Annual Financial Results - year ended 31 May 2021
European Opportunities Trust plc (the 'Company')
Legal Entity Identifier: 549300XN7RXQWHN18849
Annual Financial Results for the year ended 31 May 2021
Financial Highlights for the year ended 31 May 2021
|
|
31 May 2021 |
31 May 2020 |
% change |
|
Net asset value per share (pence) |
824.29 |
817.72 |
0.8 |
|
Net asset value total return (with dividends added back)1 |
|
|
1.2 |
|
Middle market share price (pence) |
750.00 |
753.00 |
(0.4) |
|
Share price total return (with dividends added back)1 |
|
|
0.1 |
|
MSCI Europe Total Return Index in GBP (Benchmark) |
|
|
24.6 |
|
Dividend per share (pence) |
2.0 |
3.5 |
|
|
Discount to net asset value at year end (%)1 |
(9.0) |
(7.9) |
|
|
Ongoing charges ratio (%)1,2 |
0.99 |
0.99 |
|
1 Alternative Performance Measure.
2 Excluding finance costs (interest on the Company's loan facility).
Chairman's Statement
I am pleased to present the Company's twenty first annual report and audited accounts since its launch, covering the twelve months ended 31 May 2021.
The year under review has been an exceptionally challenging period for your Company. During the twelve months to 31 May 2021 the total return on the net asset value per share of the Company was 1.2% (with dividends added back). This compares with a total return from the Company's benchmark index, the MSCI Europe Total Return Index, of 24.6% and a total return on the middle market price of the Company's shares of 0.1% during the same period. The background to the performance of your Company over the course of the financial year is discussed in detail by Alexander Darwall in the Investment Manager's Review.
There are signs of a recovery in our performance since the year end; the net asset value per share had increased by 14.7% to 945.74p between 1 June and 31 August 2021, outperforming the benchmark index which rose by 5.4%. The market price of the Company's shares increased by 14.9% to 862p between 1 June and 31 August.
Over the life of the Company from launch in November 2000 to 31 August 2021 the annualised total return on the net asset value per share has been 12.1% and the annualised total return on the share price has been 11.3%.The Company has bounced back strongly from periods of underperformance in the past and I see no reason to doubt that it will do so again.
Wirecard
I commented in detail on our former investment in Wirecard in my statement to the 2020 annual report and in my interim report to 30 November 2020. The Company's performance in the past financial year was severely impacted by the disclosure of a suspected fraud at Wirecard when its auditors, Ernst & Young, declined to sign off on its year end accounts in June 2020. The entire holding was sold by our Investment Manager on 18 June 2020 on the day of the public disclosure by the company of those circumstances. We realised a profit over the term of this investment despite the price at which those shares were sold. Wirecard has since been placed into liquidation and its former management are subject of ongoing regulatory and criminal investigations.
ESG
The new European Sustainable Finance Disclosure Regulation (SFDR), now incorporated into UK law, establishes both process and prescriptive requirements for firm and product-level Environmental, Social, and Governance ('ESG') disclosure. The UK financial services regulators, the Prudential Regulatory Authority ('PRA') and the Financial Conduct Authority ('FCA'), are seeking to ensure that climate and environmental factors are fully integrated into mainstream financial decision making. Regulated investment firms are obliged to make financial decisions which take the risks and opportunities from ESG matters into account.
Our Investment Manager meets all these regulatory obligations by explaining its investment decisions relative to sustainability risks, demonstrating that it understands the pertinent issues. It does not anticipate major changes in the portfolio or in its investment style in the foreseeable future because of these new requirements. However, we consider that Devon is well prepared to meet the challenges of these increasingly demanding regulations: it has signed up to the Principles for Responsible Investment and it has deepened its research capability through its recent recruits to its investment team.
Board composition
Philip Best has served on your Board since May 2009. The Board does not believe that his length of service, of itself, has any bearing on his independence or ability to fulfil his fiduciary duties towards our shareholders. However, we recognise the need to refresh the composition of the Board from time to time and Philip is therefore not seeking re-election as a Director of the Company at the Annual General Meeting in 2021. On behalf of the Board and our shareholders I would like to thank Philip for his huge contribution to the Company throughout his many years of service.
On 1 September 2021, the Board announced the appointments of Matthew Dobbs and Jeroen Huysinga as non-executive Directors of the Company. Both Matthew and Jeroen have considerable investment management experience and both have managed investment trusts in the past. Further details about Matthew and Jeroen are set out in the Annual Report & Accounts and we welcome them to the Board.
I intend to retire from the Board at the Annual General Meeting in 2022, with the intention of providing a period of handover to our new Board members.
With the exception of Philip Best, all Directors who have held office throughout the financial year are offering themselves for re-election at the forthcoming Annual General Meeting. Matthew and Jeroen are automatically subject to formal election by shareholders at the Annual General Meeting following their appointment to the Board.
Dividend
A resolution to declare a final dividend of 2.0p per share will be proposed at the Annual General Meeting on 10 November 2021, payable on 26 November 2021 to shareholders on the Register of Members on 22 October 2021. The ex-dividend date is 21 October 2021. The cost of this dividend is covered by the Company's distributable revenues during the financial year under review and exceeds the minimum that the Company is obliged to distribute under applicable law.
The Company's stated objective is to achieve shareholder returns primarily through capital growth. However, in order to qualify as an investment trust, the Company is not permitted to retain more than 15% of eligible investment income arising during any accounting period. Accordingly, the Board's policy is to propose a modest annual dividend and one at least sufficient to enable the Company to maintain its investment trust status.
The declaration of the dividend as a final dividend will provide shareholders with an opportunity to express their approval on the matter, in line with corporate governance guidelines. In the unlikely event that shareholders were to vote against the resolution at the Annual General Meeting to pay a final dividend then the Directors would pay an equivalent interim dividend, as otherwise the Company would be likely to lose investment trust status, with potentially disastrous tax consequences for a large number of its shareholders.
Gearing
At the end of the financial year under review, the net gearing level on the Company's investments was 7.0% (after offsetting cash deposits against the £65 million drawn down on that date). The Investment Manager tends to increase gearing at times of perceived low valuations, while reducing it as markets recover. This approach has added sustained value over the course of your Company's history. The Investment Manager will continue to consider the use of gearing as a tactical tool to improve returns.
Subsequent to the financial year end the Company renewed its revolving credit facility with The Bank of Nova Scotia, London Branch on 10 September 2021 with a maximum drawable amount of £100 million available until September 2022 and credit approval for an additional 'accordion' amount available upon application for a further £50 million.
Discount management
The Board considers that it is not in shareholders' interests for the ordinary shares of the Company to trade at a significant discount to the prevailing net asset value ('NAV'). The Board's policy is to maintain the discount in single digits, in normal market conditions. As at the financial year end on 31 May 2021 the discount was 9.0%. The discount has fluctuated during the year and has at times been above 10%; consequently there have been a number of share repurchases during the period. As at 14 September 2021 the discount was 10.9%.
Whilst the Board believes that the most effective means of minimising any discount at which the ordinary shares may trade is for the Company to deliver strong, consistent, long-term performance from the investment portfolio (in both absolute and relative terms), wider market conditions and other considerations will affect the rating of the ordinary shares from time to time. The Board is therefore committed to seeking to limit the level of volatility of the discount to the NAV at which the ordinary shares may trade by seeking to repurchase ordinary shares when they believe it to be in the interests of shareholders to do so.
In determining whether a share purchase would enhance shareholder value, the Board will take into account market conditions, the Company's performance, any known third-party investors or sellers, the impact on liquidity and total expense ratios and of course the level of discount to net asset value at which the shares are trading. Any purchases will only be made at prices below the prevailing net asset value and where the Board believes that such purchases will enhance shareholder value.
