Annual Financial Report

RNS Number : 4201Z

European Assets Trust NV

07 March 2013

 



To:                    RNS

From:                European Assets Trust NV

Date:                7 March 2013

Statement of Results for the year ended 31 December 2012

·      Total return* performance for 2012

Euro                 Sterling

Net asset value per share                                                                   32.0%                28.2%

HSBC Smaller Europe (ex UK) Index                                                   20.4%                17.0%

·      Total return* performance for the 3 years to December 2012

Euro                 Sterling

Net asset value per share                                                                   52.8%               39.5%

HSBC Smaller Europe (ex UK) Index                                                   14.6%                4.6%

·      The annual dividend for 2013 is €0.5502 per share (2012 €0.441, net), equivalent to 6% of the opening net asset value per share

Euro                 Sterling

January 2013 dividend paid per share                                              €0.1834              £0.15345

(further dividends payable in May and August)

* capital performance with dividends reinvested

Chairman's Statement

2012 review

2012 was an excellent year for our Company, with a net asset value total return* per share of +28.2 per cent in Sterling (+32.0 per cent in Euros), materially outperforming the benchmark index return of +17.0 per cent (+20.4 per cent in Euros). We were also delighted to announce an increase in the dividend for 2013 of +24.8 per cent. This was achieved with low portfolio turnover of 22 per cent, which again underlines the long term fundamental approach to investing that European Assets Trust undertakes. Our belief is that conviction investments in high quality businesses will deliver strong returns through the market cycle.  The Company has outperformed the benchmark index over one, three and five years. I am encouraged that over the past ten years, despite the well publicised upheaval in the Eurozone, the Company's net asset value total return* per share in Sterling has been +247 per cent, whilst the share price total return* has been +350 per cent, reflecting the Boards efforts to reduce the discount. The Company's performance over ten years has significantly outperformed many of the major equity indices, including the UK (FTSE 100 Index) and US (S&P 500 Index).

European small and medium sized companies as a whole had a strong year and delivered stock market returns not only above their large company counterparts, but also the US indices, the global benchmark, and the European and global bond indices. The catalyst for better performance in Europe was when the president of the European Central Bank announced that he would do 'whatever it takes' to save the Euro. The promise of further fiscal and banking integration in the region, and ultimately a more robust version of European Monetary Union, has allowed investors to consider the region again in their allocation decisions.

As should be expected with our Company, the performance principally came from good stock selection. The Manager's decision to add to the value areas of the portfolio also helped as the market recovered from the summer. We maintain a core of high quality businesses within the portfolio, but are looking to add to areas that have been unduly punished by investors. Our investments in quality financials is a case in point. We were able to buy good quality businesses at good prices because the sector has been shunned by investors. These have helped contribute to the Company's strong performance this year.

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 applying the distribution policy results in a total dividend for 2013 of Euro 0.5502 per share (2012: Euro 0.441 per share, net).  This represents a 24.8 per cent increase in the 2013 dividend compared with the previous year. The 2013 dividend will be paid in three equal instalments of Euro 0.1834 per share on 31 January, 31 May and 30 August.  The January dividend of Euro 0.1834 per share was paid to shareholders on 31 January 2012 and amounted to 15.345p 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 2012 where investment opportunities arose and at the year-end the Company was 6 per cent geared.

Liquidity enhancement policy

The Company's share price discount to net asset value was 6.4 per cent as at 31 December 2012 compared with 11.1 per cent at the previous year-end. On average over the year, the Company's discount to net asset value stood at 9.3 per cent, a level which was lower than European smaller company peer funds.  During 2012 the Company bought back 140,000 of its own shares at an average discount of 14.7 per cent (2011: 50,000 shares at an average discount of 12.6 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 2012 (2011: nil), however since the year end the Company has issued 750,000 shares from treasury at an average discount of 3.4 per cent raising £5.7 million in total for 2013 to date. 

