Interim Results

RNS Number : 0470A

European Assets Trust NV

29 July 2008

To: RNS

From: European Assets Trust NV

Date: 29 July 2008

UNAUDITED INTERIM RESULTS - SIX MONTHS TO 30 JUNE 2008

Total return* performance for the six months to 30 June 2008

Sterling Euro

Net asset value per share -10.1% -16.6%

HSBC Smaller Europe (ex UK) Index -11.9% -18.2%

Total return* performance since December 1997 (portfolio refocused)

Sterling Euro

Net asset value per share +258.8% +194.2%

HSBC Smaller Europe (ex UK) Index +186.4% +139.8%

Annual dividend of 6% of net asset value per share (2008: Euro 0.8535)

Sterling Euro

January and May dividend paid per share 41.5p 54.0c

(further dividend of 31.35c payable in August)

Dividend Information

2008

Two dividends of €0.27 per share each have been paid in January and May 2008 and a further dividend will be paid in August 2008 of €0.3135 per share (net €0.27 per share). This will result in total dividends paid for the year of €0.8535 per share. The increase in the August gross dividend is to offset the element of Dutch withholding tax and provide a full 6 per cent payment to shareholders.

Investment Manager's Review

Performance

Investors had grown accustomed to a strong start to the year for continental European smaller company share prices, invariably preceded by a pre-Christmas rally. After all, such had been the pattern for the last four years on the trot. January 2008 could not have been more different. Whereas previously at the start of the year, market observers had anticipated a new year leg-up in economic growth, this time round they feared that the persistent credit crisis would have a direct impact on the real economy. Whereas previously at the start of the year, market observers had anticipated optimistic trading statements from company managers, this time round they feared that the round of annual results announcements would be accompanied by grim forecasts for the year ahead. The HSBC Smaller Europe (ex UK) Index fell by 11.8 per cent in Sterling total return* terms in January alone.

In the event, the economic news out of Europe proved to be better than feared, at least in respect of the first three months of the year. Gross domestic product (GDP) across the 27 country-wide EU member states registered healthy year-on-year growth of 2.3 per cent in the first quarter, spurred on by strong export demand especially for capital goods. This resilient performance was accompanied by a sharp increase in headline inflation to an annualised 4.0 per cent by June, reflecting surging energy and food prices. The European Central Bank (ECB), mindful of its inflation-targeting credentials, felt obliged to flag in advance a likely increase in the market-setting interest rate at its regular July meeting, causing a renewed stockmarket sell-off in June. The worst fears about the health of smaller company profitability also proved unfounded as the annual results season passed off with relatively few negative surprises. Outlook statements were cautious rather than universally downbeat, albeit often including qualifying statements concerning visibility over profits for the coming year as a whole.

The HSBC Smaller Europe (ex UK) Index decline of 11.9 per cent in Sterling total return* terms for the first six months of 2008 coincidentally matched the January fall. The result would have been considerably poorer had it not been for a rally in April and May, triggered by the dramatic rescue of the US investment bank, Bear Stearns which kindled hopes that the worst of the credit crisis might be past. The net asset value of European Assets Trust fell by 10.1 per cent in Sterling total return* terms over the six month period. It is gratifying to note that this measure of outperformance can be attributed mainly to stock selection. Strong contributions came from two Italian-based companies, Landi Renzo and Trevi Finanziaria, and Austrian concern Schoeller Bleckmann. The linking theme here is energy, Landi Renzo being a leading supplier of alternative fuel systems for cars, Trevi providing oil rigs and services across the world, and Schoeller Bleckmann with its commanding position in specialist drill bit equipment. Another notable performance came from relative newcomer Schweizerhall, the Swiss-based manufacturer of generic slow-release pharmaceuticals and pain patches. Better-than-expected results and the surprise announcement by the company of the successful formulation of the generic equivalent of a top-selling drug sent the share price 51.1 per cent higher in Sterling total return* terms over the first six months of the year. Disappointing returns came from some of the very smallest stocks in the portfolio in terms of market capitalisation and, regrettably, from some of the more recent additions, notably German sail boat builder, HanseYachts, and Belgian computer controlled measuring equipment company, Metris.

Liquidity Enhancement Policy

The liquidity enhancement policy functioned as intended during the period. At times when the conditions were met and investors wished to sell, then the Company stood ready to buy back shares into treasury. Over the first six months of 2008, a total of 780,000 shares were taken into treasury at a discount, which was value enhancing to shareholders.

Gearing

The Managers took advantage of the precipitous fall in prices in January to add to existing holdings, drawing on the Company's borrowing facilities. Gearing reached 12 per cent of assets by the end of January and allowed the portfolio to benefit fully from the market rally in April and May. At the end of June, gearing stood at 16 per cent, with the further increase in percentage terms being the arithmetical consequence of renewed market falls in June. This is being reduced to earlier levels by the end of July.

