Annual Financial Report

RNS Number : 7007G

European Assets Trust NV

06 March 2015

 



To:                    RNS

From:                European Assets Trust NV

Date:                6March 2015

Statement of Results for the year ended 31 December 2014

·      Total return* performance for 2014

Euro                 Sterling

Net asset value per share                                                                15.3%                   7.7%

Euromoney Smaller European Companies (ex UK) Index                     5.2%                  -1.9%

·      Total return* performance for the three years to 31 December 2014

Euro                 Sterling

Net asset value per share                                                               104.7%               90.2%

Euromoney Smaller European Companies (ex UK) Index                    69.8%               57.7%

·      The annual dividend for 2015 is €0.7581 per share (2014 €0.699, netǂ), equivalent to 6% of the opening net asset value per share

Euro                 Sterling

January 2015 dividend paid per share                                                 €0.2527              £0.1933

(further dividends payable in May and August)

* Capital performance with dividends reinvested

ǂ Net of Dutch withholding tax

Chairman's Statement

2014 review

I am pleased to report another strong performance from our investment team. European Assets Trust ('the Company') achieved a Sterling net asset value ('NAV') total return for the year of +7.7% (2013: +37.8%), a Sterling share price return of +8.8% (2013: +47.5%), and a Euro dividend increase of +8.5% (2013: 27.0%).  Whilst 2014 was a more subdued year for the Company, following some very impressive returns in recent years, this was another positive return relative to our benchmark which fell -1.9% in Sterling terms and also compares favourably when measured against larger company benchmarks. 

This also adds to the impressive performance since the current investment strategy was introduced. From June 2010 Sterling NAV total return is +122.3% and Sterling share price total return +151.7%.  These are significantly outperforming the Sterling benchmark return of +47.1% for the same period.

The bulk of the Company's performance came in the second half of the year as relatively high expectations of an economic recovery in Europe gave way to more familiar scepticism of the region's prospects and a weaker market. Our NAV made particularly strong progress over this period as investors moved towards higher quality assets. Performance was also boosted by the return of corporate activity to the European smaller companies sector, with four of our holdings receiving bids in the second half of the year. The combination of strong corporate balance sheets and cheap funding costs, in an environment of low growth, should be a good combination for further activity and we would not be surprised to see our portfolio benefit from more interest this year.

A significant governance task for the Company in 2014 has been the implementation of the requirements of the Alternative Investment Fund Manager's Directive ('the AIFMD') which became fully effective on 22 July 2014.  I can report that the Company has been compliant from this date with KAS Trust & Depositary Services BV appointed as depositary and F&C Investment Business as AIF Manager.  Although financial regulatory supervision has switched to the British Financial Conduct Authority, the Company remains Dutch with the corporate duties of the Supervisory and Management Boards unchanged.

Continued market demand for the Company's shares throughout 2014 has resulted in the issuance of 3,635,000 shares at a small premium to net asset value: raising £35.4 million, enhancing shareholder value and contributing to a reduction in the Company's ongoing charges rate to 1.27% (after excluding one-off costs relating to the introduction of the AIFMD).

Change in Directorate

Since 2013 a process of succession planning has been undertaken by the Supervisory Board which has resulted, progressively, in a number of changes to its membership. 

I have been Chairman of this Company since June 1995 which has been a period of continuous and challenging change.  During this period the Company has experienced, amongst other events, the introduction of the Euro, the technology boom and its subsequent bust, the attack on the World Trade Centre, the Global Financial Crisis, and a major restructuring of the Fund.  Many of these events still impact upon the macro economic and political environments in which this Company operates and I wish to express my thanks to Board Colleagues and all our advisors for their support in successfully managing these challenges.

At the General Meeting to be held on 23 April 2015 I will step down as Chairman.  Jack Perry CBE, who was appointed to the Supervisory Board last year will be my replacement.  I know that his wise counsel will serve the Company well. 

To ensure an effective and complete handover I intend to remain on the Supervisory Board as a Director until the latter half of the current year.  Neville Cook who has served as a Supervisory Director for 21 years will also retire at this time and I wish to place on record my appreciation for his support and guidance to me over my tenure as Chairman.  In addition the Supervisory Board and the Company's advisors have greatly valued Neville's guidance and wish to add their thanks for his contribution to the Company's affairs.

Two other changes to the Supervisory Board will become effective on conclusion of the 2015 General Meeting.  Professor Robert van der Meer, Chairman of Audit, will, in addition, be appointed Vice Chairman and Julia Bond, who was appointed to the Supervisory Board last year will become Senior Independent Director.  These appointments will further strengthen the current structure of the Supervisory Board.