A total of 6,228,471 shares were repurchased into treasury during the period under review (with an aggregate value of £44.2 million) and a further 832,000 shares (with an aggregate value of £6.3 million) have been repurchased since the financial year end (as at 14 September 2021) pursuant to the Board's discount management policy. The repurchase of shares at a discount to NAV has added a total of £5.3 million to the Company's NAV during the period under review. Ordinary shares held in treasury may only be reissued by the Company at prices representing a premium to the NAV per ordinary share as at the date of re-issue.
Annual General Meeting
The Company's Annual General Meeting will be held on 10 November 2021 at 11:00 a.m. Notice of the Annual General Meeting, containing full details of the business to be conducted at the meeting, is set out in the Annual Report & Accounts. Your attention is also drawn to the Directors' Report in the Annual Report & Accounts, where various resolutions relating to special business are explained.
In addition to the formal business, Alexander Darwall will provide a presentation to shareholders on the performance of the Company over the past year as well as an outlook for the future. Subject to any restrictions in place as a result of Covid-19, the Board would welcome your attendance at the AGM as it provides shareholders with an opportunity to ask questions of both the Board and of the Investment Manager.
Please note that we have removed paper from the voting process so as to reduce the environmental impact of the Company. Electronic proxy voting is now available and shareholders named on the Company's register may submit voting instructions using the web-based voting facility at www.signalshares.com and www.proxymity.io for institutional shareholders. If you have not already registered with Signal Shares you will need your Investor Code which can be found on your share certificate or a recent dividend confirmation. Once registered, shareholders will be able to vote immediately by selecting 'Proxy Voting' from the menu. If shareholders are unable to submit voting instructions electronically they may obtain a paper proxy form from the Company's registrar, Link Group. Shareholders who hold their shares through a platform should contact the platforms customer services team for details of how to register their vote.
The voting results will be posted on the website following the Annual General Meeting and the Board will also make the customary announcement to the London Stock Exchange.
Outlook
2020 and, now, 2021 have been dominated by the Covid-19 pandemic. The long-term effects of the pandemic on the global economy and on lives, livelihoods and businesses will doubtless be felt for years to come. Yet it is at times like these that active funds have the best opportunity to lay the foundations upon which long-term outperformance can be built. Our active philosophy empowers our fund manager to invest according to his convictions. We believe that our portfolio is well-placed to adapt and perform.
On behalf of the Board, I would like to express my thanks to all of our shareholders and stakeholders for their continuing support.
Andrew Sutch
Chairman
22 September 2021
Investment Manager's Review
The total return on the net asset value of the Company's ordinary shares was 1.2% during the twelve months to 31 May 2021. This compares with a total return of 24.6%, by the Company's benchmark, the MSCI Europe Total Return Index.
Stimulative monetary and fiscal policies have boosted equity valuations, just as debts, both government and corporate, have soared during the period under review. Low interest rates and printing more money in the West were the salient features explaining strong equity markets. The European Central Bank's ('ECB') main refinancing rate remains at 0%, as it has been for the last five years; and the 3-month Euribor interest rate was -0.54% at the end of May 2021, a new historic low.
Europe's stock market performance compares well with the MSCI World Total Return Index which returned 22.5%; the S&P500 returned 21.7%; and the Nasdaq Composite Index was up 26.7%, an indication that technology stocks were a main driver of markets around the world. Japan's Nikkei-225 was up 14.5%; the MSCI AC Asia ex-Japan gained 31.7% and the MSCI Latin America Index increased by 29.1%. The Hang Seng index, too, was up 13.8% - its relatively poor performance a reflection of severe political challenges. Nevertheless, the International Monetary Fund's ('IMF') April 2021 GDP forecasts underscore the view that Europe has been more badly damaged than other regions of the world. The IMF estimates that world GDP contracted by 3.3% in 2020; and it expects a 6% bounce in 2021. These numbers compare with its forecasts for the European Union of a 6.1% contraction in 2020 and a 4.4% improvement in 2021. To judge from the IMF's forecasts, the big winners are China and other Asian economies, which barely missed a beat in 2020 yet are expected to grow rapidly in 2021. The Chinese economy is forecast to grow by 8.4% this year. The relative GDP performance of Europe is mirrored in earnings expectations. IBES (market consensus) forecasts MSCI Europe corporate earnings to rebound by 43% in 2021 after a fall in earnings of 26% in 2020. The US (S&P500) numbers are 37% and -13% respectively.
Note: All performance figures are in sterling.
Performance
Our performance in the period under review was the worst in the Company's 21-year history. Whilst the demise of Wirecard, a matter which we have covered extensively in previous reports, is an element of the explanation, it is not the only reason. Simply put, our portfolio did not participate in the most buoyant investment themes during the period under review. Investors' confidence that debts can easily and cheaply be refinanced was a significant reason for the market extending the valuations of loss-making, more speculative companies. These included many new electric economy companies engaged in activities such as the production of green hydrogen and 'circular economy' stocks. Although there is great enthusiasm for these new businesses, they are not yet proven. Technical challenges and high costs are likely to stymie the widespread adoption of some of these new ideas. Other areas of strong market performance were metals, and infrastructure and building materials stocks, beneficiaries of the massive stimulus packages in the US and Europe. To put it another way, lower value-added, capital-intensive businesses have significantly outperformed higher value-added, more capital-light businesses.
Our strategy has always been to invest in companies with structural growth, low capital needs and high value-added.
Positioning
Much of the immediate adjustment to the Covid-19 era was made just before the start of the period under review. In early 2020, we anticipated a severe squeeze on consumer incomes, though that is not how it turned out, and sold holdings, mainly travel related, which depended on buoyant consumer spending. As a result, the portfolio tilted towards business- related spending rather than consumer-related spending. Nevertheless, our investment style has not changed: the portfolio consists of the same number of stocks (c.35 securities), companies that are typically differentiated, high value-added, capital-light, global, profitable, and with less debt than the average company in the Benchmark index. We expect these companies to enjoy relatively good levels of demand visibility.
Despite the massive impact of Covid-19 and the policy responses, we believe that economic reality will assert itself in due course. The Company's portfolio is well positioned for the challenges that will present themselves when the prop of 'Quantitative Easing' (Q.E.), printing money, is removed (as surely it will be). At that point, structural winners through the cycle will be better valued than cyclical stocks. Q.E. has swept all before it. Yet it is storing up problems for the future. The massive stimulus packages in Europe and the US have driven demand to levels that will be hard to sustain. Our companies which are less volume-dependent are well positioned for this eventuality. Moreover, there are undoubtedly significant inflationary pressures from rising commodity prices. The oil price, for instance, rose sharply in the period under review. The US dollar price of WTI crude climbed 86.9% and has continued to rise since. Metals and soft commodity prices have also risen very significantly. Our companies are not particularly impacted by these pressures. Furthermore, with mounting signs of inflation, interest rate hikes are increasingly likely. Our companies generally have less debt and higher profitability than the average company in the index. As a result, again, we are less concerned. Underpinning our positioning is the view that over the cycle, differentiated, value-adding businesses will outperform. Innovation should be rewarded with pricing power. Greater geographic reach, as is typical with our companies, is both a validation of a successful strategy and also increases greatly the addressable market.
Contribution to performance (Stocks) 12 months
The following two tables detail which stock positions had the greatest impact on performance during the period, both positive and negative. The impact is the result of the Company's holdings versus the benchmark and the relative price performance of the stock over the period, all of which are calculated on a buy and hold basis and include the impact of foreign currency rates.