Outlook

We have seen the start of a recovery in the region, but the potential is still significant. Europe remains cheap on a relative and absolute measure, and any improvement in economics should lead to a flow of money from bonds, which are over-priced on most reasonable measures, and other regions, such as the US, where the valuation differentials are extreme. We have not yet seen any robust economic improvement; however, at some point it seems reasonable to believe that improving credit conditions will flow through to the real economy. It is important to say though that our investments do not rely on any regional economic improvement. Rather we like companies that can generate structural growth independent of the economic cycle. The fact is that you can buy these at large discounts precisely because they are listed in Europe. That is why we are confident about the prospects for our Company.

Shareholder meetings

The Company's Annual General Meeting will be held on 25 April 2013 at the Sheraton Amsterdam Airport Hotel 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 7 May 2013 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 had an excellent year delivering a net asset value total return of +28.2% in Sterling terms, materially ahead of the benchmark and a share price total return of +36.0%, helped by the narrowing of the discount rate from 11.1% to 6.4%.

Market review:

Ultimately 2012 was a strong year for holders of European small company assets with our benchmark, the HSBC Smaller Europe (ex-UK) Index delivering a total return of +17.0% in Sterling terms ( 20.4% in Euros). The year was however one of two halves. As we discussed in our interim report, while the year started strongly following co-ordinated liquidity injections from global central authorities and the Long Term Refinancing Operation from the European Central Bank ('ECB'), this soon gave way to further concern about the survival of the Euro. A number of elections from member countries and a Spanish banking crisis all contributed to a volatile six months for the region. However, the single most important moment for holders of European equity occurred in July when Mario Draghi, president of the European Central Bank pledged to do 'whatever it takes' to save the Euro. The ensuing second half rally produced returns for European small and mid capitalised equities that were above the large capitalised counterpart, but also above the global index 1, the US 2, and European and global bond indices 3.

In the final analysis, 2012 was the year that Germany finally took control of the Euro crisis. The ECB's insolvency guarantee was important precisely because it had the support from Merkel's government. The conclusion being that Germany would support the political project that is the Eurozone in exchange for credible commitments from the member states for structural reforms in addition to the austerity agenda that has dominated the headlines. This means a transition to a new version of the European Monetary Union which involves elements of both a banking and fiscal union, and ultimately a more robust monetary union.

While a more flexible economy and accountable system is of course extremely positive for the fundamentals of the region's economic health, the recovery in equity prices was more to do with short term relief that the Euro would not collapse rather than any sanguine long term analysis. Indeed despite the policy actions and the improvement in prices, European equity fund flows continued to be negative as late as November. However, what should be clear is that flows follow returns and not the other way round. European equities continue to be an asset class that is ranked lowly in allocation decisions, but remains very good value on both an absolute and relative basis. The allocation does not make sense when the quality of the investment assets in the region should improve from here.

1 MSCI World

2 S&P 500

3 Barcap Euro Aggregate and JPM Global Aggregate Bond Index (Total Return Un-hedged)

Performance review: a strong year for shareholders as European Assets Trust delivered strong returns

European Assets Trust had a strong year delivering a rise in net asset value total return per share of +28.2% in Sterling terms ( 32.0% in Euros). We also saw the share price discount to net asset value fall from 11.1% at the end of 2011 to 6.4% at the end of 2012 and 3.0% today, thereby helping to improve share price returns. We can therefore look back on an excellent year for the Company and its shareholders.

As is usual for our portfolio, stock selection drove the majority of this performance. Our largest position Glanbia had a particularly strong year rising +77.8%. Glanbia is an exceptionally well managed Irish domiciled business with roots in Irish dairy processing and consumer foods. Management have been transforming the business towards global nutritionals, which delivers high growth at high margins. This transformation took a significant step forward this year with the sale of 50% of its domestic dairy processing business. The result is that the company now derives about 70% of its profits from global nutritionals. Additionally, the major owner of the company, an Irish dairy co-operative, reduced its stake. The transformation of the business and the improved liquidity of the shares have attracted greater interest in the business, which was reflected in the strong returns we witnessed during the year.

