL STATEMENTS
Management report
Listed companies are required by the FCA'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 detailed in the Strategic Report above, including the
Chairman's Statement and the Investment Manager's Report. Therefore no separate
management report has been included.
Statement of Directors' responsibilities
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) ("UK GAAP").
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:
- select suitable accounting policies and then apply them consistently;
- make judgements and accounting estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject to
any material departures disclosed and explained in the Financial Statements
respectively; and
- prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for 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 Act. 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 are set out above, confirms that, to the
best of his knowledge:
- the Financial Statements, which have been prepared in accordance with UK GAAP,
give a true and fair view of the assets, liabilities, financial position and
net return of the Company;
- the Strategic Report and the Directors' Report 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; and
- the Annual Report and Financial Statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Company's performance, business model and strategy.
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
27 November 2014
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory Financial Statements for the year ended 30 September 2014 but is
derived from those Financial Statements. Statutory Financial Statements for the
year ended 30 September 2014 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 website of Edinburgh Partners
at www.edinburghpartners.com.
INCOME STATEMENT
for the year ended 30 September 2014
2014 2013
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments
at fair value 9 - 15,612 15,612 - 65,516 65,516
Foreign exchange
(losses)/gains (60) (779) (839) 12 132 144
Income 2 9,528 - 9,528 10,413 - 10,413
Management fee 3 (1,752) - (1,752) (1,387) - (1,387)
Other expenses 4 (367) - (367) (429) - (429)
Net return before
finance costs and
taxation 7,349 14,833 22,182 8,609 65,648 74,257
Finance costs 5 (95) - (95) (127) - (127)
Net return before
taxation 7,254 14,833 22,087 8,482 65,648 74,130
Tax on ordinary
activities 6 (1,008) - (1,008) (901) - (901)
Net return
attributable to
shareholders 6,246 14,833 21,079 7,581 65,648 73,229
pence pence pence pence pence pence
Return per ordinary
share* 8 14.85 35.26 50.11 18.02 156.05 174.07
* Based on the weighted average number of shares in issue during the year. The
return per ordinary share is both the basic and diluted return per ordinary
share.
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 columns are prepared under guidance published
by the 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 below form part of these Financial Statements.
BALANCE SHEET
as at 30 September 2014
2014 2013
Notes £'000 £'000
Fixed assets investments:
Investments at fair value through profit or loss 9 333,696 322,601
Current assets:
Debtors 11 784 972
Cash at bank and short-term deposits 5,026 2,545
5,810 3,517
Current liabilities:
Creditors: amounts falling due within one year 12 2,777 2,896
Net current assets 3,033 621
Net assets 336,729 323,222
Capital and reserves:
Called-up share capital 13 10,517 10,517
Share premium account 123,749 123,749
Capital redemption reserve 8,294 8,294
Capital reserve 183,578 168,745
Revenue reserve 10,591 11,917
Total equity shareholders' funds 336,729 323,222
pence pence
Net asset value per ordinary share* 14 800.41 768.31
* The net asset value per ordinary share is both the basic and diluted net
asset value per ordinary share.
The Financial Statements were approved and authorised for issue by the Board of
Directors of The European Investment Trust plc on 27 November 2014 and were
signed on its behalf by:
Douglas McDougall
Chairman
Registered in England and Wales No. 1055384
The notes below form part of these Financial Statements.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 30 September 2014
Called–up Share Capital
share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Year ended
30 September 2014
At 1 October 2013 10,517 123,749 8,294 168,745 11,917 323,222
Net return after
taxation for the
year - - - 14,833 6,246 21,079
Dividends paid 7 - - - - (7,572) (7,572)
At 30 September 10,517 123,749 8,294 183,578 10,591 336,729
2014
Year ended
30 September 2013
At 1 October
2012 10,517 123,749 8,294 103,097 11,067 256,724
Net return after
taxation for the
year - - - 65,648 7,581 73,229
Dividends paid 7 - - - - (6,731) (6,731)
At 30 September
2013 10,517 123,749 8,294 168,745 11,917 323,222
The notes below form part of these Financial Statements.
