Final Results

FIDELITY EUROPEAN VALUES PLC Final Results For the year ended 31 December 2013 PERFORMANCE OVER ONE YEAR, THREE YEARS, FIVE YEARS AND SINCE LAUNCH TO 31 DECEMBER 2013 (ON A TOTAL RETURN BASIS) (%) FTSE World Europe (ex UK) NAV Share price Index1 One year +20.0 +20.8 +25.2 Three years +32.5 +45.0 +25.8 Five years +58.0 +73.7 +57.4 Since launch (1991) +1,950.1 +1,777.1 +618.9 1 Data prior to the year ended 31 December 2011 is on a net of tax basis Sources: Fidelity and Datastream Past performance is not a guide to future returns Historical Record as at 31 December 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Total portfolio exposure (£m)1 742 685 562 716 742 750 958 906 802 576 471 Shareholders' funds (£m) 711 616 518 661 649 650 855 802 689 513 407 NAV per share (p) 1,685.78 1,428.97 1,168.57 1,335.78 1,269.52 1,183.61 1,449.76 1,283.77 1,094.71 815.04 647.43 Share price (p) 1,525.00 1,287.00 1,003.00 1,113.00 1,151.00 990.00 1,350.00 1,211.00 1,118.00 766.50 589.00 (Discount)/premium to NAV (cum income) (%) (9.5) (9.9) (14.2) (16.7) (9.3) (16.4) (6.9) (5.7) 2.1 (6.0) (9.0) Revenue return per ordinary share (p) 29.82 27.78 26.94 15.95 20.59 36.77 13.79 5.34 2.82 1.98 1.93 Dividend per ordinary share (p) 29.75 27.75 26.50 15.75 22.502 23.263 13.75 5.25 2.50 1.75 1.502 Cost of running the Company (ongoing charges) (%)4 0.96 0.98 0.94 0.91 0.92 0.89 1.06 1.47 1.55 1.58 1.63 Gearing (%)5 4.3 11.1 8.6 4.6 1.0 nil (1.0) 12.4 16.0 11.5 15.3 NAV performance (%)6 +20.0 +24.7 -11.5 +7.1 +11.3 -17.5 +13.4 +17.5 +34.7 +26.2 +38.2 Share price performance (%)6 +20.8 +31.3 -8.6 -1.3 +21.3 -25.9 +12.0 +8.6 +46.2 +30.4 +43.3 Index performance (%)6,7 +25.2 +17.8 -14.7 +5.1 +19.1 -24.6 +15.1 +19.5 +23.4 +13.2 +29.0 The total exposure of the investment portfolio, including exposure to the investments underlying the long CFDs. The amounts prior to 2011 represent 1 total assets less current liabilities, excluding the fixed term loan liabilities Interim dividend in respect of the years ended 31 December 2 2003 and 31 December 2009 An additional 13.24p per share was paid by way of a 3 special dividend 4 The percentages prior to 2012 are total expense ratios Total portfolio exposure in excess of shareholders' funds. The amounts prior to 2011 represent total net assets, less loans plus cash at bank 5 and cash funds, in excess of shareholders' funds 6 Total return basis Data prior to the year ended 31 December 2011 is on a net 7 of tax basis Sources: Fidelity and Datastream Past performance is not a guide to future returns CHAIRMAN'S STATEMENT I have pleasure in presenting the Annual Report of Fidelity European Values PLC for the year ended 31 December 2013. Shareholders will see that the format of the Report has changed this year with the introduction of a Strategic Report and other changes brought about through new regulations, as referred to later in my Statement. In my view, some refreshment and additional information is a positive and I hope you find this useful. PERFORMANCE European equities rose over the year to December 2013 as European economies stabilised and the risk of a Eurozone break-up receded. Markets were supported by improving macroeconomic data from the Eurozone and the US; the accommodative (or easy) monetary policy adopted by global policymakers to reduce the cost of borrowing also boosted sentiment. However, there was intermittent volatility during the year, particularly as the Italian election ended in a deadlock, renewing doubts about the continuation of the much needed structural reforms in the country; and later in the year when investors became worried about the collapse of the banking system in Cyprus. Against this backdrop, the net asset value ("NAV") per share of the Company returned 20.0%, but underperformed its Benchmark, the FTSE World Europe (ex UK) Index, which returned 25.2%. While absolute performance remained healthy, relative performance reflected a number of stock-specific disappointments but also an environment in which some of the companies and regions that had previously been challenged, often for good reason, became some of the best performers. These included lower-quality companies that did not meet the Manager's investment criteria of solid balance sheets and growing dividends. A detailed review of the performance of the portfolio is provided in the Manager's Review (see below). Sam Morse has concentrated in his Review on the one year period. I would, however highlight, that the three year numbers continue to be ahead of Benchmark, with a NAV total return of 32.5% versus the Benchmark of 25.8%. (All figures are in UK sterling and are on a total return basis.) DISCOUNT MANAGEMENT The Board continues to adopt an active discount management policy and share buybacks have been made during the year. Whilst the primary purpose of our policy is to reduce share price volatility in relation to NAV, buying in shares at a discount also results in an enhancement to NAV per share. Your Board has sanctioned share buybacks over the course of 2013 amounting to 2.2% of the issued share capital of the Company, a lower figure than the 2.7% repurchased in 2012. The great majority of the repurchases took place in the first half of the year, when continental European equities were still out of favour and lacked the support from investors which became more apparent as the year progressed. The lower level of share price volatility apparent in the second half of 2013 has continued into 2014. Furthermore, the level of discount has narrowed from 8.1% at the start of 2013 to 7.9% at the year end, based on the NAV excluding income. This small narrowing in the discount has given rise to a share price total return of 20.8% for 2013, ahead of the NAV total return of 20.0%. Further details of share repurchases may be found in the Directors' Report of the Annual Report. DIVIDENDS The Board intends to continue with its practice of paying out earnings in full. The objective is one of long term capital growth and we will not seek to influence the Manager to determine the level of income of your Company's portfolio in any particular year. The Board has decided to recommend a final dividend of 29.75 pence per share for the year ended 31 December 2013 (2012: 27.75 pence). This dividend will be payable on 23 May 2014 to shareholders who appear on the register as at close of business on 21 March 2014 (ex-dividend date 19 March 2014). The proposed dividend increase for 2013 over 2012 is therefore 7.2%. Whilst we emphasise that the increase is a function of stock selection and cannot be extrapolated into the future, Sam Morse continues to focus on companies which are able to grow their dividends as one of the key factors in his stock selection. A further explanation of the investment process can be found in the Annual Report. I would like to make one further observation for shareholders when comparing the level of dividend yield between companies. This is that we take a conservative approach of charging all management expenses against income and not against capital. Only the performance fee (when applicable) is charged against capital. Some companies, particularly those with an equity income objective, split management expenses between capital and income, which has the effect of increasing the income return (and dividend paying potential) and reducing the capital return. I should stress that this does not alter the total return from both capital and income combined. Moreover there is no `right' or `wrong' way and it is a matter for judgement. However, the basis should be taken into account, particularly when comparing the dividend yield between different companies. GEARING The Company gears through the use of long Contracts For Difference ("CFDs"). As at 31 December 2013, the level of gearing was 4.3% and the Board is currently working within a range of 0-10%. Our gearing range at the start of the year was 5-15%, with gearing on 1 January 2013 of 11.1%. Gearing was reduced as the year progressed, in line with a more cautious stance as share prices rose, expressed in the Manager's Review shown below. Gearing made a positive contribution to performance during the year. It is pleasing to note that the move to using CFDs as a means of gearing the portfolio, introduced in 2011 in place of traditional bank loans, continues to be positive. Operationally it works smoothly and it has been significantly cheaper for the Company than if we had used more traditional forms of borrowing. REVISED ARTICLES OF ASSOCIATION There have been a number of recent changes to tax, regulation and company