Positive contributors
|
|
Portfolio |
Benchmark |
|
Contribution |
|
|
Weight |
weight |
Price |
to |
|
|
31.05.2021 |
31.05.2021 |
12 months |
NAV return |
|
Security |
% |
% |
% |
% |
|
Intermediate Capital Group |
7.91 |
- |
72.19 |
3.51 |
|
Arrow Global Group |
4.03 |
- |
295.97 |
2.85 |
|
Genus |
7.64 |
- |
45.77 |
2.13 |
|
ASML Holding |
2.50 |
2.10 |
81.23 |
1.51 |
|
Infineon Technologies |
3.34 |
0.45 |
69.23 |
1.50 |
|
Dassault Systemes |
7.82 |
0.27 |
18.73 |
1.24 |
|
SOITEC |
3.43 |
- |
69.41 |
1.21 |
|
Novo Nordisk 'B' |
9.80 |
1.29 |
8.19 |
0.75 |
|
Edenred |
3.38 |
0.14 |
16.75 |
0.45 |
|
RELX |
8.67 |
0.49 |
1.25 |
0.24 |
Negative contributors
|
|
Portfolio |
Benchmark |
|
Contribution |
|
|
Weight |
weight |
Price |
to |
|
|
31.05.2021 |
31.05.2021 |
12 months |
NAV return |
|
Security |
% |
% |
% |
% |
|
Wirecard |
- |
0.01 |
(57.63) |
(6.14) |
|
bioMerieux |
4.89 |
0.06 |
(29.81) |
(2.11) |
|
Grenke |
1.08 |
- |
(25.48) |
(2.08) |
|
Grifols |
5.63 |
0.09 |
(21.91) |
(1.56) |
|
Deutsche Boerse |
5.55 |
0.35 |
(11.51) |
(1.05) |
|
Ubisoft Entertainment |
3.00 |
0.08 |
(17.89) |
(0.84) |
|
Experian |
9.39 |
0.36 |
(2.64) |
(0.22) |
|
Gaztransport Et Technigaz |
2.03 |
- |
3.20 |
(0.11) |
|
Network International Holdings |
0.43 |
- |
(14.16) |
(0.06) |
|
OHB |
0.35 |
- |
(15.86) |
(0.05) |
The biggest single contributor to our performance in the period under review was Intermediate Capital Group (ICG). It invests in private equity, credit, and debt. Around the world, institutions are allocating more resources to the private markets. This favourable trend and the long-term commitment of funds make for high visibility and underpin our confidence that the company will deliver good returns for the foreseeable future.
Arrow Global Group ('Arrow Global') was the next biggest contributor. The share price rose sharply after an offer was made for the company; a takeover has been agreed.
Genus was another significant contributor. The company is a world leader in porcine and bovine genetics. There is increasing demand across their major business lines and in all the main global markets. A particular opportunity is in China where there is a realistic prospect that Genus will increase its market share tremendously in the medium term. There is an even bigger prize, the introduction of gene editing for one of the main porcine respiratory diseases. Trials for this proprietary technology are well advanced. There is a realistic prospect of success which will open a significant commercial opportunity. We have reinforced the holding.
The move to the digital economy, bolstered by the roll out of 5G, has been a boon to the semiconductor industry. Accordingly, Infineon has made a positive contribution to performance. Its strength in power semiconductors plays well with the new electric economy. Where electric power efficiency is concerned - automotive, hand-held tools, wearables and other 5G applications - Infineon has world-leading positions and should benefit further as 5G applications gain ground.
Dassault Systemes, a holding since 1996, was another positive contributor. Its continuing success in CAD/CAM with core aerospace and automotive customers, has been complemented by successfully developing new verticals in, notably, life sciences and city planning. The scale of their ambitions is impressive; and they have the necessary ingredients to achieve much more.
Another long-standing holding, and our biggest position, is Novo Nordisk. It made a modest positive contribution to our performance. Nevertheless, we do not believe that the strength of Novo Nordisk's business and its fine prospects are adequately reflected in its valuation presently. The company enjoys a globally dominant position, together with one competitor, in the treatment of diabetes. This is a favourable position addressing a worsening diabetes pandemic. In addition, the company has approved 'best in class' drugs for severely obese patients. This is a big and growing market.
Edenred also made a positive contribution. This French company processes and promotes 'specific purpose money', operating schemes for governments and corporates which want to give benefits to employees for specific purposes. A typical example of their activity is the administration of food voucher schemes for corporates, their original core activity. The move from paper-based vouchers to digital vouchers is good news for Edenred; as is the rise of 'virtual canteens' in place of corporate canteens.
The biggest single 'hit' to performance was Wirecard. We sold the entire holding on the day that the fraud was reported by the company in June 2020. We have written extensively about this issue in previous reports.
The marked underperformance of bioMérieux shares is due to the company's warning that Covid-19 related demand in the US has fallen sharply. However, the future success of bioMérieux is about much more than Covid-19. They fulfil many other diagnostic needs including the reliable, fast detection of pneumonia, meningitis, and influenza. We are firmly of the view that there is a structural increase in the need for diagnostics to tackle infectious diseases and to reduce antibiotic use. Accordingly, we have retained this position.
In September 2020, Grenke was assailed by an investigative financial research group which accused the company of "widespread fraud and predatory practices". As a precaution we sold the holding. The company initiated a series of audits which have taken nearly nine months to complete, an indication that these audits have been exceptionally thorough. Over this nine-month period the company released interim findings of these audits, all of which confirmed our view that the company's management was honest and that the allegations were without foundation. Thus, we decided to take a new, small position in Grenke. The company's financial auditors duly announced an unqualified audit for 2021. Although, in our view, the company has been vindicated, it has been damaged by the unwarranted allegations. We believe that it will now recover strongly.
Deutsche Boerse was also a negative contributor to performance. It prospers most when there is uncertainty in financial markets and when interest rates are higher. Neither condition was apparent in the reporting period. However, we can easily imagine a more favourable backdrop for Deutsche Boerse and have retained the position.
Experian, the world's biggest credit bureau and credit analytics company, made a slightly negative contribution. This is a major holding in the portfolio, a reflection of our confidence that it is a high-quality company which we expect to deliver good returns whatever the macroeconomic conditions. Results and guidance are encouraging. We attribute the shares underperformance to the concern that the Biden administration will disrupt the existing, favourable industry structure. We do not believe that this is a likely eventuality because Experian's business is already well aligned with policymaker objectives: greater consumer protection and control. Indeed, what sets Experian apart from its peers is that it has established a successful direct-to-consumer credit business. It remains a core holding.
Contribution to performance (Sectors) 12 months
The following two tables detail which sectors positions had the greatest impact on performance during the period, both positive and negative. The impact is the result of the Company's holdings versus the benchmark and the relative price performance of the stock over the period, all of which are calculated on a buy and hold basis and include the impact of foreign currency rates.
Positive contributors
|
|
Portfolio |
Benchmark |
|
Contribution |
|
|
Weight |
weight |
Price |
to |
|
|
31.05.2021 |
31.05.2021 |
12 months |
NAV return |
|
Sector |
% |
% |
% |
% |
|
Financials |
18.60 |
15.44 |
21.75 |
3.23 |
|
Materials |
0.60 |
8.12 |
75.27 |
0.17 |
|
Consumer Staples |
2.80 |
13.74 |
4.94 |
0.16 |
|
Industrials |
19.20 |
14.32 |
0.58 |
0.13 |
|
Consumer Discretionary |
1.60 |
11.02 |
4.52 |
0.09 |
Negative contributors
|
|
Portfolio |
Benchmark |
|
Contribution |
|
|
Weight |
weight |
Price |
to |
|
|
31.05.2021 |
31.05.2021 |
12 months |
NAV return |
|
Sector |
% |
% |
% |
% |
|
Healthcare |
29.00 |
15.04 |
(2.94) |
(0.86) |
|
Communication Services |
3.00 |
4.01 |
(17.89) |
(0.84) |
|
Energy |
2.00 |
4.43 |
3.20 |
(0.11) |
|
Information Technology |
23.20 |
7.65 |
(0.04) |
(0.10) |
Activity
We established several new positions during the period under review. The biggest was Soitec, a company which modifies silicon wafers with its proprietary technology to improve power efficiency. Its unique technology means that the company is singularly well placed to benefit as 5G is rolled out. 5G will drive a range of new opportunities such as 'wearables' where 'always on' low power consumption is critical. Soitec is important in delivering such solutions.