CASH FLOW STATEMENT
for the year ended 30 September 2014
2014 2013
Notes £'000 £'000
Operating activities:
Investment income received 9,465 10,426
Other income received 3 -
Management fees paid (1,861) (1,283)
Other cash payments (387) (476)
Net cash inflow from operating activities 15 7,220 8,667
Servicing of finance:
Finance costs (95) (127)
Taxation:
Irrecoverable overseas tax paid (877) (901)
Recoverable overseas tax paid (161) (154)
Total taxation paid (1,038) (1,055)
Capital expenditure and financial investment:
Purchases of investments (162,177) (130,066)
Sales of investments 166,922 119,074
Exchange gains/(losses) on settlement 39 (48)
Net cash inflow/(outflow) from capital and financial
investment 4,784 (11,040)
Equity dividends paid 7 (7,572) (6,731)
Net cash inflow/(outflow) before financing 3,299 (10,286)
Financing:
Payment for own shares purchased and cancelled - -
Increase/(decrease) in cash 16 3,299 (10,286)
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
at 30 September 2014
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 asset investments at fair
value), in accordance with the Act, UK GAAP and with the AIC SORP relating to
the Financial Statements of Investment Trust Companies and Venture Capital
Trusts. The Financial Statements have been prepared in accordance with the
applicable accounting standards. The principal accounting policies detailed
below have been applied consistently throughout the period.
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 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.
Cash at bank and short-term deposits
Cash at bank and short-term deposits comprises cash in hand and demand deposits
that mature within three months. The carrying value of cash at bank and
short-term deposits is equal to its fair value.
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
The following are accounted for in this reserve:
- gains and losses on the realisation of investments;
- increases and decreases in the valuation of investments held at the year end;
- realised foreign exchange differences of a capital nature;
- unrealised 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.
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
2014 2013
£'000 £'000
Income from investments:
Overseas dividends 9,525 10,413
Other income 3 -
Total income 9,528 10,413
3. Management fee
2014 2013
£'000 £'000
Management fee 1,752 1,387
Edinburgh Partners was appointed to provide management, marketing and general
administrative services to the Company with effect from 1 February 2010 until
16 July 2014. Under the agreement, Edinburgh Partners was entitled to a fee
paid quarterly in arrears, at the rate of 0.55% per annum of the equity market
capitalisation of the Company. No performance fee was payable during this
period.
During the year ended 30 September 2014, the management fees payable to
Edinburgh Partners totalled £1,394,000 (2013: £1,387,000). At 30 September
2014, there was £nil outstanding payable to Edinburgh Partners (2013: £396,000)
in relation to management fees.
In addition to the management fee, in the year ended 30 September 2014, the
Company paid Edinburgh Partners £nil (2013: £6,000) for marketing–related
services. At 30 September 2014, there was £nil outstanding to Edinburgh
Partners (2013: £nil) in relation to marketing–related services. This cost is
included in other expenses as detailed in note 4 of these Financial Statements.
With effect from 17 July 2014, the Company appointed Edinburgh Partners AIFM
Limited as the Company's AIFM. Under the Management Agreement, the AIFM is
entitled to a fee paid monthly in arrears at a rate of 0.55% per annum of the
equity market capitalisation of the Company. No performance fee will be paid.
During the year ended 30 September 2014, the management fees payable to the
AIFM totalled £358,000 (2013: £nil). At 30 September 2014, there was £287,000
outstanding payable to the AIFM (2013: £nil) in relation to management fees.
4. Other expenses
2014 2013
£'000 £'000
Audit services 20 19
Directors' remuneration* 87 86
Other 260 324
367 429
* See the Directors' Remuneration Report in the full Annual Report and
Financial Statements.
5. Finance costs
2014 2013
£'000 £'000
Loan non-utilisation fee 95 127
On 19 September 2011, the Company entered into a euro 30,000,000 secured
multi–currency revolving loan facility agreement with Scotiabank Europe PLC for
the purpose of pursuing its investment objective. The facility was available for
three years and interest was payable on amounts drawn down at the rate of 1.55%
above the British Bankers' Association Interest Settlement Rate. A
non-utilisation fee of 0.5% per annum was payable. The facility was cancelled
with effect from 3 July 2014.
6. Tax on ordinary activities
a) Analysis of charge for the year 2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Current tax:
UK corporation tax - - - - - -
Overseas tax suffered 1,008 - 1,008 901 - 901
Total tax charge for the year 1,008 - 1,008 901 - 901
b) The standard rate of corporation tax in the UK ("corporation tax rate") was
23% in the year to 31 March 2014 and is 21% in the year to 31 March 2015.