law which affect investment trusts and the Company. The Board is therefore seeking approval at the forthcoming Annual General Meeting to adopt new Articles of Association substantially in the form of the existing Articles of Association but updated to reflect these changes. In particular, the new Articles of Association have been amended: (i) to remove the prohibition on the distribution of realised capital profits; this change will help to keep our Articles in line with what is allowable under current legislation. I believe we should move with legislative changes, but stress that the Board has no intention of using this power in the immediate future and would only do so if it felt that it were in the best interest of the Company's shareholders; and (ii) to incorporate provisions to facilitate compliance with the Alternative Investment Fund Managers Directive. Further details can be found below. REGULATORY CHANGES There are a number of regulatory changes that have come into force, or are shortly to come into force, and the Company's Annual Report for the year under review reflect these changes. We now include a Strategic Report which is designed to provide better information to the Company's members and potential investors on how the Directors have performed their duty in promoting the success of the Company. The Strategic Report is shown below. New regulations have come into force requiring additional information to be included in the Directors' Remuneration Report and you will note that we are now required to adopt a Remuneration Policy which will be put to shareholders at the forthcoming Annual General Meeting and formally come into force from that date. You will see also that there is a new Report of the Audit Committee in the Annual Report. ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE ("AIFMD") You may recall I wrote in the Half-Yearly Report to 30 June 2013 that the Board had agreed to appoint FIL Investments International (the current Manager) as its interim Alternative Investment Fund Manager ("AIFM"). Further to that announcement, the Board has agreed in principle to appoint FIL Investment Services (UK) Limited (a FIL Group company) to become the Company's AIFM. FIL Investment Services (UK) Limited will delegate the portfolio management to FIL Investments International. An additional requirement of the AIFMD is to appoint a depositary on behalf of the Company who will oversee the custody cash arrangements and other AIFM responsibilities of the Company. To this end the Board have agreed in principle to appoint J.P. Morgan Europe Limited to act as the Company's depositary. J.P. Morgan Europe Limited is part of the same group of companies as JPMorgan Chase Bank, who act as the Company's bankers and custodians. JPMorgan Chase Bank will continue to act as bankers and custodians to the Company. PROPOSED SUB DIVISION OF SHARES The Board are conscious that the Company's share price has increased substantially from its launch price of £1 per share in 1991 to a price of £15.20 per share as at close of business on 6 March 2014. The higher share price has caused a notable proportion of individuals' monthly savings amounts and dividend reinvestment amounts in Savings and ISA plans to roll over to the following month. To help alleviate this problem, and to enhance the appeal of the Company's shares to investors with smaller amounts, we announced on 17 January 2014 a proposal to sub divide your Company's shares on a 10 for 1 basis. If this had been in effect on 6 March 2014, the new share price for each of the 10 new ordinary shares arising would, following the sub-division, become approximately £1.52 and the nominal value per share would, following the sub-division, become 2.5 pence per share. A 10 for 1 basis, rather than some other multiple, has the advantage of making it easier for shareholders to equate their new share price and holding to their original purchase price and holding. The proposed share split will be put to shareholders at the forthcoming Annual General Meeting as an ordinary resolution. If passed, applications will be made for admission of the new Ordinary shares to the Official List and on the London Stock Exchange's market for listed securities. If the applications are accepted, it is proposed that the effective date for dealings to commence in the new Ordinary shares will be 2 June 2014. Further details of the resolution are shown below. We hope you will support this resolution. DIRECTORATE We are pleased to have welcomed Marion Sears to the Board in 2013 and shareholders voted in favour of her appointment at our 2013 Annual General Meeting. Also at the 2013 Annual General Meeting Simon Duckworth retired from the Board after ten years as a Director and we give thanks to Simon for the valuable contribution he has made over the many years he has served on the Board. We wish him well in his future endeavours. Subsequently, no further changes have been made. In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies the entire Board is subject to annual re-election. The Directors have a wide range of appropriate skills and experience to make up a balanced Board for your Company. With the exception of Simon Fraser, in the opinion of the Board, all other Directors are independent. Simon Fraser, due to his previous employment relationship with the Manager and his directorship of another investment trust managed by Fidelity, namely Fidelity Japanese Values PLC, is deemed non-independent by the UK Corporate Governance Code. The Board is convinced that Simon Fraser's experience serves the Company well; and the Directors support unanimously his continued position as a Director of the Company. In line with good corporate governance the Board carries out an assessment of its own performance every year and every three years an independent, externally facilitated evaluation of its performance takes place as required by the UK Corporate Governance Code for Directors of all FTSE 350 companies. The next such independent evaluation will take place during 2015. The Board has considered the proposals for the re-election of all of the Directors and recommends to shareholders that they vote in favour of the proposals. CONTINUATION VOTE In accordance with the Articles of Association of the Company, an ordinary resolution that the Company continue as an investment trust for a further two years was passed at the 2013 Annual General Meeting. A further continuation vote will take place at the Annual General Meeting in 2015. ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at Fidelity's offices at 25 Cannon Street, London EC4M 5TA (St Paul's or Mansion House tube stations) on Thursday 15 May 2014 at midday. My fellow Directors and I look forward to talking with as many shareholders as possible on this occasion. We will be holding a presentation by our Portfolio Manager, Sam Morse. OUTLOOK The economic backdrop in Europe is improving and the trend is continuing into 2014. Whilst the Eurozone still presents many challenges, the main focus of concern amongst investors has shifted to China, which is experiencing a slowdown in growth, and Emerging Markets which are being impacted by the tapering of Quantitative Easing in the United States. However, we should not ignore the fact that many companies that operate within Europe generate much of their earnings from Emerging Markets, particularly China and this, along with the level of exuberance we saw in markets in 2013, means that a degree of caution should be exercised. As I write this report, there is a dangerous situation developing closer to home in Crimea. The outcome is difficult to predict, but it will certainly impact equity markets. In this respect, our focus remains on investing in strong European companies offering fundamental value with the prospect of making decent returns from current valuation levels. We are, as I said this time last year, fortunate to have a wide choice of investment opportunities across the region. Humphrey van der Klugt Chairman 10 March 2014 MANAGER'S REVIEW PERFORMANCE REVIEW As shown in the Financial Summary in the table above, the NAV per share of the Company returned 20.0% in the year to 31 December 2013, underperforming the FTSE World Europe (ex UK) Index, which returned 25.2%. (All performance figures are quoted on a total return basis and in UK sterling). MARKET BACKGROUND 2013 turned out to be a surprisingly strong year for continental European equities. In a rewarding first quarter, Italian elections, which resulted in dead-lock, and the banking system woes in Cyprus created short term