We also bought back into shares in adidas. We had previously sold the shares believing that the company would suffer from a squeeze in consumer spending. However, results over the last twelve months have been excellent. Demand has been buoyant, not least in China where the brand appears to have improved its standing in the eyes of consumers. The industry structure, dominated by Nike and adidas, is a favourable one; digital technologies are strengthening their leadership position; and demand trends are good for adidas.
It is many years since we bought shares in an 'Initial Public Offering' (IPO). However, we participated in the IPO of Darktrace, a UK listed company which provides cyber security software. What sets the company apart is its platform which uses unsupervised machine learning to detect cyber threats. The announcement of a partnership with Microsoft supports the view that Darktrace has good solutions and good prospects.
In the payments space, we invested in Worldline. The French-listed company operates digital transaction processing platforms and merchant services. There is a clear trend to digital payments. Moreover, as the largest processor in Europe, Worldline should be a winner in this 'scale' business.
The Company has previously held shares in Mowi (formerly Marine Harvest), the Norwegian-based leading salmon farmer. We initiated a new position for two reasons. The first was evidence of new customers in supermarkets during lockdown; the second reason was that relatively constrained supply, coupled with continuing stronger demand, is likely to support good prices for Mowi.
In the UK, we bought shares in Pets at Home Group, the retailer. The background is favourable: there has been an 8% increase in UK pet ownership over the past year. Pets at Home's integrated model, offering the full range of pet-related services, including veterinary services, pet food, toys, grooming and so forth, is unique and is gaining market share.
Another new purchase was that of Borregaard, a Norwegian company which produces advanced and environmentally friendly biochemicals that can replace oil-based products by using the different components of wood. Products include biopolymers, speciality cellulose, biovanillin, cellulose fibrils and bioethanol for a variety of applications in sectors such as agriculture and aquaculture, construction, pharmaceuticals and cosmetics, foodstuffs, batteries, and biofuels.
We also added to our existing holdings of Ubisoft Entertainment ('Ubisoft'), Grifols and Gaztransport Et Technigaz ('GTT'). Ubisoft, the video games publisher, reported satisfactory results but a slightly disappointing outlook. We think the trends remain good for them and increased the holding. Grifols, the blood plasma fractionation company, too is struggling as plasma collections have been disrupted by Covid-19 restrictions. Moreover, new technologies are being developed which attempt to disrupt Grifols' traditional fractionation business. In our view, demand for fractionated blood plasma will remain strong notwithstanding new disruptive innovations and in due course, collections will return to normal and Grifols should flourish. Finally, as shares in GTT weakened we bought more. GTT is a 'play' on growing demand for Liquified Natural Gas ('LNG'), providing engineering and design technologies for the LNG carriers. Although Europe appears to be turning against LNG, we think that there is good, sustainable demand for LNG in Asia. Accordingly, we think that GTT has good prospects.
As regards sales, the biggest was that of Wirecard, all of which we sold on the day of its announcement indicating that fraud had taken place. Since the financial year end we have sold the entire holding in Arrow Global following the announcement of an agreed takeover offer for the company. All other disposals were of very small positions which we had little prospect of increasing. Thus, we sold Ossur, Knorr-Bremse, AT&S, Smiths Group and RWS, all very small holdings. We also reduced the holding in Deutsche Boerse to fund other purchases.
Gearing
At the end of the 2019/20 financial year the Company had no gearing. Net borrowings at the end of May 2021 were £61.6m, representing gearing of 7%. The effective gearing was somewhat less as the holding in Arrow Global (worth c. £37.8 million at the period end) might be considered as quasi-cash given that we expect the agreed takeover to be completed soon, making effective gearing 2.7%. This holding has been sold since the financial year end. Some of the money from borrowings was used to fund share buybacks, a value-enhancing operation for shareholders when the Company's shares trade at a discount to their net asset value. Average borrowing costs were 1.63%, little changed from last year.
Outlook
We clearly misjudged that Covid-19 and related policy responses would be a boon to stock markets. We saw Covid-19 as a threat to economies, raising costs and fostering indebtedness. It might be that, as Keynes put it, investors indulged in "spontaneous optimism rather than mathematical expectations'', a bout of what he described as ''animal spirits".
There are three significant new investment considerations for the future: the lasting effects of Covid-19-related policies; ESG; and the transition to the Green Economy (the European Green Deal is Europe's new growth strategy). Taken together, these constitute a 'regulatory reset'. We believe that our strategy is well placed to cope with this. Our high-quality, profitable companies should prosper through their innovation and technology leadership. Moreover, though there is evidence that Europe is falling behind other parts of the world, most of our companies have successful global strategies which mitigate this concern. We identify companies that are, typically, global winners that happen to be listed in Europe.
We have strengthened our research resources with a better, bigger investment team than we have ever had. Successful investments such as Darktrace are directly linked to this superior research resource. It is almost inconceivable that the current levels of monetary expansion in Europe and the US can be sustained indefinitely. At some point reality will bite and businesses will be challenged by the enormity of debt repayments and the risk of weaker demand. We are confident that our 'special' companies will outperform through the cycle.
Alexander Darwall
CIO, Devon Equity Management Limited
22 September 2021
Investment Portfolio
as at 31 May 2021
|
|
|
|
31 May 2021 |
31 May 2021 |
31 May 2021 |
|
|
|
Country of |
Market Value |
Percentage |
Percentage |
|
Company |
Sector |
Listing |
£'000 |
of Portfolio |
of Portfolio |
|
Novo Nordisk 'B' |
Healthcare |
Denmark |
91,831 |
9.8 |
9.8 |
|
Experian |
Industrials |
United Kingdom |
87,989 |
9.4 |
10.1 |
|
RELX |
Industrials |
Netherlands |
81,236 |
8.7 |
9.6 |
|
Intermediate Capital Group |
Financials |
United Kingdom |
74,075 |
7.9 |
5.0 |
|
Dassault Systemes |
Information Technology |
France |
73,259 |
7.8 |
6.8 |
|
Genus |
Healthcare |
United Kingdom |
71,565 |
7.7 |
3.8 |
|
Grifols |
Healthcare |
Spain |
52,731 |
5.6 |
6.5 |
|
Deutsche Boerse |
Financials |
Germany |
51,962 |
5.6 |
8.8 |
|
BioMerieux |
Healthcare |
France |
45,820 |
4.9 |
7.2 |
|
Arrow Global Group |
Financials |
United Kingdom |
37,784 |
4.0 |
0.8 |
|
SOITEC |
Information Technology |
France |
32,100 |
3.4 |
- |
|
Edenred |
Information Technology |
France |
31,712 |
3.4 |
2.0 |
|
Infineon Technologies |
Information Technology |
Germany |
31,277 |
3.3 |
2.0 |
|
Ubisoft Entertainment |
Communication Services |
France |
28,147 |
3.0 |
1.9 |
|
ASML Holding |
Information Technology |
Netherlands |
23,721 |
2.5 |
2.0 |
|
Gaztransport Et Technigaz |
Energy |
France |
19,060 |
2.0 |
0.9 |
|
Barry Callebaut |
Consumer Staples |
Switzerland |
16,634 |
1.8 |
1.8 |
|
adidas |
Consumer Discretionary |
Germany |
10,284 |
1.1 |
- |
|
Grenke |
Financials |
Germany |
10,156 |
1.1 |
5.8 |
|
Darktrace |
Information Technology |
United Kingdom |
9,775 |
1.0 |
- |
|
Bayer |
Healthcare |
Germany |
9,204 |
1.0 |
2.6 |
|
Worldline |
Information Technology |
France |
8,476 |
0.9 |
- |
|
Mowi |
Consumer Staples |
Norway |
8,269 |
0.9 |
- |
|
Wolters Kluwer |
Industrials |
Netherlands |
6,765 |
0.7 |
0.3 |
|
Borregaard |
Materials |
Norway |
4,966 |
0.5 |
- |
|
Pets at Home Group |
Consumer Discretionary |
United Kingdom |
4,490 |
0.5 |
- |
|
Oxford Instruments |
Information Technology |
United Kingdom |
4,407 |
0.5 |
0.2 |
|
Network International Holdings |
Information Technology |
United Kingdom |
4,013 |
0.4 |
0.3 |
|
OHB |
Industrials |
Germany |
3,276 |
0.4 |
- |
|
KWS Saat |
Consumer Staples |
Germany |
1,350 |
0.1 |
0.1 |
|
Elkem |
Materials |
Norway |
513 |
0.1 |
- |
|
Grifols Preference |
Healthcare |
Spain |
125 |
- |
- |
|
Total |
|
|
936,972 |
100.0 |
|
Strategic Report
The Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013. The Strategic Report seeks to provide shareholders with the relevant information to enable them to assess the performance of the Directors and the Company during the financial year under review.