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 2015 of Euro 0.7581 per share (2014: Euro 0.699 per share, net).  This represents an 8.5% increase in the 2015 dividend compared with the previous year. The 2015 dividend will be paid in three equal instalments of Euro 0.2527 per share on 30 January, 29 May and 28 August.  The January dividend of Euro 0.2527 per share was paid to shareholders on 30 January 2015 and amounted to 19.33p 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 facility available throughout the year was Euro 25.0 million.  The facility 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 the year where investment opportunities arose and at the year-end the Company was 6 per cent geared.

Liquidity enhancement policy

During 2014 the Company sold 3,635,000 of its own shares held in treasury through its liquidity enhancement policy raising £35.4 million. The sale of these treasury shares occurred at an average premium of 0.1% to the estimated net asset value at time of issue.  The benefits of this issuance include: improved stock liquidity, a reduction in the Company's expense ratio (Ongoing Charges figure) and a marginal uplift to the net asset value of existing shares resulting from issuance at a small premium. 

Since the year end until 26 February 2015 the Company has sold a further 1,330,000 shares from treasury at an average premium to net asset value of 0.1% raising £13.3 million.  As at 26 February 2015 the Company has 1,982,057 shares remaining in treasury.  In 2013 the Company issued 3,180,000 of treasury shares raising £27.7 million.

Outlook

European equities have got off to a strong start in 2015 following further monetary intervention by the European Central Bank and some encouraging leading indicators. We are also optimistic that Europe can begin to show some economic progress with the triple stimuli of lower energy prices, a weaker currency, and tentative improvements in lending and borrowing data. Valuations look attractive to us, and companies appear to be in fine shape. If profit levels improve from here, returns for European equity investors could be very attractive.  We must however take note of rising geo-political tensions which can cause volatility even for long term investors.  Nevertheless we will continue to be disciplined in deploying our strategy that has served us so well in recent years.

Shareholder meetings

The Company's General Meeting will be held at 11.00am on 23 April 2015 at the Company's Office, Weena 210-212, Rotterdam, the 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 2015 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.  I will also take this as an opportunity to present Jack as the Company's new Chairman. The Supervisory Board look forward to welcoming as many shareholders as are able to attend. 

Sir John Ward CBE

Chairman

Manager's review

A year of strong performance with sterling NAV total return of 7.7% in comparison to -1.9% for the benchmark.

Market Review

Entering 2014, Europe's economy seemed to have stabilised with a return to economic growth, while political risks and talk of the break-up of the Eurozone were no longer headline news. The European banking crisis that had consumed investor attention during the previous two or three years had all but disappeared with the major financial institutions having taken important de-risking measures. The European Central Bank had become more accommodative by cutting its financing rate to an all-time low in an effort to spur economic activity and stave off the risk of deflation. This led to a strong first half for European equities with our indices, the Euromoney Smaller European Companies index registering gains of +6.6% in Sterling terms and +10.8% in Euro terms.

The optimism of the first half receded rapidly from the beginning of July with the bail out of Banco Espirito bringing the financial crisis back into focus, while the Ukraine/Russia conflict reminded investors of the dangers of exogenous shocks towards an already fragile region. Additionally, towards the end of the summer, leading economic indicators, while still in expansionist territory, started softening encouraging scepticism over Europe's economic recovery. While the market recovered towards the end of the year in anticipation of further European Central Bank intervention, ultimately our index lost ground in the second half and returned +5.2% in Euro terms for the full year, but fell -1.9% in Sterling terms. The weakening European currency is frustrating for Sterling investors but reflects the different economic cycles that the UK and Europe are in, with the Bank of England's next move more likely to be tightening, in contrast to further expansionist policy by the European Central Bank; something that ultimately should be positive for investors in European equities.

Performance Review

It was a year of two halves for European Assets in terms of performance relative to the benchmark. As I cautioned in my 2013 annual review at the beginning of the year, I was concerned that investors appeared a little complacent about the prospects of a European recovery. This informed our stock research and we focused particularly hard on the quality areas of the market which had lagged the strong market recovery, and adjusted the portfolio accordingly. Whilst our absolute performance remained strong during this period it did lag a rallying benchmark.

Our strategy however prevailed during the second half of the year as investors became more cautious and quality assets took market leadership. Our portfolio performed particularly well in this environment delivering very strong performance in absolute terms against a benchmark which fell over the same period.