We had a number of other strong performers within consumer goods, of which C&C Group was notable rising +57.9%. The producer of Magners cider and Tennent's lager, made significant progress, with an acquisition in the US premium cider market. With ownership of The Vermont Hard Cider Company, C&C Group now has around 40% of the premium cider category in the US, a fast growing market with an extremely low share of the wider alcoholic drinks' market.

We also had some strong performers in the Industrial segment, with the German robotics company Kuka the pick, rising +90.0%. While there was no specific event that drove this performance, the company benefitted from strong results and order momentum, driven by the greater adoption of automation within industrial manufacturing. This is a structural trend that was the pillar of the initial investment case.

Our financial holdings also delivered good performance. The sector had been ignored by investors, but we have been positive towards the quality names for some time. When investors take a broad brush view towards an area our view is that it provides an opportunity for us to buy some quality assets at a discount to their intrinsic value. We were rewarded with this approach, particularly in the second half of the year, as a number of our companies delivered strong performance. Of note was Azimut the Italian asset manager which rose +76.2% during the period.

The disappointing performers were Neopost, the manufacturer of postal franking machines, which fell -21.6%, and D'Ieteren, the car distributor and windscreen repairer, which fell -11.5%. Neopost suffered from disappointing growth figures. We continue to believe that the company is going through a transition, and that the current growth figures are not indicative of a long term trend. The company also delivers us a 9% dividend yield, which we are happy to receive until they start to demonstrate some growth again. We were more disappointed with D'Ieteren who produced two profit warnings through the year, the second of which was released just before Christmas. We are currently reviewing the investment case and will report back during our regular releases.

The final comment about performance this year was that it was delivered with low portfolio turnover; we did minimal trading this year. The turnover figure was 22% 4 and was artificially boosted by adding to gearing and funding the dividend payment. This demonstrates the long term investment approach with which we manage your Company.

4 ((purchases + sales)/2)/average assets

Investment Outlook; Europe has the potential to be the attractive recovery play in equity markets.

Our investment thesis remains constant despite the rally that we have seen; European equity remains a neglected asset class trading at a significant discount on both a relative and absolute basis, which provides excellent investment opportunities. These opportunities are most attractive within the diverse and poorly understood small and medium sized company market.

As of writing this report, 2013 has seen a very strong start. We would however caution that recoveries are rarely smooth and Europe clearly has some challenges, not least the outcome of the Italian elections and later in the year the German electorate will make their feelings known in their September elections. Additionally, the economic statistics within Europe are still disappointing. However, there are reasons to remain positive; particularly over the long term (should equity investments ever be made on short term considerations?).

The fact that European equity funds were experiencing outflows in aggregate as recently as November tells you that the mindset of investors is slow to change. Indeed it had become fashionable to be as pessimistic as possible and anticipate 'Black Swans' (the high risk of improbable extreme events) at every juncture. It is of course during these times that you can buy assets cheaply and make the best returns over the long term.

The rise in equity prices thus far has been in response to the dramatic improvement in credit conditions brought about by policy actions. However, European equity prices are still cheap on both an absolute and relative basis. If we look at the US the differential is most dramatic. The policy makers in the US have been rewarded; they took policy action early, improved their credit markets and are now seeing these improvements flow through to the real economy. However, this is well known and reflected in valuations. The most positive argument for European equities is that we will see this happen in Europe; slow improvements in credit conditions filtering through to economies and improving corporate profits. European equities are valued at low multiples on cyclically low profits. A recovery in corporate profits will encourage a flow to the asset class, particularly from bonds, which are over valued on most sensible metrics. This has the potential to be a very powerful driver of European equity market returns.

In this scenario, small and medium sized companies will benefit disproportionately as they tend to be more geared to growth than their large company counterparts. Additionally, while the cost of capital has fallen dramatically for secure assets, the corporate surpluses have continued to increase. With greater confidence in the economic outlook we should see the prospect of greater Merger and Acquisition ('M&A') activity providing a spur to the small and medium sized company market in which we invest.