Outlook

Recently released statistics have dampened hopes that continental Europe might emerge unscathed from the credit crunch. Already in April, the Belgian business sentiment index, widely seen as a barometer for the rest of Europe, fell to its lowest level since August 2005. This pessimism has since been borne out by weak industrial output figures for all the major European economies. There is a distinct possibility that Europe-wide GDP in the second quarter will have fallen or at best stagnated. The abrupt shift in economic fortunes has been mirrored at the corporate level with a steadily increasing number of profit warnings. Even those company heads maintaining guidance or sounding positive liberally lace their statements with any number of caveats.

With this uncertain backdrop, it is proving very difficult to find new investment candidates. A franchise which appears robust could evaporate at the first sign of falling demand; an apparent solid earnings base built on operating leverage could disintegrate as soon as sales growth starts to falter. We are particularly wary of companies with a limited trading history on the stock exchange; at least with entities listed for several years it is possible to test the strength of the franchise and profitability over all stages of the economic cycle. We see this as the main prop for our current portfolio of just 40 names, as evidenced by the strong relative contribution from stock selection in the half year performance numbers. It is much easier to arrive at a valuation for stocks whose longevity through economic ups and downs allows forecasts for shareholder returns to be modelled accurately rather than simply guessed at. Valuing stocks on the basis of price/earnings to growth ratios (PEG ratios) is not fashionable but has some merit if the earnings are tracked over a longer time-frame taking in different economic conditions. On this measure, the Company's current portfolio of stocks in aggregate is trading on a ratio of less than 1 times, that is the price earnings ratio is less than the rate of long-term average earnings growth. A PEG ratio of less than one can serve as a useful indicator that a given stock or portfolio is cheap and holds out the prospect of share price appreciation despite the unremitting gloomy equity market sentiment. A fully invested portfolio reflects the potential opportunity and can allow the portfolio to benefit from any recovery in smaller European company share prices.

Crispin Longden

Investment Manager

F&C Investment Business Limited

*Capital performance with dividends added back

Balance Sheet		30 June	31 December
		2008	2007
	Note	Euro 000	Euro 000
Investments
Securities	5	198,311	233,131
Net current liabilities	6	(24,217)	(4,210)

Total assets less current liabilities		174,094	228,921

Equity shareholders' funds		174,094	228,921



Net asset value per ordinary share	7	€10.60	€13.32
Expressed in sterling - basic		£8.39	£9.78
- treasury		£8.34	£9.73

The number of shares in issue at 30 June 2008 was 16,425,925 (31 December 2007 - 17,190,991).


Revenue Account - six months to		30 June	30 June
		2008	2007
	Note	Euro 000	Euro 000

Income from investments
Securities		3,188	3,590
Deposit interest		50	88
Securities lending		91	141
	1	3,329	3,819

Movements on investments - realised		2,675	17,585
Movements on investments - unrealised		(42,006)	10,737
		(39,331)	28,322

Total (loss)/income		(36,002)	32,141

Expenses and interest	4
Administration expenses		(554)	(499)
Investment management fee		(883)	(1,059)
Interest		(646)	(141)
Net (loss)/income	2	(38,085)	30,442

Distributed by dividends	3	8,889	10,086

Earnings per share	Euro	(4.60)	1.73
Dividends per share	Euro	0.54	0.592

Statement of Cash Flows - six months to

	30 June	30 June
	2008	2007
	Euro 000	Euro 000

Cash flow from investment activities
Interest, dividends and other income	3,496	3,607
Purchases of shares	(32,841)	(86,623)
Sales of shares	27,719	73,049
Administrative expenses, investment management fees and interest charges Refund of surtax	(2,231) -	(1,853) 445
	(3,857)	(11,375)


Cash flows from financial activities
Dividends paid	(8,889)	(10,086)
Sale of shares from treasury	-	27,142
Repurchase of own shares	(11,375)	-
Loan facility	27,500	(10,000)
	7,236	7,056


Cash at bank
Net increase/(decrease) for the period	3,379	(4,319)
Balance as at 31 December	(467)	4,641
Balance as at 30 June	2,912	322

Notes


1. Income is stated after deduction of irrecoverable withholding taxes of Euro 361,000 (2007 - Euro 528,165).

2. Income for the six months period should not be taken as an indication of the income for the full year.

3. Two dividends of Euro 0.27 per share each have been paid in January and May 2008 respectively, a further dividend of Euro 0.3135 per share will be paid on 29 August 2008. These dividends are mostly funded from accumulated capital gains.

4. The total expense ratio, based on average shareholders' funds for the first half of the year amounted to 1.48 per cent annualised (first half year 2007, 1.15 per cent annualised).

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

6. The Company has Euro 27.5 million drawn down on its banking facilities at 30 June 2008 (31 December 2007: Euro Nil).

7. During the six months to 30 June 2008 the Company purchased 780,000 shares to be held in treasury. In addition, 14,934 shares were issued during the period via the scrip dividend option.

8. The accounting policies applied in preparing the half-year figures at 30 June 2008 are consistent with those underlying the 2007 annual accounts.


9. Copies of the interim report will be mailed to shareholders and will be available from the registered office of the Company and the website www.europeanassets.co.uk.