Business and Status
During the year, the Company carried on business as an investment trust with its principal activity being portfolio investment. The Company has been approved by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the eligibility conditions of sections 1158 and 1159 of the Corporation Tax Act 2010 and the ongoing requirements for approved companies as detailed in Chapter 3 of Part 2 of the Investment Trust (Approved Company) (Tax) Regulations 2011. In the opinion of the Directors, the Company has conducted its affairs in the appropriate manner to retain its status as an investment trust.
The Company is an investment company within the meaning of section 833 of the Companies Act 2006.
The Company is not a close company within the meaning of the provisions of the Corporation Tax Act 2010 and has no employees.
The Company is domiciled in the United Kingdom and was incorporated in England & Wales on 16 August 2000. The Company started trading on 20 November 2000.
Reviews of the Company's activities are included in the Chairman's Statement and Investment Manager's Review.
There has been no significant change in the activities of the Company during the year to 31 May 2021 and the Directors anticipate that the Company will continue to operate in the same manner during the current financial year.
Investment policy
The Company will, at all times, invest and manage its assets, with the objective of spreading risk and in accordance with the following Investment Restrictions.
Notwithstanding the broad powers of investment available to the Company as a closed-ended fund, the Board has adopted the following investment restrictions:
|
· no single holding shall constitute more than 10% of the Company's total assets (calculated at the time of investment). The Board will pay particular attention to holdings which grow to represent more than 10% of total assets;
· the Company will not invest in unlisted securities;
· the Company's will not invest in derivative instruments, whether for efficient portfolio management, gearing or investment purposes;
· the Company will not invest in other listed closed-ended investment funds;
· the Company shall not take legal or management control over any investments in its portfolio; and
· not more than 50% of the Company's investments may be in securities which are not qualifying securities or government securities for the purposes of the UK ISA Regulations. |
Any material change in the investment policy of the Company described above may only be made with the approval of shareholders by an ordinary resolution.
Investment Approach
The Investment Manager adopts a stock picking approach in the belief that a thorough analysis and understanding of a company is the best way to identify long-term superior growth prospects. This understanding begins with identifying those companies where the ownership structure and incumbent management are conducive to the realisation of the aim of achieving superior long-term earnings growth.
The Investment Manager will seek to identify companies which enjoy certain key business characteristics including some or all of the following:
|
· a strong management record and team, and the confidence that the Investment Manager has in that management's ability to explain and account for its actions;
· proprietary technology and other factors which indicate a sustainable competitive advantage;
· a reasonable expectation that demand for their products or services will enjoy long-term growth; and
· an understanding that structural changes are likely to benefit rather than negatively impact that company's prospects. |
In analysing potential investments, the Investment Manager will employ differing valuation techniques depending on their relevance to the business characteristics of a particular company. However, the underlying feature will be the sustainability and growth of free cashflow in the long-term.
Portfolio risk
Portfolio risk is mitigated by investment in a diversified spread of investments. The Investment Manager is not constrained by benchmark weightings, sector, geographical location within Europe or market capitalisation or size of investee companies.
Benchmark index
The Company's benchmark is the MSCI Europe Total Return Index in GBP. Since the Company now has a 31.4% weighting to UK Listed companies, the Board no longer considers it appropriate to show the MSCI ex-UK Europe index as a secondary benchmark. The change of benchmark was communicated to shareholders following the 2019 Annual General Meeting.
Borrowing limits
The Board considers that long-term capital growth can be enhanced by the use of gearing through bank borrowings. The Board considers that the Company's level of gearing should be maintained at appropriate levels, with sufficient flexibility to enable the Company to adapt at short notice to changes in market conditions.
The Board oversees the level of gearing in the Company and reviews the position with the Investment Manager on a regular basis. In normal circumstances the Board does not expect the level of gearing to exceed 20% of the Company's total assets (calculated at the time of borrowing).
Subsequent to the financial year end, on 10 September 2021, the Company renewed its revolving credit facility with The Bank of Nova Scotia, London Branch with a maximum drawable amount of £100 million available until September 2022 and credit approval for an additional 'accordion' amount available upon application for a further £50 million. The amount of £65 million was drawn down as at the financial year end on 31 May 2021.
Future developments
It is the Board's ambition to grow the asset base of the Company through a combination of organic growth and new issuance of shares with a view to achieving the critical mass necessary to attract broader demand from wealth managers, IFAs and other institutional buyers of investment trust shares. The Investment Manager continues to be encouraged to use the particular advantages of an investment trust structure to enhance potential returns to shareholders, including the use of gearing and the freedom to hold high conviction positions through periods of sharp market fluctuations.
Planned life of the Company
The Articles of Association of the Company provide that at every third Annual General Meeting an ordinary resolution shall be proposed that the Company shall continue in existence as an investment trust. If any such resolution is not passed at any of those meetings, the Directors shall, within 90 days of the date of the resolution, put forward to shareholders proposals (which may include proposals to wind up or reconstruct the Company) whereby shareholders are entitled to receive cash in respect of their shares equal as near as practicable to that to which they would be entitled on a liquidation of the Company at that time (and whether or not shareholders are offered other options under the proposals).
As a resolution to that effect was passed at the 2020 Annual General Meeting held on 16 November 2020, the next scheduled continuation vote will be at the 2023 Annual General Meeting.
Shareholders should note that the valuations used to produce the accounts on a going concern basis might not be appropriate if the Company were to be liquidated.
Dividend policy
The Company's objective is to achieve shareholder returns through capital growth rather than income. However, in order to qualify for approval as an investment trust, the Company is not permitted to retain more than 15% of eligible investment income arising during any accounting period. Accordingly, the Board's policy is to propose a modest annual dividend and one at least sufficient to enable the Company to maintain its investment trust status.
Management
The Company has no employees and most of its day-to-day responsibilities are delegated to the Company's Investment Manager and Company Secretary.
