Annual Financial Report

RNS Number : 1004Z

European Assets Trust NV

12 March 2012

 



To:                    RNS

From:                European Assets Trust NV

Date:                12 March 2012

Statement of Results for the year ended 31 December 2011

·      Total return* performance for 2011

Euro                 Sterling

Net asset value per share                                                                   -7.6%                -9.9%

HSBC Smaller Europe (ex UK) Index                                                  -21.8%              -23.8%

·      Total return* performance for the 3 years to December 2011

Euro                 Sterling

Net asset value per share                                                                    64.9%               42.5%

HSBC Smaller Europe (ex UK) Index                                                    47.7%               27.5%

·      The annual dividend for 2012 is €0.441 per share (2011: €0.51, net), equivalent to 6% of the opening net asset value per share

Euro                 Sterling

January 2012 dividend paid per share                                                €0.147              £0.122

(further dividends payable in May and August)

* capital performance with dividends reinvested

Chairman's Statement

2011 review

While 2011 was a difficult year for investors across the globe, European Assets Trust managed to deliver a performance well ahead of the benchmark index, thereby providing some capital preservation in a tough environment of falling equity markets. The Company's net asset value per share total return* was -9.9 per cent in Sterling terms (-7.6 per cent in Euro terms). This reflected well against our benchmark, the HSBC Smaller Europe (ex UK) Index, which returned -23.8 per cent in Sterling (-21.8 per cent in Euros).

Stock picking contributed to the majority of this performance, with our Irish companies performing particularly well. While Ireland entered 2011 out of favour with investors, its stock market managed to produce the best performance globally (as measured by MSCI), comfortably outperforming the more fashionable stock markets of the so-called BRIC (Brazil, Russia, India and China) countries. Additionally, the focus on quality companies served us well through the year, as investors began to reward those businesses with strong balance sheets, high returns and structural growth.

It was also encouraging to see portfolio turnover reduce to below 30 per cent for 2011. In contrast to the prevailing trend of short termism in the markets, European Assets Trust selects companies carefully and invests in them for the longer term. This low level of turnover reflects this fundamental approach well.

Europe as a region is currently shunned by investors, and this should help provide a basis for good future returns, particularly in small and medium sized companies where the opportunities for stock picking are so attractive. There will of course be volatility until the Eurozone crisis is resolved, but this is an exciting period for investors who want to access high quality businesses at good prices.

Distribution

The level of dividend paid by the Company each year is determined by the Board in accordance with the Company's distribution policy.  The Board has stated that, barring unforeseen circumstances, it will pay an annual dividend equivalent to 6 per cent of the net asset value of the Company at the end of the preceding year.  The dividend is funded from a combination of accumulated capital gains and income.

The Board has already announced that the 6 per cent of net asset value has been maintained for 2012 which results in a total dividend of Euro 0.441 per share (2011: Euro 0.51 per share, net).  This 2012 dividend reflects the fall over the year in the Company's net asset value per share. The 2012 dividend will be paid in three equal instalments of Euro 0.147 per share at the end of January, May and August.  The January dividend of Euro 0.147 per share was paid to shareholders on 31 January 2012 and amounted to 12.2p per share in Sterling terms.

Shareholders may elect to receive dividends by way of further shares in the Company rather than cash.  Where shareholders so elect, they will receive shares based on the net asset value of the Company; the shares may trade in the market at a discount or premium to net asset value.  Subject to personal circumstances and shareholders taking their own tax advice, UK resident individual shareholders who receive a scrip dividend should not be liable to UK income tax on such dividend.  Instead, UK capital gains tax rules should apply.

Gearing

The Company has a banking facility to allow the Manager to gear the portfolio within the 20 per cent of assets level permitted under the Articles.  The total facility available of Euro 18.5 million is Euro-denominated and flexible, allowing the Manager to draw down amounts for such periods as required.  The Manager made use of the facility during 2011 where investment opportunities arose and at the year-end the Company was 10 per cent geared.