volatility but did little to halt a rise in share values. The market did, however, suffer a brief mid-year correction when US bond yields started to climb in anticipation of the June "tapering" announcement from the Federal Reserve. Shares resumed their long march upwards, in the second half of the year, as optimism grew that European economies were on the mend and that earnings and dividend growth would follow. Economic news improved as the year progressed with some of the more indebted European countries, such as Spain and Italy, finally emerging from recession in the third quarter. As a consequence of improved growth prospects, the cost of government debt in these countries also started to fall rapidly. Existential threats to the Eurozone receded further as these countries appeared to have fiscal deficits more firmly under control; Greece, for instance, forecast a primary surplus. This positive economic momentum was given a further boost, in November, when the European Central Bank ("ECB"), reduced its core interest rate by a quarter of a percent, to protect the nascent recovery and to ward off the possibility that very low rates of inflation might turn into outright deflation. Responding to better news in Europe, markets rose steadily through the second half of the year, shrugging off growing evidence that emerging markets, such as China, Brazil and Turkey, were, by contrast, beginning to experience less robust prospects for growth and, in some cases, weakening currencies. This is partly on the premise that rising bond yields in the US would result in the repatriation of liquidity that had supported emerging market growth for many years. There was some concern that weakness in emerging markets might impact the recovery in developed markets more forcefully but a delay in "tapering", which had been expected in the autumn, allayed investors' worries in the short term. The year ended on a quiet note despite the positive announcement, following the German election, of a "grand coalition" between Merkel's winning Christian Democratic Union and the Social Democrats. The market was held in check by renewed fears of "tapering", after stronger economic data in the US, and by some nervousness ahead of the ECB's review of the asset quality of Eurozone banks and subsequent stress tests. Against a backdrop of improving domestic economies, cyclical sectors such as financials and consumer discretionary were re-rated strongly. Conversely, more defensive sectors, especially those with emerging market or commodity exposure, such as energy and consumer staples, delivered more modest returns. Disappointingly, although share prices rose handsomely in 2013, the earnings and dividends of continental European companies did not, in aggregate, grow. This makes the scale of the returns enjoyed in the year quite surprising. PORTFOLIO REVIEW The Company's investment strategy has not changed: your Manager continues to focus on identifying, and investing in, attractively valued companies, with sound balance sheets, which can deliver consistent dividend growth. This investment strategy has worked well, in terms of superior returns to the Benchmark, over the long term but it does not work every year. Although your Company enjoyed satisfactory absolute returns in 2013, the Company's NAV underperformed the Benchmark, despite the benefits of gearing in a rising market. This underperformance is largely attributable to poor stock selection. Some of the underperformance is, however, also attributable to a more `risk-on' environment, particularly in the second half of the year. Companies which performed best in this environment were often the laggards of previous years, such as highly-leveraged companies or companies exposed to the domestic economies of Spain and Italy. In many cases, these companies did not meet your Manager's required criteria of growing dividends, cash generation and a strong balance sheet. By contrast, companies whose earnings and dividends had proved more robust in more difficult economic times started the year at more elevated valuation levels and, therefore, did not enjoy the same quantum of re-rating although, in many cases, they delivered continued earnings and dividend growth. In terms of stock selection, which remains the primary determinant of your Company's performance, there were a number of detractors spread across different sectors. In the energy and materials sectors, in addition to Saipem and Umicore, whose travails were covered in the half-yearly report, Royal Dutch Shell performed poorly, particularly in the second half of the year, with the resignation of the Chief Executive preceding very disappointing quarterly results. Turkiye Garanti Bankasi, also mentioned in the half-yearly report, declined further, particularly towards the end of the year, as the Turkish Lira weakened and as political tensions resurfaced due to a corruption probe involving some cabinet ministers' relations. The technology business, SAP, also performed poorly as it became apparent that the company would not meet medium-term guidance on margins due to the requirement to invest more to address the challenge from "cloud" competitors. Swedish Match, already facing increasing competition in Swedish snus, also saw a sharp slowdown in growth in its other major business, US mass-market cigars, as the competitive environment worsened. Most of these businesses are sound businesses, which meet the investment criteria of your Manager's strategy, so holdings have been retained, although often in reduced amounts. Saipem was a mistake and it was sold entirely early on in the year. There were some stock-picking successes, most notably in the financial sectors, with 3i Group, KBC, the Belgian bank, and Sampo, the Finnish insurance company, all delivering strong relative performances but, in general, the detractors more than off-set these more encouraging performers. To summarise, it was a poor year for stock selection. Mistakes have been made and lessons learned. As the great investor, Sir John Templeton, famously remarked: "The only way to avoid mistakes is not to invest - which is the biggest mistake of all" which was certainly true in 2013. OUTLOOK The market has had two strong years in a row. The Benchmark has, over that time, climbed by almost 50%. Valuations of continental European companies have risen from a low base but are now, in aggregate, beginning to look less attractive, relative to history and relative to bonds. Some argue that equities will remain well supported by global liquidity and a possible rotation out of bonds and cash into equities. Time will tell. In your Manager's opinion, the market will struggle to make much progress from here, unless the improvement in the economic environment feeds through into stronger-than-expected earnings and dividend growth; expectations are high that this will happen, and that is, in itself, a risk. The improvement in the economies of Europe is encouraging and, going forward, fiscal austerity will be less of a drag on growth as deficits shrink. This recovery is, however, likely to be slow and fragile, because there is little credit growth, given high debt levels and a requirement, particularly in the case of banks, to delever. Slowing growth, currency weakness and political instability in emerging markets may also restrain the pace of economic growth in developed economies. The recent events in the Ukraine are a case in point. It is important to remember that almost a third of continental European companies' revenues and profits are sourced from these emerging economies. The outlook remains balanced. Caution is warranted, especially given the more positive sentiment towards European equities, and a pull-back is quite probable, hence the reduction in your Company's level of gearing, but many of the major risks that have plagued markets in recent years have, for the time being, receded. FIL Investments International 10 March 2014 STRATEGIC REPORT The Directors have pleasure in presenting the Strategic Report of the Company which replaces and enhances reporting previously included in the `Business Review' section of the Directors' Report. It provides a review of the Company's business and describes the principal risks and uncertainties it faces. An analysis of the performance of the Company during the financial year and the position at the year end is included taking into account its objective, strategy and risks and how these are measured using Key Performance Indicators. The Chairman's Statement and Manager's Review form part of the Strategic Report. BUSINESS AND