However, our strategy remains constant; we aim to invest in high quality businesses, managed by proven managers, at good prices. Over the last year, when the market pessimism was high we added to the value areas of the portfolio. These areas tend to do well during a market recovery and this has proved to be the case so far. We are excited about the prospects for European Assets Trust.

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 2012

		As at	As at
BALANCE SHEET (after appropriation of the Result)		31 December 2012	31 December 2011
	Note	€	€
Investments
Securities	1	143,798,006	120,201,243
Receivables
Other receivables		176,265	273,087
Total current assets		176,265	273,087
Current liabilities (due within one year)
Bank overdraft		(8,485,185)	(10,658,843)
Accrued liabilities		(202,730)	(291,563)
Total current liabilities		(8,687,915)	(10,950,406)
Total of receivables and other assets less current liabilities		(8,511,650)	(10,677,319)
Total assets less current liabilities		135,286,356	109,523,924
Capital and reserves
Issued share capital		6,790,002	6,845,429
Share premium account		16,646,031	17,504,713
Other reserves		111,850,323	85,173,782
		135,286,356	109,523,924
Net asset value per ordinary share	2	€9.17	€7.36
Expressed in sterling - basic		£7.43	£6.15
- treasury	3	£7.40	£6.12

REVENUE ACCOUNT
For the year ended		31 December 2012		31 December 2011
		€		€
Income from investments
Dividends from securities		3,306,636		3,386,717
Withholding taxes		-		(4,029)
		3,306,636		3,382,688
Movements on investments - realised		7,316,661		8,717,108
Movements on investments - unrealised		25,090,966		(18,879,053)
		32,407,627		(10,161,945)
Interest received		-		2,357
Total investment gain/(loss)		35,714,263		(6,776,900)
Investment management fee		(1,017,335)		(1,033,096)
Administrative expenses		(1,065,257)		(955,034)
Interest charges		(163,132)		(198,239)
Total operating expenses		(2,245,724)		(2,186,369)
Net profit/(loss)		33,468,539		(8,963,269)
Earnings per share		€2.27		€(0.60)
Dividends per share	4	€0.4698		€0.5337
(For 2013 the annual dividend is €0.5502 per share)

STATEMENT OF CASH FLOWS

For the year ended	31 December	31 December
	2012	2011
	€	€
Cash flow from investment activities
Dividends	3,400,638	3,328,253
Purchases of securities	(21,924,032)	(35,462,611)
Sales of securities	30,743,448	32,615,047
Administrative expenses	(1,111,140)	(981,717)
Investment management fee	(1,017,335)	(1,033,096)
Interest received	-	2,357
Interest charges	(211,814)	(146,087)
	9,879,765	(1,677,854)
Cash flows from financing activities
Credit facility	(2,173,658)	9,830,607
Dividends	(6,791,998)	(7,781,688)
Repurchase of own shares	(914,109)	(371,065)
	(9,879,765)	1,677,854
Cash and cash equivalents
Net decrease for the year	-	-
Balance as at 1 January	-	-
Balance as at 31 December	-	-

The balance of cash and cash equivalents at the beginning and end of the year ended 31 December 2012 was nil.  The net movement during the year ended 31 December 2012 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 14,760,874 shares in issue (2011- 14,881,368). During the year the Company issued 19,506 shares through its scrip dividend option and purchased 140,000 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 €0.1834 was announced on 3 January 2013 and paid on 31 January 2013. This dividend was paid from other reserves. During 2013, a total distribution of €0.5502 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 2012 would have increased net assets and net profit for the year by €35.9 million (2011: €30.1 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.  Liquidity risk of the Company is mitigated by the fact that the Company is a closed-end investment company.

·      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 2012 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 2012 Report & Accounts and other resolutions will be held on 25 April 2013 in Amsterdam and a Shareholders' and Investors' Briefing will be held on 7 May 2013 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

Wilbert van Twuijver, Managing Director

FCA Management BV, Rotterdam                                                                    [phone]

 

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