Liquidity enhancement policy

The Company's share price discount to net asset value was 11.1 per cent as at 31 December 2011 compared with 13.2 per cent at the previous year-end. On average over the year, the Company's discount to net asset value stood at 10 per cent, a level which was lower than European smaller company peer funds.  During 2011 the Company bought back 50,000 of its own shares at an average discount of 12.6 per cent (2010: 335,000 shares at an average discount of 13.2 per cent), thereby enhancing net asset value per share for continuing shareholders.  These shares are held in treasury and are available for release back to the market. No shares were sold from treasury during 2011 (2010: nil).

Change in Management Arrangements

The Boards were advised by F&C Investment Business (F&C) in October that Sam Cosh (Director, European Equities at F&C) had been appointed lead investment manager to the Company. Sam has been co-managing the Company's investment portfolio since the second half of 2010 and is supported by the rest of the 19-strong F&C European Equity team. 

The Boards remain satisfied with the continuing appointment of F&C as investment manager and therefore support the appointment of Sam Cosh as lead manager.  In reaching this decision, the Boards have taken into account the Company's strong investment performance relative to the benchmark index since June 2010, following the adoption of the process being applied by the F&C European Equity team to the management of the Company's investment portfolio.

Outlook

While 2012 has started positively, there is still much uncertainty in the markets, particularly regarding the continuing Eurozone crisis. Equity prices are however attractive, and there is significant potential within Europe if the politicians seize the opportunity to reform their economies. There is huge latent potential within Europe if supply side reforms are pushed through, making the economies more flexible, and ultimately more productive. Loose monetary conditions, such as low interest rates and a declining exchange rate, supply side reforms and an improving shareholder culture should be an excellent recipe for good long term returns for shareholders.

We are concentrating on quality businesses that should continue to do well in a period of low growth and tight financing conditions. We expect to see an acceleration in market share gainers and losers, with structural growth and high quality prevailing. We also expect the small and medium sized sector to be buoyed by Mergers and Acquisitions (M&A) in 2012, as large corporates with strong balance sheets look to build their market positions. If the Euro weakens further, European assets should only become more attractive to international acquirers.

Shareholder meetings

The Company's Annual General Meeting will be held on 9 May 2012 at the Hotel de l'Europe in Amsterdam, Netherlands.  In addition, the Company holds a Shareholders' and Investors' Briefing in London each year.  The London Briefing this year will take place on 17 May 2012 at 11.30am at Pewterers' Hall, Oat Lane, London EC2V 7DE and will include a presentation from the Investment Manager on the Company and its investment portfolio.  A light buffet will be served at the end of the briefing.  The Board looks forward to welcoming as many shareholders as are able to attend this year. 

Sir John Ward CBE

Chairman

Manager's review

European Assets Trust performed strongly in 2011 relative both to its benchmark and the more favoured emerging markets of China, India, and Brazil.

2011 was a challenging year for equity investors, but while the focus fell on the problems of the Euro area, most investors would have finished the year disappointed. Our index, the HSBC Smaller Europe (ex UK), fell -23.8 per cent in Sterling total return terms and -21.8 per cent in Euro terms. However, poor equity market performance was shared across the globe with India, China, and Brazil all performing poorly. The standout performer was however the Irish stockmarket which, as measured by the MSCI, was the best performing stockmarket globally, rising +18.1 per cent in Euro terms. This reflects the fact that Ireland has approached the crisis with pragmatism and an acknowledgement of the need to make significant adjustments. They have managed to rebalance their savings and investments and regain their competitiveness. Unit labour costs have fallen dramatically from the peak (-30 per cent), which is in marked contrast to the other peripheral countries which have not made enough progress on this front.