STATUS The Company carries on business as an investment trust and has been accepted as an approved investment trust by HM Revenue & Customs under Sections 1158 and 1159 of the Corporation Tax Act 2010, subject to the Company continuing to meet eligibility conditions. The Directors are of the opinion that the Company has conducted its affairs in a manner which will satisfy the conditions for continued approval. The Company is registered as an investment company under Section 833 of the Companies Act 2006 and operates as such. It is not a close company and has no employees. OBJECTIVE The Company's objective is to achieve long term capital growth from the stockmarkets of continental Europe. The Benchmark Index for performance measurement purposes is the FTSE World Europe (ex UK) Index. STRATEGY In order to achieve this objective, the Company has an actively managed portfolio of investments, consisting primarily of continental European securities. The principal activity is to pursue the objective through operating as an investment trust company. As part of the strategy, the Board has delegated the management of the portfolio and other services. The objective, strategy and principal activity have remained unchanged throughout the year ended 31 December 2013. The Board has reviewed the summary of the year's activities and is in agreement with the indications of likely future developments and the factors likely to affect these which are given in the Chairman's Statement and the Manager's Review shown above. The stock selection approach adopted by the Portfolio Manager is considered to be well suited to achieving the objective. Although income is being received by way of dividend payments the emphasis is placed on capital growth. The Board takes the view that investing in equities is a long term process, and that the Company's returns to shareholders will vary from year to year. Unlike equivalent open-ended investment vehicles, the investment trust structure offers investors a portfolio which may be geared. The Board takes the view that long term returns can be enhanced by the use of gearing, in a carefully considered and monitored way. The gearing range is considered by the Board and Portfolio Manager at their quarterly board meetings. INVESTMENT POLICY The Company invests principally in continental European securities with a view to achieving long term capital growth for shareholders. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual situations. Whilst the Company's overall exposure to individual countries and industry sectors is monitored, the portfolio is not structured primarily on a country or industrial weightings basis, although certain investment restrictions apply in order to diversify risk. No material change will be made to the investment policy without shareholder approval. INVESTMENT RESTRICTIONS - A minimum of 80% of gross assets will be invested in companies from countries which are included in the Benchmark Index. - A maximum of 5% of gross assets may be invested in companies of non-European countries which have some European exposure or connection. - A maximum of 10% of the Company's gross assets may be invested in the aggregate of: a) securities not listed on a recognised stock exchange; and b) holdings in which the interest of the Company amounts to 20% or more of the equity capital of any listed company. - The Company will not invest more than 10% of gross assets in any one quoted company at the time of acquisition. - A maximum of 5% of the Company's gross assets may be held in unquoted securities in aggregate at any one time. - The Company's normal policy is to be geared in the belief that long term investment returns will exceed the costs of gearing. This gearing is obtained through the use of borrowing and/or through the use of Contracts for Difference ("CFDs") to obtain exposure to securities selected by the Manager. The effect of gearing is to magnify the consequence of market movements on the portfolio. If the portfolio value rises the NAV will be positively impacted, but if it falls the NAV will be adversely impacted. The Board is responsible for the level of gearing in the Company and reviews the position on a regular basis. The aggregate exposure of the Company to equities, as a result of borrowing or under CFDs, will not exceed 130% of the total net assets (a gearing level of 30%) at the time at which any CFD is entered into or a security acquired. It should be stressed that the majority of the Company's exposure to equities will be through direct investment, not CFDs. In addition, the limits on exposure to individual companies and groups will be calculated on the basis that the Company has acquired the securities to which any CFD is providing exposure. - The maximum amount of cash or cash equivalents held by the Company will be 25% of the Company's total net assets, but this limit will not include any cash or cash equivalent paid as collateral for unrealised losses on CFDs. In practice the cash position will normally be much lower. - The Board reserves the right to lend stock and/or assets of up to 10% of the Company's total net assets. - The Board reserves the right to hedge the portfolio by way of currency. - A maximum of 10% of the Company's gross assets may be invested in the securities of other investment companies (including listed investment trusts). INVESTMENT MANAGEMENT PHILOSOPHY, STYLE AND PROCESS The Portfolio Manager's key focus is on identifying attractively valued companies which exhibit good long term structural growth prospects. The Portfolio Manager prefers companies that he believes can grow their dividend over the next three to five years, as evidence suggests that such companies outperform over the long term. In order to identify these companies, the Portfolio Manager looks for the following main characteristics: - positive fundamentals (structural growth prospects, a proven business model); - the ability to generate cash; - a strong balance sheet; and - an attractive valuation. The Portfolio Manager draws upon the substantial intelligence uncovered by Fidelity's team of pan-European analysts when researching stocks. A great deal of importance is placed on attending company meetings. Being a bottom- up stock picker, the Portfolio Manager aims to generate outperformance through company selection, on a three to five year investment horizon, rather than through sector or country positions. PERFORMANCE In the year ended 31 December 2013, the Company's net asset value total return was 20.0%, underperforming the FTSE World Europe (ex UK) Index total return of 25.2%. Details on trends and factors that may impact the future performance of the Company are included in the Chairman's Statement on and Manager's Review shown above. The ten year Summary of Performance is shown above. The Ten Largest Investments, the Distribution of the Portfolio and the Full Portfolio Listing is disclosed in the Annual Report. RESULTS AND DIVIDENDS The Company's results are set out in the Income Statement shown below. The total return after taxation for the year ended 31 December 2013 was £120.06 million, of which the revenue return amounted to £12.66 million. The Directors recommend that a final dividend of 29.75 pence (2012: 27.75 pence) per share be paid on 23 May 2014 to shareholders who appear on the register as at the close of business on 21 March 2014 (ex-dividend date 19 March 2014). ATTRIBUTION ANALYSIS The attribution analysis table below shows how the increase in NAV has been achieved. Analysis of change in NAV during the year (pence per share) Starting NAV 1 January 2013 1,428.97 Impact of: Index +314.97 Exchange Rate +44.94 Gearing +24.72 Stock Selection -87.40 Share Repurchases +4.86 Charges -14.83 Cash/Residual -2.70 NAV Excluding the Dividend Paid 1,713.53 Dividend paid -27.75 Closing NAV 31 December 2013 1,685.78 Sources: Fidelity and Datastream Past performance is not a guide to future returns KEY PERFORMANCE INDICATORS The key performance indicators ("KPIs") used to determine the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below. Year ended Three years 31 December ended 31 December 2013 2012 2013 % % % NAV per share1,2 +20.0 +24.7 +32.5 Share Price2 +20.8 +31.3 +45.0 FTSE World Europe (ex UK) Index2 +25.2 +17.8 +25.8 Discount to NAV (based on ex income NAV) 7.9 8.1 n/a Discount to NAV (based on cum income NAV) 9.5 9.9 n/a Ongoing Charges1 0.96 0.98 n/a 1 Calculated in accordance with AIC guidelines 2 Calculated on a total return basis Sources: Fidelity and Datastream Past performance is not a guide to future returns The Summary