Accordingly, the Company's profits for the year ended 30 September 2014 are
taxed at an effective rate of 22% (2013: 23.5%). The corporation tax rate is
expected to be reduced to 20% from 1 April 2015 and as a consequence, the
effective rate of corporation tax for the Company for the year ending
30 September 2015 would be 20.5%.
The taxation charge for the Company for the year ended 30 September 2014 is
lower (2013: lower) than the effective rate of 22% (2013: 23.5%). The
differences are explained below:
2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before taxation 7,254 14,833 22,087 8,482 65,648 74,130
Theoretical tax at UK
corporation tax rate of 22%
(2013: 23.5%) 1,596 3,263 4,859 1,993 15,427 17,420
Effects of:
- Foreign dividends that are
not taxable (1,951) - (1,951) (2,025) - (2,025)
- Non-taxable investment gains - (3,263) (3,263) - (15,427) (15,427)
- Disallowed expenses 1 - 1 1 - 1
- Unrelieved management
expenses 354 - 354 31 - 31
- Overseas tax suffered 1,008 - 1,008 901 - 901
1,008 - 1,008 901 - 901
c) Factors that may affect future tax charges
At 30 September 2014, the Company had unrelieved management expenses of
£2,577,000 (2013: £968,000). 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
2014 2013
Declared and paid Payment date £'000 £'000
Final dividend for the year ended 30 September 2013 31 January 2014 5,889 -
of 14.0p
Special dividend for the year ended 30 September 31 January 2014 1,683 -
2013 of 4.0p
Final dividend for the year ended 30 September 2012 31 January 2013 - 5,048
of 12.0p
Special dividend for the year ended 30 September 31 January 2013 - 1,683
2012 of 4.0p
7,572 6,731
The Directors recommend a final dividend in respect of the year ended
30 September 2014 of 14.0p and a special dividend of 1.0p payable on
30 January 2015 to all shareholders on the register at the close of business on
9 January 2015, a total of 15.0p (2013: 18.0p). The ex-dividend date will be
8 January 2015. The recommended final dividend and special dividend are subject to
approval by shareholders at the Annual General Meeting to be held on 20 January 2015.
Based on 42,069,371 ordinary shares in issue at the date of this report,
the total dividend payment will amount to £6,310,000 as detailed below. 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.
2014 2013
£'000 £'000
Proposed
2014 final dividend of 14.0p (2013: 14.0p) per ordinary share* 5,889 5,889
2014 special dividend of 1.0p (2013: 4.0p) per ordinary share* 421 1,683
6,310 7,572
* Based on 42,069,371 shares in issue at 27 November 2014.
8. Return per ordinary share
2014 2013
Net Ordinary Per Net Ordinary Per
return shares* share return shares* share
£'000 pence £'000 pence
Net revenue return after
taxation 6,246 42,069,371 14.85 7,581 42,069,371 18.02
Net capital return after
taxation 14,833 42,069,371 35.26 65,648 42,069,371 156.05
Total return 21,079 42,069,371 50.11 73,229 42,069,371 174.07
* Weighted average number of ordinary shares in issue during the year.
9. Listed investments
2014 2013
£'000 £'000
Analysis of investment portfolio movements
Opening book cost 277,594 244,487
Opening investment holding gains 45,007 436
Opening valuation 322,601 244,923
Movements in the year:
Purchases at cost 162,188 131,382
Sales - proceeds (166,705) (119,220)
Sales - realised gains on sales 33,995 20,945
Investment holding (losses)/gains (18,383) 44,571
Closing valuation 333,696 322,601
Closing book cost 307,072 277,594
Closing investment holding gains 26,624 45,007
333,696 322,601
2014 2013
£'000 £'000
Analysis of capital gains and losses
Gains on sales 33,995 20,945
Investment holding (losses)/gains (18,383) 44,571
Gains on investments 15,612 65,516
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 of these Financial Statements above. 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 2014, the Company incurred transaction costs
of £270,000 (2013: £231,000) and £233,000 (2013: £168,000) on purchases and
sales of investments respectively. These amounts are included in gains on
investments at fair value, as disclosed in the Income Statement above.
10. Significant holdings
The Company had no holdings of 3% or more of the share capital of any portfolio
companies.