The other notable performer was the US market which managed to produce a positive return (S&P rose +5.5 per cent in Euro terms) in a year plagued by political unrest and economic uncertainty. A recent report by the McKinsey Global Institute on global deleveraging might help to explain at least some of this performance. In contrast to Europe, America's private debt has fallen as a share of GDP since 2008 and this has been within a backdrop of looser fiscal policy. Clearly the debate in Europe is now centering on the severity of the austerity measures and whether this is in fact a handicap to growth and then debt repayment. The McKinsey report focuses on the experience of Finland and Sweden following the bank busts of the 1990s, and has some implications for European technocrats. While both Sweden and Finland recovered strongly, Sweden did not begin its budget cutting until the economy recovered, while Finland exacerbated their recession by trying to impose austerity measures too early. Perhaps the most important lesson for European politicians though is that Sweden and Finland both overhauled their economies following their banking crises. In Europe the potential for structural reform is massive, but the Eurozone so far has been too laser-focused on austerity. The new Spanish government is looking to restructure its intractable labour laws and Italy's Mario Monti is introducing its liberalisation programme. This should be the start of a region wide effort, that should be encouraged by Angela Merkel. Indeed the German chancellor needs only to look back to the reaction to the collapse of equity values in 1973-74, 'the culture of stability' that Germany followed was put in the shade by the inflationary bias of the US monetary policy. In the ensuing period, German equities chronically under-performed.

Another important reflection on 2011 is that we have seen a change in market leadership. 2011 began with consensus supporting the two great investment themes of the last decade; namely commodities and emerging market growth. The year ended though with a year of underperformance in these two categories and eventually investor capitulation. The emerging theme and the one which we have talked about through the year is high quality structural growth. Good quality businesses will find their positions have improved significantly relative to pre 2008, where marginally positioned businesses could access growth and financing because both were abundant. In today's world, the cost of capital of poorly positioned businesses has increased dramatically, whereas that for high quality secure growth stocks has fallen. Perhaps the most extreme example of this is within the banking sector, where poorly structured banks are struggling to access capital, whereas well positioned businesses can access funding and are able to lend at a lower risk and much higher margin then they could before.

Performance

Good performance was delivered from strong stock picking, particularly in Ireland, which as a stock market delivered the best performance globally, as measured by the MSCI.

The Company's net asset value per share total return was -9.9 per cent in Sterling terms and -7.6 per cent in Euro terms for 2011. While we never like to see a reduction in the net asset value, given the magnitude of the fall of our index (-23.8 per cent in Sterling and -21.8 per cent in Euros) this is a good performance. Since we have changed the strategy of the Company in 2010 we have emphasised the need to preserve capital. We aim for a smooth progression of the net asset value through the market cycle which will enable the payment of the dividend to shareholders on a broadly sustainable basis. We are pleased to have achieved some capital preservation relative to market performance in 2011.

The overwhelming contribution to our strong relative performance was our stock selection rather than any sector allocation. Within this though, our Irish companies contributed most significantly. As we have argued before, investors shunned the Irish market which gave us the opportunity to invest in some quality business at good prices. This has proved to be the correct approach. Of particular note was our investment in Glanbia, the international nutrition and Irish dairy business, which rose +24.7% through the year. While nothing of particular note happened to the company in 2011, investors are beginning to understand the magnitude of change that this business is going through. This is a company that is still seen as an Irish dairy company, and is valued as such, but now makes more than half of its profits from the fast growing and high margin nutritionals business. This transition will continue and we are delighted to be holding the stock which is valued materially below where it should be. The other major contributors to performance came from Paddy Power, the Irish gambling company which continues to leverage off its strong brand and innovative marketing,Lindt, the branded chocolate company, and Christian Hansen, the global market leader in dairy enzymes. We also performed well in the financial sectors, where our holdings in Topdanmark, the Danish non-life insurance company, and Bolsas y Mercados Espanoles, the Spanish stock exchange did well.