of Performance graphs in the Annual Report indicate the relative historical performance of the Company against its Benchmark Index since launch and the discount or premium to NAV over that period. Some of the Company's KPIs are considered to be beyond the Board's control. However, they are measures of the Company's absolute and relative performance and the Board monitors them regularly. Indices and ratios which assist in managing performance and compliance are also reviewed, including the ongoing charges. Expenses are considered regularly at Board meetings and this enables the Board to review costs and consider any expenditure outside that of its normal operations. In addition to the KPIs set out above, the Board regularly reviews the Company's performance against its peer group of investment trusts. The principal risks and uncertainties stated below includes descriptions of other performance indicators, their monitoring and management which are important to the business of the Company. Long term performance is also monitored and the Summary of Performance graphs in the Annual Report show this information. PRINCIPAL RISKS AND UNCERTAINTIES The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The process is regularly reviewed by the Board in accordance with the Financial Reporting Council's "Internal Control: Revised Guidance for Directors". The Board is responsible for the Company's system of internal control and for reviewing its effectiveness. An internal controls report providing an assessment of risks, together with controls to mitigate these risks, is prepared by the Manager and considered by the Audit Committee. The Board also determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. Market Risk The Company's assets consist of listed securities and the principal risks are therefore market related such as market downturn, interest rate movements, and exchange rate movements. The Portfolio Manager's success or failure to protect and increase the Company's assets against this background is core to the Company's continued success. Risks to which the Company is exposed and which form part of the market risks category are included in the financial statements in the Annual Report together with summaries of the policies for managing these risks. These comprise: market price risk (which comprises interest rate risk, foreign currency risk and other price risk); derivative instruments risk; liquidity risk; counterparty risk; and credit risk. Performance Risk The achievement of the Company's performance objective relative to the market requires the application of risk. Strategy, asset allocation and stock selection might lead to underperformance of the Benchmark Index. The Board reviews risk at each Board meeting, considers the asset allocation of the portfolio and the risk associated with particular countries and industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively monitoring the portfolio selected in accordance with the asset allocation parameters and seeks to ensure that individual stocks meet an acceptable risk/reward profile. Income/Dividend Risk The Company's revenue may decline which would impact on the Company's ability to maintain its dividend. The Company's objective is capital growth and, as explained in the Chairman's Statement above, the Portfolio Manager is not constrained in any way to determine the level of income. The Board monitors this risk through the receipt of detailed income reports and forecasts which are considered at each meeting. Discount Control Risk The price of the Company's shares as well as its discount to NAV, are factors which are not within the Company's total control. Some short term influence over the discount may be exercised by the use of share repurchases at acceptable prices. Details of share repurchases during the year are given in the Annual Report. The Company's share price, NAV and discount volatility are monitored daily by the Manager and considered by the Board at each of its meetings. Gearing Risk The Company has the option to invest up to the total of any loan facilities or to use Contracts for Difference ("CFDs") to invest in equities. The principal risk is that gearing magnifies investment returns. Therefore, if the Company is geared in strongly performing stocks, it will benefit from gearing. If the Company is geared in poorly performing stocks, the impact would be detrimental. Other risks are that the cost of gearing may be too high or that the term of the gearing is inappropriate in relation to market conditions. The Company currently has no bank loans and geared exposure is being achieved solely through the use of long CFDs. This has reduced the cost of gearing as outlined in the Chairman's Statement above and provides greater flexibility. The Board regularly considers gearing and gearing risk and sets limits accordingly. Tax and Regulatory Risks A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status, resulting in the Company being subject to tax on capital gains. A breach of other legal and regulatory rules may lead to suspension from listing on the London Stock Exchange or a qualified audit report. The Board receives regular reports from the Manager confirming regulatory compliance during the year. There are a number of prospective regulations which could impact the Company. Of greatest significance is the Alternative Investment Fund Managers Directive ("AIFMD"). The implementation date for the Directive was July 2013 but with a transitional period whereby investment trusts will not be required to apply for AIFMD authorisation until July 2014. The Board has reviewed the impact of the directive on the Company's operations and decided in principle to appoint FIL Investment Services (UK) Limited (for no additional fee) as its Authorised Investment Fund Manager ("AIFM") before the end of the transitional period on 22 July 2014. FIL Investment Services (UK) Limited is in the process of seeking to become a registered AIFM during the transitional period so that your Company will become fully compliant by July 2014. An additional requirement of the AIFMD is to appoint a depositary on behalf of the Company which will oversee custody and cash arrangements of the Company. To this end the Board have agreed in principle to appoint J. P. Morgan Europe Limited to act as the Company's depositary. JPMorgan Chase Bank will continue to act as bankers and custodians to the Company. There will be an additional operating cost associated with this new role but it is not possible at this stage to be precise about the level of additional cost. Operational Risks The Company has no employees and relies on a number of third party service providers, principally the Manager, Registrar and Custodian. The Company is dependent on the Manager's control systems and those of its Custodian and Registrar, both of which are monitored and managed by the Manager in the context of the Company's assets and interests on behalf of the Board. The security of the Company's assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements, among other things, rely on the effective operation of such systems. The Manager, Registrar and Custodian are subject to a risk-based programme of internal audits by the Manager. In addition, service providers' own internal controls reports are received by the Board and any concerns investigated. Certain of the Company's relationships with its service providers will change as the Company implements AIFMD and in particular the Company is required to appoint a depositary. While it is believed that the likelihood of poor governance, compliance and operational administration by third party service providers is low, the financial consequences, for example, of cyber crime, could be serious, including the associated reputational damage to the Company. Other Risks A continuation vote takes place every two years. This takes the form of an ordinary resolution to shareholders and requires a simple majority of votes cast in favour to ensure that the Company continues in existence for a further two years until the next continuation vote is put to shareholders. There is a risk that shareholders do not vote in favour of the continuation vote during periods when performance is poor. Further details are provided in the Chairman's Statement, in relation to the next continuation vote and a review of the Company's performance. BOARD DIVERSITY The Board carries out any candidate search against a set of objective criteria on the basis of merit, with due regard for the benefits of diversity on the Board, including gender. As at 31 December 