J.P. Morgan Europe Limited acts as the Company's Depositary and the Company has entered into an outsourcing arrangement with J.P. Morgan Chase Bank N.A. for the provision of accounting and administration services.
Although Devon Equity Management Limited is named as the Company Secretary, J.P. Morgan Europe Limited provides administrative support to the Company Secretary as part of its formal mandate to provide broader fund administration services to the Company.
Risk management & internal controls
The Board has established an ongoing process for identifying, evaluating and managing significant risks faced by the Company.
Viability statement
In accordance with the Code of Corporate Governance issued by the Association of Investment Companies ('AIC') in February 2019 (the 'AIC Code'), the Board has assessed the longer term prospects for the Company beyond the twelve months required by the going concern basis of accounting. The period assessed is for five years to 31 May 2026.
The Company's investment objective is to achieve long-term capital growth and the Board regards the Company's shares as a long-term investment. The Board believes that a period of five years is considered a reasonable period for investment in equities and is appropriate for the composition of the Company's portfolio. As part of its assessment, the Board has noted that shareholders voted in favour of the continuation of the Company at the Annual General Meeting held on 16 November 2020.
As part of its assessment of the viability of the Company, the Board has reviewed and considered the principal risks and uncertainties that may affect the Company, including emerging risks and matters relating to the Covid-19 pandemic. The Board has also considered the Company's business model including its investment objective and investment policy, a quarterly forecast of the Company's projected income and expenses and the liquidity of the Company's portfolio to ensure that it will be able to meet its liabilities as they fall due.
The Board has taken into account an assessment of the liquidity of the portfolio and considered the viability of the Company under various scenarios. Using historic market crashes and economic crises as base cases, the tests modelled the effects of severe stock market volatility on the Company's NAV and its ability to meet its liabilities. Based on the results of the tests, the Board concluded that the schedule of investment limits and restrictions put in place by the Board and the mitigating actions for the principal risks would protect the value of the Company's assets to a sufficient degree.
The Board has noted that:
|
· The Company holds a highly liquid portfolio invested predominantly in listed equities;
· European equities remain an attractive opportunity for investors;
· The Company maintains a relatively low level of gearing and has at all times been comfortably compliant with its loan to value and other covenant obligations to its lender, The Bank of Nova Scotia, London Branch;
· The Company's ongoing charges and operational expenses are well covered by the expected levels of return and revenue and no significant increase to ongoing charges or operational expenses is anticipated; and
· The Investment Manager and other key service providers have suitable arrangements in place to ensure that they can continue to provide their services to the Company despite the Covid-19 pandemic. |
The Board has also considered the Company's prospects over the next five years, the predicted demand for the Company's shares as well as market outlook, both for equity shares and investment trusts. These considerations assume:
|
· The Investment Manager's compliance with the Company's investment objective, its investment strategyand asset allocation;
· That the portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary;
· The continuation of the Board's discount management policy; and
· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company's total assets. |
The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.
The Directors' assessment of the Company's ability to operate in the foreseeable future is included in the Going Concern Statement in the Directors' Report.
Key Performance Indicators
At the quarterly board meetings the Directors consider a number of performance indicators to help assess the Company's success in achieving its objectives. The key performance indicators used to measure the performance of the company over time are as follows:
|
Share price total return |
|
|
|
|
|
|
|
|
|
to 31 May 2021 |
1 year (%) |
3 years (%) |
5 years (%) |
|
The Company |
0.1 |
(0.6) |
46.7 |
|
MSCI Europe Total Return Index in GBP (Benchmark) |
24.6 |
23.0 |
66.4 |
|
AIC Europe peer group1 |
32.0 |
46.0 |
101.8 |
|
|
|
|
|
|
Net asset value total return |
|
|
|
|
|
|
|
|
|
to 31 May 2021 |
1 year (%) |
3 years (%) |
5 years (%) |
|
The Company |
1.2 |
7.8 |
54.8 |
|
MSCI Europe Total Return Index in GBP (Benchmark) |
24.6 |
23.0 |
66.4 |
|
AIC Europe peer group1 |
26.2 |
38.6 |
93.9 |
|
|
|
|
|
|
(Discount)/premium |
|
|
|
|
|
|
|
|
|
as at 31 May |
2021 (%) |
2018 (%) |
2016 (%) |
|
The Company |
(9.0) |
(1.1) |
3.7 |
|
AIC Europe peer group1 |
(5.1) |
- |
- |
|
|
|
|
|
|
Ongoing charges |
|
|
|
|
|
|
|
|
|
for the year ending 31 May |
2021(%) |
2018 (%) |
2016 (%) |
|
The Company |
0.99 |
0.91 |
1.08 |
|
AIC Europe peer group1 |
0.85 |
- |
- |
1 The AIC Europe peer group is available at www.theaic.co.uk
There were 8 investment trusts in the AIC Europe sector as at 31 May 2021. The Board monitors the Company's performance in relation to both the sector as a whole and the companies within the sector which the Board considers to be its peer group.
Discount to net asset value
The Company's Discount Management Policy is set out in the Chairman's Statement.
Under the Listing Rules, the maximum price that may currently be paid by the Company on the repurchase of any ordinary shares is 105% of the average of the middle market quotations for the ordinary shares for the five business days immediately preceding the date of repurchase. The minimum price is the nominal value of the ordinary shares.
The Board is proposing that its authority to repurchase up to approximately 14.99% of its issued share capital should be renewed at the Annual General Meeting. The new authority to repurchase will last until the conclusion of the Annual General Meeting of the Company in 2022 (unless renewed earlier). Any repurchase made will be at the discretion of the Board considering prevailing market conditions and within guidelines set from time to time by the Board, the Companies Act, the Listing Rules and Model Code.
Treasury Shares
In accordance with the Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 which came into force on 1 December 2003 any ordinary shares repurchased, pursuant to the above authority, may be held in treasury. These ordinary shares may subsequently be cancelled or sold for cash. This gives the Company the ability to reissue shares quickly and cost effectively and provide the Company with additional flexibility in the management of its capital. The Company may hold in treasury any of its ordinary shares that it purchases pursuant to the share buyback authority granted by shareholders. During the financial year the Company repurchased 6,228,471 ordinary shares to be held in treasury at an average discount of 10.8%.
Ordinary shares held in treasury may only be reissued by the Company at prices representing a premium to the net asset value per ordinary share as at the date of re-issue.
Principal risks and uncertainties
In accordance with the AIC Code, the Board is responsible for establishing procedures to manage risk, oversee the internal control framework, and determine the nature and extent of principal risks the Company is willing to take in order to achieve its long-term strategic objectives. The Board has overall responsibility for the Company's systems of internal controls and for reviewing their effectiveness. The Board, with the support of the Audit Committee and the Investment Manager, has carried out a robust assessment of the principal and emerging risks which may impact the Company. The principal risk factors that may affect the Company and its business can be divided into the following areas:
|
Principal Risks and Uncertainties |
Management of risks through Mitigation & Controls |
|
Investment Strategy Key risks and uncertainties include: poor investment performance over an extended period relative to Benchmark; the sudden departure of a Portfolio Manager and/or key staff member; or the development of a significant discount to net asset value in the Company's shares.
|
The Board reviews the Company's investment objective and policies and the Investment Manager's investment approach in the context of past performance (relative to Benchmark), shareholder feedback and broader market and economic conditions. The Board sets mandate restrictions as necessary.
The Board reviews the succession plans prepared by the Investment Manager and takes into consideration the availability of suitably experienced personnel to manage the Company's portfolio in the event of an emergency.