Our poor performers were, not surprisingly, in the more cyclical sectors. SAF Holland, the manufacturer of components for truck trailers, fell -43.6%. This was a combination of poor communication during some lacklustre results in the summer, and a deterioration of global industrial production data coming to bear on the more cyclical sectors of the market. The other notable poor performer was Oriflame, the direct sales cosmetic company. Results for this company have been poor for an extended period, and we conducted some detailed analysis to try and understand whether this was a structural or temporary issue. While we never like to sell a company after making losses, we have done so as we have concluded that the business was faced with issues of a structural nature. It has since continued to perform badly.

Outlook

European small and medium sized companies are attractively valued and provide a wealth of opportunities for the disciplined investor.

The year has started very positively as the market shrugged off the S&P downgrade to most of Europe and digested the impact of the European Central Bank liquidity injection. For the time being, the liquidity concerns of the banking system have been set to one side, and the market has seen some significant rotation towards risk; stocks and sectors that performed badly last year have started well this year. When the market is in risk-on mode, 'all boats get lifted', no matter what the quality. So will this continue? We can't make predictions and strongly agree with Peter Lynch's assertion - 'nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts.....'. The valuations of European equities, however, provide a decent base for good performance, and we are positive about European small and medium sized companies in particular.

Through the second half of last year, we have however used the market weakness to make some changes to the portfolio. Firstly, we have allowed the gearing to increase as we saw more value within the portfolio. It now stands at 10 per cent of assets, but is unlikely to increase from here. Secondly we have added some stocks to the portfolio which are at the value end of the spectrum, but also, as you would expect, high quality. We have started positions in Storebrand the Norwegian pensions business and Aareal, the German bank. Both are well capitalised and have seen their competitive positions improve during the crisis, but are valued significantly below their intrinsic value, in a large part because investors have abandoned the financial sector on mass.

In terms of outlook, we think there is a huge amount of potential within European small and medium sized companies. Valuations are attractive, and although the start of the year has been positive, allocations towards the region are very low. As discussed above, the potential for supply side reforms to unlock the potential within Europe is huge. Indeed, easier monetary conditions, such as a decline in exchange rate and lower interest rates, with the addition of supply-side reforms and improving shareholder culture, is an excellent recipe for good shareholder returns. It is up to the European politicians, and Mrs Merkel in particular, to release this potential.

Within the portfolio, the two themes that we have been articulating to investors are still very relevant; quality and Mergers & Acquisitions (M&A). As discussed earlier in this review, poorly positioned companies will have difficulties accessing finance and growth. Conversely, companies with strong business models, high barriers to entry, and high returns on capital, should fare relatively well. We concentrate on the latter, and because the 'investment universe' of European small and medium sized  companies is vast and diverse, this means we can find these quality businesses and invest in them at good prices. This theme clearly worked well during last year.

Looking back on 2011, we expected M&A to take a larger role. With growth difficult to come by, and balance sheets strong, we expected small and medium sized companies to benefit from a rise in corporate activity. Clearly while there were instances of this happening, indeed we benefitted when Norkom was acquired at the beginning of the year, the environment of uncertainty meant that M&A took a back seat. With more confidence in the markets, and a weaker Euro, making European companies more attractive for international acquirers, we would expect the portfolio to benefit more from this in 2012.

Sam Cosh

Lead Investment Manager

F&C Investment Business Limited

 

* capital performance with dividends reinvested

 

 

 

AUDITED STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2011

		As at	As at
BALANCE SHEET (after appropriation of the Result)		31 December 2011	31 December 2010
	Note	€	€
Investments
Securities	1	120,201,243	127,630,993
Receivables
Other receivables		273,087	223,280
Total current assets		273,087	223,280
Current liabilities (due within one year)
Bank overdraft		(10,658,843)	(828,236)
Accrued liabilities		(291,563)	(386,091)
Total current liabilities		(10,950,406)	(1,214,327)
Total of receivables and other assets less current liabilities		(10,677,319)	(991,047)
Total assets less current liabilities		109,523,924	126,639,946
Capital and reserves
Issued share capital		6,845,429	6,859,820
Share premium account		17,504,713	17,861,387
Other reserves		85,173,782	101,918,739
		109,523,924	126,639,946
Net asset value per ordinary share	2	€7.36	€8.49
Expressed in sterling - basic		£6.15	£7.27
- treasury	3	£6.12	£7.24