2013, there were four male Directors and one female Director on the Board. EMPLOYEE, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES The Company has no employees and all of its Directors are non-executive, the Company's day- to- day activities being carried out by third parties. The Company has not adopted a policy on human rights as it has no employees and its operational processes are delegated. The Company's financial reports are printed by a company which has won awards for its environmental awareness and further details of this may be found on the back cover of this report. Financial reports and other publicly available documentation are also available on the Company's website www.fidelity.co.uk/its. Details about Fidelity's own community involvement may be found on its website www.fidelity.co.uk. CORPORATE ENGAGEMENT The Board believes that the Company should, where appropriate, take an active interest in the affairs of the companies in which it invests and that it should exercise its voting rights at their general meetings. Unless there are any particularly controversial issues (which are then referred to the Board) it delegates the responsibility for corporate engagement and shareholder voting to Fidelity. These activities are reviewed annually. FUTURE DEVELOPMENTS The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and the Manager's Review shown above. By Order of the Board FIL Investments International Secretary 10 March 2014 RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER The Directors have complied with the provisions of Financial Reporting Standard 8 "Related Party Disclosures", which require disclosure of related party transactions and balances. FIL Investments International is the Manager and Secretary of the Company and details of the services provided and fees paid are given in the Annual Report. Fees paid to the Directors are disclosed in the Directors' Remuneration Report of the Annual Report. STATEMENT OF DIRECTORS' RESPONSIBILITIES The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under that law they have elected to prepare the financial statements in accordance with UK Generally Accepted Accounting Practice. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period. In preparing these financial statements, the Directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent; - state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and - prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that its financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report, a Corporate Governance Statement and a Directors' Remuneration Report that comply with that law and those regulations. The Directors have delegated responsibility for the maintenance and integrity of the corporate and financial information included on the Company's pages of the Manager's website www.fidelity.co.uk/its. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their own jurisdictions. We confirm that to the best of our knowledge the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and the Strategic Report and 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 it faces. We confirm that we consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's performance, business and strategy. Approved by the Board on 10 March 2014 and signed on its behalf. Humphrey van der Klugt Chairman Sub-Division of Ordinary Shares Resolution 12 to be proposed at the forthcoming Annual General Meeting is being proposed as an ordinary resolution and concerns the sub-division of the Company's Ordinary shares on a 10 for 1 basis (the Sub-Division). The Company's Ordinary shares (the Existing Ordinary Shares) currently have a nominal value of 25 pence each. The closing price of the Existing Ordinary Shares as at 6 March 2014 (being the last practical date prior to the publication of this Annual Report) was £15.20. As announced by the Company on 17 January 2014, the Board are aware that smaller investors, or investors who participate in monthly saving plans or dividend reinvestment schemes have experienced difficulty fulfilling their order because of the high price at which the Existing Ordinary Shares trade, resulting in a cash surplus that cannot be invested until sufficient funds have built up in their accounts. If the Existing Ordinary Shares were to have been sub-divided on 6 March 2014, the shares would have been valued at £1.52 per share reflecting the fact that Ordinary shareholders would have then held ten times as many new Ordinary shares. Shareholders should note therefore that, subject to market movements, the aggregate value of their shareholdings should remain the same. The Board are of the opinion that the lower share price will enhance the appeal of the Existing Ordinary Shares to smaller investors. It is therefore proposed that, on 2 June 2014 (or such other time and date as the Directors may determine), each of the Existing Ordinary Shares that appear on the share register at the Record Date of 6.00 pm on 30 May 2014 will be sub-divided into 10 Ordinary shares of 2.5 pence each (the New Ordinary Shares). The resolution is conditional upon, and takes effect on, the admission of the New Ordinary Shares to the Offcial List of the UK Listing Authority and to trading on the London Stock Exchange's market for listed securities. The New Ordinary Shares will carry the same rights in all respects as the Existing Ordinary Shares, including voting rights. The only change will be the aggregate number of shares held and the nominal value per share. The Company's net assets will remain unchanged following the Sub-Division and the Company's daily released net asset value per share will equate to one tenth of its original net asset value per share. The number of shares in issue on 6 March 2014 (being the last practical date prior to the publication of these accounts) was 42,162,834 Existing Ordinary Shares. If resolution 12 is passed and becomes effective, the number of shares in issue following the Sub-Division will be 421,628,340 New Ordinary Shares. The Company's final dividend is due to be paid on 23 May 2014 to existing shareholders who appear on the Company's register on 21 March 2014. The Sub-Division will not affect the payment of the Company's final dividend. If the Sub-Division is approved and based on the timetable set out above, applications will be made for admission of the New Ordinary Shares to the Official List and to trading on the London Stock Exchange's market for listed securities. If the applications are accepted, it is proposed that the last day of trading on the London Stock Exchange of the Existing Ordinary Shares will be 30 May 2014 and the New Ordinary Shares will commence trading on 2 June 2014, with the following identifiers: ISIN: GB00BK1PKQ95 Sedol: BK1PKQ9 Ticker: FEV/LON. No fractional entitlements will arise as a result of the Sub-Division, as each shareholder's holding of Existing Ordinary Shares will be capable of division into New Ordinary Shares on a whole number basis. By way of an example, a shareholder who held 1,000 Existing Ordinary Shares prior to the Sub-Division, would, immediately following the Sub-Division, hold 10,000 New Ordinary Shares. Based on this example, the net asset value of the Existing Ordinary Shares as at 6 March 2014 (being the latest practical date prior to the publication of these accounts) of £15.20 per share would, following the Sub-Division, become £1.52 per share. If resolution 12 becomes effective, new share certificates representing the New Ordinary Shares will be sent to shareholders who currently hold shares in certificated form, on or about 16 June 2014. Once received, all old share certificates which relate to the Existing Ordinary Shares must be destroyed as they will no longer be valid. If you do not receive a new share certificate but believe you are entitled to one please call 0871 664 0300 (calls cost 10 pence per minute plus network extras. Lines are open 8.30 am - 5.30 pm Monday to Friday) or email: shareholderenquiries@capita.co.uk. No temporary documents to title will be issued. Transfers between 2 June 2014 and 16 June 2014 will be certified against the register of members of the Company. CREST accounts are expected to be credited on 2 June 2014. Based on current UK tax legislation and the practice of HMRC, for those shareholders who (i) are beneficial owners of their Existing Ordinary Shares, (ii) hold their Existing Ordinary Shares as an investment (and not via an individual savings account (ISA)) and (iii) are ordinarily resident in the UK for taxation purposes, the Sub-Division will