The Board has established a discount management policy and regularly considers its ongoing appropriateness in light of market conditions. In addition to seeking annual shareholder approval to its share buy-back authority, the Board also puts a continuation vote to every third AGM of the Company (the next in 2023). |
|
Market Key risks and uncertainties include: the impact of macroeconomic and geopolitical conditions on the Company's investments; or volatility in the market prices of the Company's investments.
|
The Board considers the economic and geopolitical risks and uncertainties that the Company is exposed to through regular reviews of the Investment Manager's positions and commentary. The Company does not take active positions in currencies, nor does it invest in fixed income securities.
The Investment Manager reduces liquidity risk by investing in a diversified portfolio of highly liquid, exchange-traded equities and by adhering to her Board's limits on individual holdings. The Board has set a policy that the Company will not invest in unlisted securities. |
|
Operational Key risks and uncertainties include: a cybercrime event or an IT systems failure which compromises the Company's data or the Investment Manager's ability to manage the Company's portfolio; inadequacy of disaster recovery planning to ensure continuity of the Investment Manager's operations; or the inadequacy of the oversight and controls undertaken by the Custodian, the AIFM or the Investment Manager in relation to the Company.
|
The Board relies on the cyber security and IT risk management tools implemented by the Investment Manager, the AIFM and the Custodian to prevent cyber-attacks. The Investment Manager uses a well- established third-party IT system (Bloomberg) for all trading activity on behalf of the Company.
The Board is reliant on the Investment Manager and its key third party service providers to ensure that appropriate measures are in place in order that critical operations can be maintained at all times. The Investment Manager is fully compliant with the Operational Resilience requirements set out by the FCA.
The Board considers the internal controls of the Investment Manager and all key third party service providers on at least an annual basis. System-enforced controls are in place in each case which alert staff in oversight and compliance roles of any breaches. Similarly, 'Four eye' checks are mandated for all manual controls to ensure there is sufficient oversight over actions taken. A third annual Audit & Risk Committee meeting was introduced in 2021 to enhance the consideration of risks and internal controls. |
|
Legal and regulatory Key risks and uncertainties include: the risk of non-compliance with existing regulatory or legal requirements, including resultant negative PR implications; adverse implications of regulatory change; or changes to the Company's policies and reporting obligations in relation to sustainability and ESG risks.
|
The Board relies on the services of its Company Secretary and JP Morgan to report changes in and to ensure compliance with all applicable laws and regulations including the Companies Act 2006, the UKLA Listing Rules and the Alternative Investment Fund Managers Directive.
The Audit & Risk Committee reviews the performance of the external auditor and the effectiveness of the independent audit process on an annual basis. The experience of the auditor in financial accounting and auditing standards is reviewed to ensure that changes in audit standards are anticipated, understood and complied with.
The Board is reliant on the Investment Manager to ensure that appropriate measures are in place so that its approach to ESG investing is appropriately defined and adhered to. Accordingly, the Investment Manager has developed and implemented its published ESG Policy for the Company. |
Emerging risks that could impact the Company in the future are considered at each Board meeting, along with any potential mitigating actions.
The Investment Manager seeks to ensure that individual stocks in the Company's portfolio meet an acceptable risk/reward profile by reference to both principal and emerging risks.
In accordance with the AIC Code, the Board has carried out a review of the effectiveness of the system of internal control as it has operated over the year and up to the date of approval of the Annual Report and Accounts.
Directors
The Board currently comprises five male Directors and two female Directors.
Modern Slavery statement
The Modern Slavery Act 2015 requires certain companies to prepare a slavery and human trafficking statement. The Company does not fall within the scope of the Modern Slavery Act 2015 and therefore no slavery and human trafficking statement is included in the Annual Report.
Environmental, Social and Governance ("ESG") matters
The ESG landscape is ever evolving and the investment market is seeing a significant shift in ESG related regulations, practices, initiatives, and challenges. Therefore, it is essential that the Company's Investment Manager monitors the changing landscape and reacts accordingly.
The Board ensures that the Company's corporate reporting reflects its strategy, objectives and commitments. Although the Company does not have specific ESG or sustainability objectives and therefore does not require its Investment Manager to employ negative screens and restrict the investment universe, the Board shares Devon's belief that ESG factors are an important and value-adding component of company research. Devon incorporates ESG factors into its investment decisions on behalf of the Company and it views ESG as a material input to its fundamental evaluation of securities.
Devon's investment decisions for the Company are primarily driven by business and financial considerations. They are looking for companies with distinctive characteristics which they expect to yield substantial benefits to shareholders over the long term. As such, they recognise that political, environmental, and social issues are likely to have a material impact on future financial performance.
Whilst ESG issues, such as strong governance, form an integral part of the wider investment process, Devon does not consider Sustainability Risks explicitly. Consequently, Devon does not promote the Company as an ESG product for the purposes of the EU Sustainable Finance Disclosure Regulation ("SFDR"). This is made clear in all marketing and communications with clients.
However, Sustainability Risks can have a negative impact upon the material value of an investment. To deliver on the aim of maximising investment returns for the Company, it is essential that Devon identifies companies with sustainable business models and returns. As such, the Board and Devon both consider 'Sustainability Risk' to be indistinguishable from core business considerations.
Devon's concentrated, long-term approach to investment affords ample scope to engage with management teams on issues relating to culture, governance, and enduring sustainability. The Company's lengthy holding periods and objective of capital growth means that companies which depend on unsustainable business practices are unlikely to meet the threshold required for investment. For example, Devon places great emphasis on corporate culture and the integrity of management and undertakes extensive research in this area prior to any investment. A strong corporate culture demands a high level of employee satisfaction, and is unlikely to tolerate exploitative labour, uneconomic wages, negligent or dangerous business practices.
Similarly, Devon believes the end consumer of goods or services to be a powerful arbiter. If a company compromises on raw material quality, abuses their supply chain, or underinvests in their workforce, product and/or service quality is likely to suffer. This would have the effect of turning consumers away from the product, damaging the brand, and lowering future growth prospects. Such considerations are central to Devon's investment process.
The Board and Devon both believe that companies with good practices are better placed to achieve good investment outcomes for investors over the longer term. The Board and Devon therefore seek to ensure that investee company management teams are responsible custodians of their business, that they report clearly on ESG metrics and that they seek to improve on those areas in which they are failing. When considering ESG, Devon aims to engage companies:
|
• on significant issues arising from internal ESG research;
• on issues arising in connection with voting activity;
• on complex, thematic issues such as climate change, cyber security, human rights and water scarcity,that may pose a threat to investments over the medium to long term;
• in response to negative media coverage or alerts from third party research providers regarding an investee company;and
• in industry collaborations. |
Devon recognises that certain industries and countries with weak environmental or governance structures present additional business risks for prospective investee companies. As part of its due diligence process, it aims to become aware of where and how such risks exist. Provided that all applicable laws and regulations are applied and adhered to, Devon defers to the judgement of management teams as to the appropriateness of operating in any such industry or jurisdiction. If such activities change Devon's risk perception of an industry or company, it may preclude an investment.
Effective and responsible active ownership has long been part of Devon's approach to investment, and Devon's commitment to stewardship was formalised when it became a signatory of the UN-sponsored Principles for Responsible Investment (PRI). The Principles for Responsible Investment demonstrate Devon's commitment to responsible investment and a sustainable financial system. The UK Stewardship Code ('the Code'), first published in 2010 and updated in 2012 and again in 2019, sets high stewardship standards for asset managers that are authorised by the FCA. The Code's principles of management and emphasis on active engagement are closely aligned with Devon's investment philosophy. As such, Devon fully supports the Code and complies with its principles.