REVENUE ACCOUNT
For the year ended		31 December 2011		31 December 2010
		€		€
Income from investments
Dividends from securities		3,386,717		2,845,582
Withholding taxes		(4,029)		(6,409)
		3,382,688		2,839,173
Movements on investments - realised		8,717,108		18,494,021
Movements on investments - unrealised		(18,879,053)		6,394,399
		(10,161,945)		24,888,420
Interest received		2,357		253
Total investment (loss)/gain		(6,776,900)		27,727,846
Investment management fee		(1,033,096)		(904,376)
Administrative expenses		(955,034)		(1,030,445)
Interest charges		(198,239)		(78,554)
Total operating expenses		(2,186,369)		(2,013,375)
Net (loss)/profit		(8,963,269)		25,714,471
Earnings per share		€(0.60)		€1.70
Dividends per share	4	€0.5337		€0.4613

STATEMENT OF CASH FLOWS

For the year ended	31 December	31 December
	2011	2010
	€	€
Cash flow from investment activities
Dividends	3,328,253	2,872,588
Purchases of securities	(35,462,611)	(78,069,054)
Sales of securities	32,615,047	83,719,045
Administrative expenses	(981,717)	(1,045,988)
Investment management fee	(1,033,096)	(904,376)
Interest received	2,357	257
Interest charges	(146,087)	(53,316)
	(1,677,854)	6,519,156
Cash flows from financing activities
Credit facility	9,830,607	828,236
Dividends	(7,781,688)	(6,849,207)
Repurchase of own shares	(371,065)	(2,365,401)
	1,677,854	(8,386,372)
Cash and cash equivalents
Net decrease for the year	-	(1,867,216)
Balance as at 1 January	-	1,867,216
Balance as at 31 December	-	-

The balance of cash and cash equivalents at the beginning and end of the year ended 31 December 2011 was nil.  The net movement during the year ended 31 December 2011 was nil.  This is due to the Company's use of a banking facility.

PRINCIPAL RISKS

The Company's assets consist mainly of listed equity shares and its principal risks are therefore market-related. The Company holds a portfolio of shares which have a diversified geographic spread. The Company is subject to a number of risks including: market, credit, currency and liquidity risks (see Note 5). The Boards seek to mitigate these risks in a number of ways including: through review of the investment environment and the Company's investment portfolio, policy setting and reliance on contractual obligations.

ACCOUNTING POLICIES

The Company is a closed-end investment company with variable capital incorporated in the Netherlands. The financial statements have been prepared in accordance with the Dutch Financial Supervision Act and have also been prepared in accordance with accounting principles generally accepted in the Netherlands.

Notes.

1.         Listed investments are valued at the closing bid price on the valuation date on the relevant stock markets.

2.         Based on 14,881,368 shares in issue (2010- 14,912,652). During the year the Company issued 18,716 shares through its scrip dividend option and purchased 50,000 of its own shares to be held in treasury.

3.         The Company's treasury net asset value is in accordance with the AIC calculation method where shares are held in treasury; subject to the Company's resale policy, including limiting dilution to 0.5 per cent of net asset value per annum. Based on shares held in treasury since the liquidity enhancement policy was put in place in 2005.

4.         Dividends per share are stated gross of applicable Dutch withholding tax.  A dividend of €0.147 was announced on 5 January 2012 and paid on 31 January 2012. This dividend was paid from other reserves. During 2012, a total distribution of €0.441 per share is payable in equal instalments in January, May and August.