11. Debtors
2014 2013
£'000 £'000
Due from brokers - 217
Taxation recoverable 754 723
Prepayments and accrued income 30 32
784 972
12. Creditors: amounts falling due within one year
2014 2013
£'000 £'000
Due to brokers 2,361 2,349
Other creditors and accruals 129 151
Management fee accrued 287 396
2,777 2,896
13. Called–up share capital
2014 2013
£'000 £'000
Allotted, called-up and fully paid:
42,069,371 (2013: 42,069,371) ordinary shares of 25p each 10,517 10,517
During the year to 30 September 2014, no ordinary shares were purchased and
cancelled (2013: no ordinary shares were purchased and cancelled).
Duration of the Company
The Company neither has a termination date nor the requirement for any periodic
continuation votes.
14. Net asset value per share
2014 2013
£'000 £'000
Net asset value per ordinary share 800.41p 768.31p
The net asset value per ordinary share is based on net assets of £336,729,000
(2013: £323,222,000) and on 42,069,371 (2013: 42,069,371) 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
2014 2013
£'000 £'000
Net return before finance costs and taxation 22,182 74,257
Adjust for returns from non-operating activities:
- Gains on investments (15,612) (65,516)
- Foreign exchange losses/(gains) of a capital nature 779 (132)
Return from operating activities 7,349 8,609
Adjustment for non-cash flow items:
- Decrease/(increase) in debtors and accrued income 2 (7)
- (Decrease)/increase in creditors and accruals (131) 65
Net cash inflow from operating activities 7,220 8,667
16. Reconciliation of net cash flows to movement in net cash
2014 2013
£'000 £'000
Movement in net cash resulting from cash flows 3,299 (10,286)
Foreign exchange movements (818) 180
Movement in net cash 2,481 (10,106)
Net cash brought forward 2,545 12,651
Net cash carried forward 5,026 2,545
Analysis of net cash
At Foreign At
1 October Cash exchange 30 September
2013 flows movement 2014
£'000 £'000 £'000 £'000
Cash at bank 2,545 3,299 (818) 5,026
At Foreign At
1 October Cash exchange 30 September
2012 flows movement 2013
£'000 £'000 £'000 £'000
Cash at bank 12,651 (10,286) 180 2,545
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:
2014 2013
Cash Cash
No flow No flow
interest interest interest interest
rate rate risk rate rate risk
exposure exposure Total exposure exposure Total
£'000 £'000 £'000 £'000 £'000 £'000
Equity shares
Euro 244,023 - 244,023 254,550 - 254,550
Swiss franc 58,576 - 58,576 27,579 - 27,579
Danish kroner 16,988 - 16,988 20,664 - 20,664
Swedish krona 14,109 - 14,109 6,678 - 6,678
US dollar - - - 7,419 - 7,419
Sterling - - - 5,711 - 5,711
Cash at bank and
short-term deposits
Euro - 4,949 4,949 - 2,499 2,499
Sterling - 77 77 - 46 46
Debtors
Euro 560 - 560 776 - 776
Swiss franc 79 - 79 67 - 67
Norwegian krone 91 - 91 97 - 97
Danish kroner 24 - 24 - - -
Sterling 22 - 22 24 - 24
NZ dollar 8 - 8 8 - 8
Creditors: amounts
falling due within one
year
Euro (2,361) - (2,361) (1,708) - (1,708)
Sterling (415) - (415) (547) - (547)
NZ dollar (1) - (1) - - -
Danish kroner - - - (641) - (641)
331,703 5,026 336,729 320,677 2,545 323,222
2014 2013
Exchange rates vs sterling
Euro 1.2834 1.1963
Swiss franc 1.5490 1.4644
Danish kroner 9.5529 8.922
US dollar 1.6212 1.6194
Swedish krona 11.6860 10.4016
Norwegian krone 10.4122 9.7395
NZ dollar 2.0799 1.9443
18. Risk analysis
The Company is an investment company, whose shares are admitted to trading on
the London Stock Exchange and are listed on the New Zealand Stock Exchange. It
conducts its affairs so as to qualify in the 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 AIFM, is responsible for the Company's risk management, as set out in the
Strategic Report above.
The principal risks the Company faces are:
• Investment and strategy risk
• Discount volatility risk
• Market risk (comprising: interest rate risk, currency risk and price risk)
• Liquidity risk
• Credit risk
• Gearing risk
The AIFM 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 Strategic Report above.
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.