Ultimately our stock picking prevailed to deliver another year of good returns in Euro terms. A portion of this was however lost, when translated back to Sterling returns, as the Euro weakened through the year. Given the scale of this devaluation it is pleasing nonetheless to grow the NAV in Sterling terms; +7.7% over the course of the year, particularly compared to the market which fell -1.9% over the same time period. This further adds to the strong performance that European Assets Trust shareholders have enjoyed since the current investment strategy was employed; since June 2010 the NAV has progressed +122.3% in Sterling total return terms, with a share price return of +151.7%, both significantly outperforming the benchmark return of +47.1%.

During our marketing in recent years, in highlighting the prospects for European small companies we have consistently posited the potential for M&A to provide support for our sector. After all, funding costs are low, and companies have done a fantastic job of building up robust balance sheets during and following the financial crisis. It made sense to us that these balance sheets should be deployed. Initially this was more focused on greater capital returns to shareholders through dividends and buybacks, something that we support, however, progress on corporate activity was limited. That was until the second half of 2014 when like the proverbial London bus which takes so long to arrive, four bids appeared in rapid succession, of course contributing significantly to performance.

Our biggest contributor came from the Irish airline Aer Lingus, which received a bid from IAG, the owners of British Airways. This played a large part in the share's return of +64.7% (Sterling), however this was not the whole story. The company became biddable because management had done a fantastic job, not just in improving the operational performance of the company over a long period, but more recently in achieving a solution to the complex issue surrounding a pension deficit, taking a significant risk away for a potential suitor.

Jazztel, the Spanish broadband supplier, also performed very strongly increasing +50.5% following a bid from Orange. Jazztel holds a strategically important position in the Spanish telecoms market with good quality fibre assets. The market had gone through a consolidation process that left Orange strategically compromised. Acquiring Jazztel was the only real option left available to them if they were going to continue to compete in the Spanish market.

Two other holdings performed well on the back of corporate activity; Exact the Dutch software provider and Nutreco the Dutch animal nutrition business. Exact rose +30.2% following a bid from a private equity business who were prepared to make the investments in the business to put it on a 'cloud' platform. This is a substantial and complex journey, not without risk, and one that is probably best undertaken away from the short term scrutiny of the listed market.

Nutreco was bought by a wealthy Dutch family, following a period of underperformance. Following a detailed review, we used the weakness in the share price over the first half of the year to add to our position, and were delighted that our fundamental research was rewarded with some excellent performance.

In terms of poor performers, we managed to avoid any significant disasters, although Tod's the luxury shoe brand had a particularly bad year falling -43.2%. In retrospect we were too complacent about the valuation of the stock heading into 2014, and it turned out to be a valuation that couldn't take much disappointment. Unfortunately weak demand in both emerging markets and their home market, combined with changes in distribution strategy led to some substantial downgrades. We do however continue to hold the company as we believe in the long term growth prospects and the power of the brand. It is good to see that so far in 2015 some of this performance has been re-gained following encouraging full year results and outlook statements.

Investment Outlook

2015 has started strongly for European equities. The latest European Central Bank intervention and announcement of quantitative easing combined with a decent result from the Purchasing Manager's Index, possibly the most closely watched leading indicator of economic activity, has helped to renew some optimism in the region. Heading into the year though, expectations of European economic growth, and corporate earnings progress, were excessively low. This was reflected in the strong performance of quality assets in the second half of last year, as investors searched for a combination of scarce growth and yield. There is however the potential for a positive growth surprise this year due to the combined effects of lower energy costs, a weaker currency and improving credit conditions. While we would not expect the effects of these powerful influences to filter through immediately, for a region where little growth is expected, and indeed where valuations discount little growth, this could, through the year, provide a significant fillip to growth and consequently equity market performance in a region where the investment world is under-invested.

Admittedly, we do not want to base our stock decisions based on expectations of economic growth, however, smaller companies should benefit from any improvement in the domestic European economy. The last decade has seen global growth related companies lead the market, as China embarked on a once in a generation capital formation binge. This is something that will take some time to absorb and potentially leads to a structural over-supply in those regions. Europe, in contrast has seen a painful period of capital destruction. Indeed this is why expectations are so low. If economic growth were to surprise positively, this could have a powerful effect on the domestic businesses who have been re-adjusting their cost bases. The improvements in returns would be powerful, yet the expectations of this occurring are low. European Smaller companies are by their nature more domestically focused then their larger counterparts and should feel the benefits of this disproportionately.

We will however, trust in the philosophy and process that has served your company so well in recent years. We will look to invest in quality businesses, run by proven managers, at attractive prices. We believe that this is the best way to deliver good performance at an attractive level of risk, and will continue to employ this strategy irrespective of prevailing economic conditions.