not be treated as a disposal for the purposes of UK capital gains tax, nor as a distribution of income for the purposes of UK income tax. If you are in any doubt as to your taxation position or if you are subject to tax in any jurisdiction other than the UK then you should consult your own professional adviser. No UK stamp duty or stamp duty reserve tax will be payable by shareholders as a result of the Sub-Division. Adoption of New Articles of Association Resolution 16 to be proposed at the forthcoming Annual General Meeting is being proposed as a special resolution and relates to the adoption of new Articles of Association (the New Articles) which update the Company's existing Articles of Association. There have been a number of recent changes to tax, regulation and company law which affect investment trusts and the Company. The Board is therefore seeking approval to adopt the New Articles, substantially in the form of the existing Articles, but updated to reflect these changes. In particular: 1. As a result of changes in tax law, the Companies Act 2006 has been amended to remove the requirement that an investment company's articles of association must prohibit a distribution of realised capital profits and so it is now possible for such companies to pay dividends out of capital profits. It is therefore proposed that the Company's Articles should be updated to give the Company this greater flexibility in line with tax and company laws. The Board has no current intention to pay dividends out of capital profits but believes that it is in shareholders' best interests for the Board to have this power should circumstances warrant its use in the future. 2. The Company is an alternative investment fund for the purposes of the Alternative Investment Fund Managers Directive ("AIFMD"). The proposed New Articles have therefore also been updated in order to incorporate the powers that may be granted to the Board as a result of the implementation of AIFMD. In particular, it is proposed to include a new Article 131, expressly granting the Board the authority to allow a depositary to discharge liability for loss of financial instruments held in custody in accordance with the limited circumstances permitted by Article 21 of AIFMD. A copy of the existing Articles of Association and the proposed New Articles (showing all changes to the existing Articles), are available for inspection at the registered office of the Company and at 25 Cannon Street, London EC4M 5TA and will be made available for inspection at the Company's forthcoming Annual General Meeting at least 15 minutes prior to the start of the meeting and up until the close of the meeting. Income Statement for the year ended 31 December 2013 2013 2012 revenue capital total revenue capital total £'000 £'000 £'000 £'000 £'000 £'000 Gains on investments designated at fair value through profit or loss - 95,243 95,243 - 93,403 93,403 Gains on derivative instruments held at fair value through profit or loss - 12,044 12,044 - 19,630 19,630 Income* 21,066 - 21,066 18,518 - 18,518 Investment management and (5,821) - (5,821) (4,929) (2,243) (7,172) performance fees Other expenses (803) - (803) (629) - (629) Exchange gains/(losses) on 4 108 112 (76) (153) (229) other net assets Net return before finance 14,446 107,395 121,841 12,884 110,637 123,521 costs and taxation Finance costs (279) - (279) (326) - (326) Net return on ordinary activities before taxation 14,167 107,395 121,562 12,558 110,637 123,195 Taxation on return on ordinary activities** (1,505) - (1,505) (503) - (503) Net return on ordinary activities after taxation for the year 12,662 107,395 120,057 12,055 110,637 122,692 Return per ordinary share* 29.82p 252.94p 282.76p 27.78p 254.97p 282.75p Reconciliation of Movements in Shareholders' Funds for the year ended 31 December 2013 share capital share premium redemption capital revenue total capital account reserve reserve reserve equity £'000 £'000 £'000 £'000 £'000 £'000 Opening shareholders' funds as at 1 January 2012 11,073 58,615 4,752 425,007 18,170 517,617 Net return on ordinary activities after - - - 110,637 12,055 122,692 taxation for the year Repurchase of ordinary (292) - 292 (12,457) - (12,457) shares Dividend paid to - - - - (11,578) (11,578) shareholders Closing shareholders' funds as at 31 December 2012 10,781 58,615 5,044 523,187 18,647 616,274 Net return on ordinary activities after - - - 107,395 12,662 120,057 taxation for the year Repurchase of ordinary (234) - 234 (13,239) - (13,239) shares Dividend paid to - - - - (11,901) (11,901) shareholders Closing shareholders' funds as at 31 December 2013 10,547 58,615 5,278 617,343 19,408 711,191 Balance Sheet as at 31 December 2013 Company number 2638812 2013 2012 £'000 £'000 Fixed assets Investments designated at fair value through profit or loss 669,216 583,938 Current assets Derivative assets held at fair value through 19,980 16,448 profit or loss Debtors 2,463 1,940 Fidelity Institutional Liquidity Fund plc 31 30 Cash at bank 21,326 20,450 43,800 38,868 Creditors Derivative liabilities held at fair value - (2,747) through profit or loss Other creditors (1,825) (3,785) (1,825) (6,532) Net current assets 41,975 32,336 Total net assets 711,191 616,274 Capital and reserves Share capital 10,547 10,781 Share premium account 58,615 58,615 Capital redemption reserve 5,278 5,044 Capital reserve 617,343 523,187 Revenue reserve 19,408 18,647 Total equity shareholders' funds 711,191 616,274 Net asset value per ordinary share 1,685.78p 1,428.97p The financial statements were approved and authorised for issue by the Board of Directors on 10 March 2014 and were signed on its behalf by: Humphrey Van der Klugt Chairman Cash Flow Statement for the year ended 31 December 2013 2013 2012 £'000 £'000 Operating activities Investment income received 14,631 13,165 Income received on long CFDs 3,009 1,162 Deposit interest received 44 53 Investment management fee paid (5,619) (4,721) Performance fee paid (2,243) - Directors' fees paid (104) (161) Other cash payments (660) (675) Net cash inflow from operating activities 9,058 8,823 Finance costs Interest paid on long CFDs (281) (335) Net cash outflow from finance costs (281) (335) Overseas taxation recovered 651 1,106 Financial investments Purchase of investments (156,750) (129,219) Disposal of investments 167,459 144,451 Net cash inflow from financial investment 10,709 15,232 Derivative activities Proceeds of long CFD positions closed 5,765 9,038 Net cash inflow from derivative activities 5,765 9,038 Dividends paid to shareholders (11,901) (11,578) Net cash inflow before use of liquid resources and financing 14,001 22,286 Cash flow from management of liquid resources Fidelity Institutional Liquidity Fund plc (1) 1 Net cash (outflow)/inflow from management of (1) 1 liquid resources Net cash inflow before financing 14,000 22,287 Financing Repurchase of ordinary shares (13,232) (14,055) Net cash outflow from financing (13,232) (14,055) Increase in cash 768 8,232 Notes to the Financial Statements 1. The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010. 2. Accounting Policies a) Basis of accounting - The financial statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of fixed asset investments and derivative assets and liabilities, and on the assumption that approval as an investment trust continues to be granted by HM Revenue & Customs. b) Income - Income from equity investments is credited to the Income Statement on the date on which the right to receive the payment is established. Overseas dividends are stated gross of withholding tax. UK dividends are stated at the amount actually receivable, which is net of the attaching tax credit. Interest receivable on short term deposits is credited on an accruals basis. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the dividend foregone is recognised in the capital column of the Income Statement. Derivative income from dividends on long contracts for difference ("CFDs") is included in `Income' and recognised in the revenue column of the Income Statement. c) Special dividends - Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case. d) Expenses - All expenses are accounted for on an accruals basis and are charged in full to the revenue column of the Income Statement with the exception of any performance fee which is charged wholly to the capital column, as it arises mainly from capital returns on the portfolio. e) Taxation - Irrecoverable overseas withholding tax suffered is recognised at the same time as the income to which it relates. Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, at the Balance Sheet date, where transactions or events that result in an obligation to pay more, or a right to pay less, tax in the future have occurred. A deferred taxation asset is recognised when it is more likely than not that the asset will be recoverable. f) Foreign currency - The Directors, having regard to the currency of the Company's share capital and the predominant currency in which its investors operate, have determined the functional currency to be UK sterling. Transactions denominated in foreign currencies are translated to UK sterling at the rate of exchange ruling as at the date of those transactions. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. All capital gains and losses, including exchange differences on the translation of foreign currency assets and liabilities, are dealt with in the capital column of the Income Statement. g) Valuation of investments - The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company's Board of Directors. Accordingly, upon initial recognition the investments are designated by the Company as "at fair value through profit or loss". They are included initially at fair value, which is taken to be their cost, and subsequently the investments are valued at fair value, which is measured as follows: - Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed, or otherwise at fair value based on published price quotations; and - Unlisted investments, where there is not an active market, are valued using an appropriate valuation technique so as to establish what the transaction price would have been at the Balance Sheet date. In accordance with the AIC SORP the Company includes transaction costs, incidental to the purchase or sale of investments, within gains on investments and has disclosed them in the Annual Report. h) Derivative instruments - Some of the Company's exposure to European equities is through the use of long CFDs. The gearing level is monitored and reviewed by the Board on a regular basis. CFDs are measured at fair value which is the difference between the settlement price of the contract and the fair value of the underlying shares in the contract, which is calculated in accordance with policy 1(g). Gains and losses in the fair value of the CFDs are included in `Gains on derivatives instruments held at fair value through profit or loss' in the capital column of the Income Statement. Income received from dividends on long CFDs is included in `Income' and interest paid on long CFDs is included in `Finance costs', in the revenue column of the Income Statement. i) Fidelity Institutional Liquidity Fund plc - The Company holds an investment in the Fidelity Institutional Liquidity Fund plc - Euro Fund (the "Fund"). The Fund invests in low risk short term investments. It is a distributing fund and accordingly the interest earned within the Fund is treated as income. j) Capital reserve - The following are accounted for in capital reserve: - Gains and losses on the disposal of investments and derivative instruments; - Changes in the fair value of investments and derivative instruments held at the year end; - Foreign exchange gains and losses of a capital nature; - Performance fees; - Dividends receivable which are capital in nature; and - Costs of repurchasing ordinary shares. As a result of technical guidance by the Institute of Chartered Accountants in England and Wales in TECH 02/10: Distributable Profits, changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as `capital reserve' in the Reconciliation of Movements in Shareholders' Funds and the Balance Sheet. At the Balance Sheet date all investments held by the Company were listed on a recognised stock exchange and were considered to be readily convertible to cash. k) Dividends - In accordance with Financial Reporting Standard 21: Events after the Balance Sheet Date, dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date. 2013 2012 £'000 £'000 3 INCOME Income from investments designated at fair value through profi t or loss Overseas dividends 16,599 15,301 Overseas scrip dividends 728 1,435 UK dividends 686 570 18,013 17,306 Income from derivative instruments held at fair value through profi t or loss Dividends on long CFDs 3,009 1,162 21,022 18,468 Other income Deposit interest 44 50 Total income 21,066 18,518 4 INVESTMENT MANAGEMENT AND PERFORMANCE FEES Investment management fee - charged to revenue 5,821 4,929 Performance fee - charged to capital - 2,243 Total investment management and performance fees 5,821 7,172 A summary of the terms of the Management Agreement is given in the Directors' Report of the Annual Report. 2013 2012 £'000 £'000 5 OTHER EXPENSES AIC fees 23 26 Custody fees 132 118 Directors' fees1 136 127 Legal and professional fees 158 88 Marketing expenses2 155 60 Printing and publication expenses 78 87 Registrars' fees 68 76 Other expenses 30 26 Fees payable to the Company's Auditor - for the audit of the annual financial statements3 23 21 803 629 Details of the breakdown of Directors' fees are provided in 1 the Directors' Remuneration Report of the Annual Report Marketing expenses in 2012 include the release of £82,000 due 2 to an underspend of the 2011 accrual The VAT on fees payable to the Company's Auditor is included 3 in "other expenses" 2013 2012 £'000 £'000 6 DIVIDENDS Dividend paid: Dividend of 27.75 pence per ordinary share paid for the year ended 31 December 2012 11,901 - Dividend of 26.50 pence per ordinary share paid for the year ended 31 December 2011 - 11,578 11,901 11,578 Dividend proposed: Dividend of 29.75 pence per ordinary share proposed for the year ended 31 December 2013 12,543 - and based on the number of ordinary shares in issue at the date of this report - 11,901 Dividend of 27.75 pence per ordinary share proposed for the year ended 31 December 2012 12,543 11,901 The Directors have proposed the payment of a final dividend for the year ended 31 December 2013 of 29.75 pence per ordinary share to be paid on 23 May 2014, to shareholders on the register at the close of business on 21 March 2014 (ex-dividend date 19 March 2014). 7. NET ASSET VALUE PER ORDINARY SHARE The net asset value per ordinary share is based on net assets of £711,191,000 (2012: £616,274,000) and on 42,187,693 (2012: 43,127,073) shares, being the number of ordinary shares in issue at the year end. 8 . SHARE CAPITAL Issued, allotted and fully paid Ordinary shares of 25 pence each Beginning of the year 43,127,073 10,781 44,294,946 11,073 Repurchase of ordinary shares (939,380) (234) (1,167,873) (292) End of the year 42,187,693 10,547 43,127,073 10,781 9 . RESERVES The "share premium account" arose on the issue of ordinary shares. It is not distributable by way of dividend and it cannot be used to fund share repurchases. The "capital redemption reserve" maintains the equity share capital of the Company and represents the nominal value of shares repurchased and cancelled. It is not distributable by way of dividend and it cannot be used to fund share repurchases. The "capital reserve" reflects realised gains or losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives held and other income and costs recognised in the capital column of the Income Statement. It is not currently distributable by way of dividend. It can be used to fund share repurchases. The "revenue reserve" represents the net revenue surpluses recognised in the revenue column of the Income Statement that have been retained and have not been distributed to shareholders as dividends. It is distributable by way of dividend. STATUS OF RESULTS ANNOUNCEMENT 2012 Financial Information The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31 December 2012 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. 2013 Financial Information The figures and financial information for 2013 are extracted from the published Annual Report and Accounts for the year ended 31 December 2013 and do not constitute the statutory accounts for that year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course. A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM. The annual report and financial statements will be posted to shareholders as soon as is practicable and in any event no later than 13 April 2014 and will shortly be available on the Company's website at www.fidelity.co.uk/its. Enquiries: Jenny Thompson - Company Secretary, FIL Investment International - 01737 836869 Keren Holland - Corporate Communications, FIL Investments International - 0207 074 5262 Christopher Pirnie - Head of UK Company Secretariat, FIL Investment International - 01737 837929

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