5.         Financial instruments and risk management

General

In the normal course of its business, the Company holds a portfolio of equities and other securities, and manages investment activities with on-balance sheet risk.  Equities and other securities are valued at fair value.  The Company is subject to the risks described below.

·      Market risk

Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, caused by factors that exclusively apply to the individual instrument or its issuer or by factors that affect all instruments traded in the market.  Interest rate risk is the risk that the value of a financial instrument will fluctuate as a result of changes in interest rates.

The Company minimises the risks by making a balanced selection of companies with regard to distribution across European countries, sectors and individual stocks.

Any changes in market conditions will directly affect the profit or loss reported through the Revenue Account.  A 25 per cent increase, for example, in the value of the securities portfolio as at 31 December 2011 would have increased net assets and net profit for the year by €30.1 million (2010: €31.9 million).  A decrease of 25 per cent would have had an equal but opposite effect. The calculations above are based on investment valuations at the respective balance sheet dates and are not representative of the year as a whole, nor reflective of future market conditions.

·      Credit risk

Credit risk is the risk that the counterparty of a financial instrument will no longer meet its obligations, as a result of which the Company will suffer a financial loss.  To reduce exposure to credit risk relating to financial instruments, the creditworthiness of the counterparties and the transactions' size and maturity are assessed by service providers to the Company.  Wherever it is customary in the market, collateral will be demanded and obtained.  The Company and its service providers monitor and control its risks to exposures frequently and, accordingly, Management believes that it has in place effective procedures for evaluating and limiting the credit and market risks to which it is subject.

·      Foreign currency risk management

Currency risk is the risk that the value of a financial instrument will fluctuate as a result of changes in exchange rates. The Company reports its results and financial position in Euros. The Company's main activity is to invest in small and medium-sized companies in Continental Europe whereby a majority of the Company's investments concern companies with listings and activities in the European Monetary Union.  The Company will have exposure to Continental European currencies other than the Euro.  The Company does not employ any derivatives to hedge its exposure to other currencies.

·      Liquidity risk

Liquidity risk is the risk that the Company is not able to obtain the financial means required to meet its obligations.  The Company minimises this risk by mainly investing in equities that are traded on a regular basis.  The Company may use borrowings to seek to enhance returns for shareholders.  This may include the use of financial instruments; such financial instruments are valued at fair value.  Cash balances may be held from time to time and these will be held with reputable banks.

·      Insight into actual risks

The Report of the Management Board Director, the overview of the Investment Portfolio, which includes the geographic distribution of the investments, and the Notes to the Annual Accounts give an insight into the actual risks at the balance sheet date.

·      Risk management

Managing risk is a part of the investment process as a whole and, with the help of systems, the risks outlined above are limited, measured and monitored on the basis of fixed risk measures.

·      Policy regarding the use of financial instruments

Investing implies that positions are taken.  As it is possible to use various instruments, including derivative instruments, to construct an identical position, the selection of derivatives is subordinate to the positioning of a portfolio.  The Company does not employ any derivatives to take positions.

The Company presently has banking facilities to gear the portfolio within the 20 per cent of assets level as permitted under the Articles and under the Company's tax status as a Fiscal Investment Institution.

7.         These are not the full accounts. The full accounts for the year to 31 December 2011 will be sent to shareholders and will be available for inspection at the Company's registered office Weena 210-212, NL-3012 NJ Rotterdam and from the investment managers at F&C Investment Business, 80 George Street, Edinburgh, EH2 3BU. The Company's website address is www.europeanassets.eu where the accounts can also be found once available.

8.         A General Meeting to adopt the 2011 Report & Accounts and other resolutions will be held on 9 May 2012 in Amsterdam and a Shareholders' and Investors' Briefing will be held on 17 May 2012 at Pewterers' Hall, Oat Lane, London.

For further information, please contact:

Sam Cosh

F&C Investment Business Ltd, Fund Manager                                                  0207 628 8000

Michael Campbell,

F&C Investment Business Ltd, Company Secretary                                          0207 628 8000

 

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