Sam Cosh

Lead Investment Manager

F&C Investment Business Limited

 

 

 

 

AUDITED FINANCIAL STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014

		As at	As at
BALANCE SHEET (after appropriation of the Result)		31 December 2014	31 December 2013
	Note	€	€
Investments
Securities	1	290,695,109	222,966,178
Receivables
Other receivables		168,518	71,398
Total current assets		168,518	71,398
Current liabilities (due within one year)
Banking facility		(17,485,254)	(13,825,114)
Accrued liabilities		(251,607)	(135,888)
Total current liabilities		(17,736,861)	(13,961,002)
Total of receivables and other assets less current liabilities		(17,568,343)	(13,889,604)
Total assets less current liabilities		273,126,766	209,076,574
Capital and reserves
Issued share capital		9,944,070	8,261,141
Share premium account		89,360,641	47,756,492
Other reserves		173,822,055	153,058,941
		273,126,766	209,076,574
Net asset value per ordinary share	2	€12.63	€11.64
Expressed in sterling  - basic		£9.80	£9.69
- treasury	3	£9.80	£9.68

REVENUE ACCOUNT
For the year ended	Note	31 December 2014		31 December 2013
		€		€
Income from investments
Dividends from securities		5,099,147		3,804,665
Withholding taxes		(7,026)		(50,927)
		5,092,121		3,753,738
Movements on investments - realised		16,706,124		9,935,353
Movements on investments - unrealised		16,483,480		38,931,205
		33,189,604		48,866,558
Total investment gain		38,281,725		52,620,296
Investment management fee Depositary and custody fees		(2,003,329) (107,993)		(1,364,563) (59,697)
Other expenses		(1,110,662)		(979,524)
Interest charges		(268,973)		(198,366)
Total operating expenses		(3,490,957)		(2,602,150)
Net profit		34,790,768		50,018,146
Earnings per share		€1.72		€3.07
Dividends per share	4	€0.7221		€0.5757

STATEMENT OF CASH FLOWS

For the year ended	31 December	31 December
	2014	2013
	€	€
Cash flow from investment activities
Dividends	4,995,001	3,858,605
Purchase of securities	(74,378,548)	(65,487,947)
Sales of securities	39,905,816	35,177,781
Depositary fees, custody fees and other expenses	(1,215,134)	(1,124,281)
Investment management fee	(2,003,329)	(1,364,563)
Interest charges	(271,870)	(171,596)
	(32,968,064)	(29,112,001)
Cash flows from financing activities
Credit facility	3,660,140	5,339,929
Dividends	(14,027,654)	(8,809,528)
Sale of own shares	43,335,578	32,581,600
	32,968,064	29,112,001
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 2014 was nil. The net movement during the year ended 31 December 2014 was nil.  This is due to the Company's use of a banking facility.

PRINCIPAL FINANCIAL RISKS

The Company's financial instruments consist mainly of listed equity shares and its principal financial risks are therefore market-related. The Company holds a portfolio of shares which have a diversified geographic spread. The Company's financial instruments are subject to a number of risks including: market, credit, foreign 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 drawn up in accordance with the provisions of Title 9, Book 2, of the Dutch Civil Code and the Dutch Accounting Standards as published by the Dutch Accounting Standards Board ("Raad voor de Jaarverslaggeving").

Notes

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

2.         Based on 21,617,544 shares in issue (2013: 17,959,002). During the year the Company issued 23,542 shares through its scrip dividend option and sold 3,635,000 of its own shares 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 €0.2527 was announced on 7 January 2015 and paid on 30 January 2015. This dividend was paid from other reserves. During 2015, a total distribution of €0.7581 per share is payable in equal instalments in January, May and August.

5.         Financial instruments

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, as described above.  These financial instruments are 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 2014 would have increased net assets and net profit for the year by €72.7 million (2013: €55.7 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 transaction 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 risks to which it is subject.

·      Foreign currency risk

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 Europe, excluding the United Kingdom, 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 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 of financial instruments

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.

6.         These are not the full accounts. The full accounts for the year to 31 December 2014 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.

7.         A General Meeting to adopt the 2014 Report & Accounts and other resolutions will be held at 11.00am on 23 April 2015 at the Company's offices in Rotterdam and a Shareholders' and Investors' Briefing will be held at 11.30am on 7 May 2015 at Pewterers' Hall, Oat Lane, London.

For further information, please contact:

Sam Cosh

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

Scott McEllen,

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

Wilbert van Twuijver, Managing Director

FCA Management BV, Rotterdam                                                                    [phone]

 

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