The Investment Manager meets regularly with the Board to discuss the portfolio
performance and strategy. The Board receives regular 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 Strategic 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 2014 are
disclosed in note 17 of these Financial Statements.
The majority of the Company's assets were non-interest bearing as at
30 September 2014. There was no exposure to interest bearing liabilities during
the year ended 30 September 2014.
If interest rates had reduced by 0.25% (2013: 0.25%) from those obtained as at
30 September 2014, 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 (2013: £6,000). If there
had been an increase in interest rates of 0.25% (2013: 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 2014 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 2014
are disclosed in note 17 of these Financial Statements.
If sterling had strengthened by 10% against all other currencies on 30
September 2014, with all other variables held constant, it would have had the
effect of reducing the net capital return before taxation by £33,705,000
(2013: £31,799,000), the net revenue return before taxation by £943,000
(2013: £1,029,000) and therefore would reduce net assets by £34,648,000
(2013: £32,828,000.) If sterling had weakened by 10% against all other currencies,
there would have been an equal and opposite effect on both the net capital
return and net revenue return before taxation. This level of change is
considered to be reasonable based on observation of current market conditions.
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 at www.theeuropeaninvestmenttrust.com and on the website of
Edinburgh Partners at www.edinburghpartners.com.
Fixed asset investments are valued at their fair value. Details of the
Company's investment portfolio as at 30 September 2014 are disclosed above. In
addition, an analysis of the investment portfolio by sector and geographical
distribution is detailed above.
The maximum exposure to price risk at 30 September 2014 is the fair value of
investments of £333,696,000 (2013: £322,601,000).
If the investment portfolio valuation fell by 20% from the amount detailed in
the Financial Statements as at 30 September 2014, 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 £66,739,000
(2013: £64,520,000). 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 price risk at 30 September 2014 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 2014. 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 The Northern Trust
Company 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. As at 30 September 2014, The Northern Trust Company
London Branch (NTC) had a long-term rating from Standard and Poor's of AA-.
The maximum exposure to credit risk as at 30 September 2014 was £339,506,000
(2013: £326,118,000). The calculation is based on the Company's credit risk
exposure as at 30 September 2014 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 three-year euro 30,000,000
secured multi–currency revolving loan facility with Scotiabank Europe PLC. The
principal covenants are (a) that the adjusted asset coverage ratio must be not
less than 4.00 to 1.00, and (b) that the net asset value of the Company must be
not less than £120,000,000 at any time. The facility was not utilised and was
cancelled with effect from 3 July 2014. As at 30 September 2014, the Company
therefore had no gearing.
The Board undertakes an annual assessment and review of all the risks stated
above and in the Strategic Report above 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.
The Company is subject to externally imposed capital requirements, which have
been met throughout the year:
◠as a public company, the Company has a minimum share capital of £50,000;
â— in order to be able to pay dividends out of profits available for
distribution, the Company has to be able to meet one of the two capital
restrictions tests imposed on investment companies by company law.
Any changes to the ordinary share capital are set out in note 13 of these
Financial Statements. Dividend payments are set out in note 7 of these
Financial Statements.
The Company's capital comprises:
2014 2013
£'000 £'000
Called-up share capital 10,517 10,517
Share premium account 123,749 123,749
Capital redemption reserve 8,294 8,294
Capital reserve 183,578 168,745
Revenue reserve 10,591 11,917
Total equity shareholders' funds 336,729 323,222
The capital reserve consists of realised capital reserves of £156,950,000 and
unrealised capital gains of £26,628,000 (2013: realised capital reserves of
£123,728,000 and unrealised capital gains of £45,017,000). The unrealised
capital gains consist of unrealised investment holding gains of £26,624,000
(2013: £45,007,000) and unrealised foreign exchange gains of £4,000
(2013: £10,000).
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 AIFM and the Investment Manager
Information with respect to transactions with the AIFM and the Investment
Manager is detailed in note 3 of these Financial Statements and in the
Strategic Report above.
Annual General Meeting
The Company's forty-second Annual General Meeting will be held on
Tuesday, 20 January 2015 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.morningstar.co.uk/uk/NSM.
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
website of Edinburgh Partners at www.edinburghpartners.com.
Enquiries:
Dale Robertson
Kenneth J Greig
Edinburgh Partners AIFM Limited
Telephone: 0131 270 3800
The Company's registered office address is:
Beaufort House
51 New North Road
Exeter
EX4 4EP
27 November 2014
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.
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