Climate change and other ESG considerations pose systemic risks to a well-functioning financial system. As well as becoming a signatory to the PRI and the Code, Devon has put in place the following in order to comprehensively account for ESG: an ESG Policy, a Sustainability Risk Policy, a revised Remuneration Policy to account for SFDR Level 1 requirements, a Shareholder Rights Directive (SRD) II Engagement Policy and Annual Disclosure, and SFDR disclosures.
Through compliance with SRD II, which aims to promote effective stewardship and long-term decision making, Devon has outlined its investment approach, engagement, and monitoring and voting behaviour with enhanced transparency. Furthermore, the Board shares Devon's belief that performance management structures are consistent with, and promote, sound and effective ESG risk management. Devon's approach to remuneration promotes long-term horizons instead of short-term incentives. Consequently, the investment team are incentivised to integrate stewardship into investment decision-making.
Sustainability risks and SFDR
The EU Sustainable Finance Disclosure Regulation ("SFDR") is a regulatory framework which applies to the Company in its capacity as an investment trust. The Board has also therefore made the following sustainability related disclosures in accordance with Article 6(1) of SFDR:
The Company is not considered an 'ESG financial product' since it does not promote and does not maximise portfolio alignment with Sustainability Factors (as defined in SFDR). However, the Company is exposed to Sustainability Risks due to the nature of the securities in which it invests.
1. How Sustainability Risks are integrated into the investment decisions of the Investment Manager.
Sustainability Risks are integrated into investment decision making and risk monitoring to the extent that they represent potential or actual material risks and/or opportunities for maximising long-term risk-adjusted returns. Devon considers Sustainability Risks as part of its broader analysis of potential investments and the factors considered will vary depending on the security in question, but typically include ownership structure, board structure and membership, capital allocation track record, management incentives, labour relations history, and climate risks.
2. The assessment and likely impacts of Sustainability Risks on the returns of the Company.
Due to the nature of the Company's investment strategy and types of securities it holds, the Company is exposed to varied Sustainability Risks which include, but are not limited to:
|
· shareholder rights (e.g. election of directors, capital amendments);
· changes to regulation (e.g. greenhouse gas emissions restrictions, governance codes);
· physical threats (e.g. extreme weather, climate change, water shortages);
· brand and reputational issues (e.g. poor health and safety records, cyber security breaches);
· supply chain management (e.g. increase in fatalities, lost time injury rates, labour relations); and
· work practices (e.g. observation of health, safety and human rights provisions). |
Section 172 statement
Under section 172 of the Companies Act 2006, the Directors have a duty to act in good faith and to promote the success of the Company for the benefit of its shareholders as a whole. In doing so, the Directors must have regard to:
|
· the likely consequences of any decision in the long term;
· the interests of the Company's employees;
· the need to foster the Company's business relationships with suppliers, customers and others;
· the impact of the Company's operations on the community and the environment;
· the desirability of the Company maintaining a reputation for high standards of business conduct; and
· the need to act fairly between members of the Company. |
As an investment trust, the Company has no employees, customers or physical assets; our stakeholders include our shareholders and our service providers, such as the Investment Manager, AIFM, Depositary, Custodian, Lender, Registrar, Auditors, Broker and Administrator.
The Board believes that the optimum basis for meeting its duty to promote the success of the Company is by appointing and managing third parties with the requisite performance records, resources, infrastructure, experience and control environments to deliver the services required to achieve the investment objective and successfully operate the Company. By developing strong and constructive working relationships with these parties, the Board seeks to ensure high standards of business conduct are adhered to at all times and service levels are enhanced whenever possible. This combined with the careful management of costs is for the benefit of all shareholders who are also key stakeholders.
Relationships with the Investment Manager & AIFM
Devon acts as Investment Manager and FundRock acts as the Company's AIFM with responsibility for additional risk oversight in accordance with the requirements of European law. The Board regularly meets with senior representatives from Devon and FundRock and pays particular attention to the control procedures and processes in place at Devon and FundRock to ensure that the investment management operations for the Company continue to be handled with the appropriate level of resource and professionalism.
The portfolio activities undertaken by the Investment Manager and the impact of decisions taken are set out in the Investment Manager's Review in the Annual Report & Accounts. Information is provided on the Company's approach towards ESG is found in the Annual Report & Accounts. The Directors are supportive of the Manager's approach, which focuses on engagement with the investee companies on ESG issues. Further information on the annual evaluation of the Investment Manager, to ensure its continued appointment remains in the best interests of shareholders, is set out in the Annual Report & Accounts.
Relationships with other service providers
Service providers such as, JP Morgan Chase Bank ("the Bank and the Custodian"), JP Morgan Europe Limited ("the Depositary"), Cenkos Securities ("the Broker") and Link Group ("the Registrar") are also considered key stakeholders. The Board receives regular reports from them and evaluates them to ensure expectations on service delivery are met.
Engagement with shareholders
The Directors value engagement with shareholders. The Company reports to shareholders twice a year by way of the Half-Yearly Financial Report and Annual Report & Accounts. In addition, net asset values are published daily and factsheets are published monthly on the Company's website, www.europeanopportunitiestrust.com. Key decisions are announced to the London Stock Exchange through a Regulatory News Service.
The Company holds an Annual General Meeting. In normal circumstances all shareholders are invited to attend, and this provides an open forum for them to discuss issues and matters of concern with the Board and representatives of the Investment Manager and the Company's advisors. The Board regularly reviews shareholder feedback to ensure that shareholder views are taken into consideration as part of any decisions taken by the Board. The Chairman actively seeks to engage with shareholders and attended meetings with investors during the year.
The Investment Manager also engages with the Company's larger shareholders and the outcome of these discussions are reported to the Board at the following Board meeting. Shareholders are invited to communicate with the Board through the Chairman or Company Secretary. Alternatively, issues can be discussed with the Company's Senior Independent Director.
The Board ensures that Directors are able to discharge their duties by, amongst other things, providing them with relevant information and training on their duties. At all times, the Directors can access as a Board, or individually, advice from its professional advisers including the Company Secretary, lawyers and Auditors.
Whilst certain responsibilities are delegated, the Board has established terms of reference for its Committees which are reviewed regularly by the Board. The Board has set the parameters within which the AIFM and Investment Manager operate and these are set out under the terms of agreements with FundRock and Devon and minutes of Board meetings.
Principal decisions taken during the year under review
The Directors take into account section172 considerations in all material decisions of the Company.
Examples of the principal decisions taken by the Board during the year under review (and post year-end) are as follows:
|
· Regulatory change: In order to position the Company for changes in the regulatory environment in the United Kingdom post-Brexit, in November 2020 the Board elected to switch the entity within the FundRock group that acts as its AIFM from FundRock Management Company SA (in Luxembourg) to FundRock's wholly owned and UK regulated entity, FundRock Partners Ltd. There was no change in the terms of engagement or the fees payable to the AIFM in this context. The Board, receives regular updates from the Investment Manager and other key service providers to ensure that the Company continues to meet applicable regulatory standards.
· Internal controls: During the year under review, the Board engaged Optima Consulting Partners Ltd to carry out a detailed post-transition review of the systems and internal controls in place at Devon, the result of which was considered satisfactory.
· Covid-19: The impact of Covid-19 and the public policy responses to it (including continuing low interest rates) have created unprecedented investment challenges. The Board has had frequent contact with the Investment Manager where investment strategy, risk, gearing and discount management have been discussed. These meetings have confirmed the Board's view that the Investment Manager has applied the Company's stated investment policies consistently throughout the period under review. The Board continues to review emerging risks that could have a potential impact on the operational capability of the Investment Manager and other key service providers.
· Wirecard: As a result of the insolvency of Wirecard AG ('Wirecard') in June 2020, the Board has agreed, in principle, to participate in a class action claim in the insolvency of Wirecard and also in a separate class action claim against Wirecard's long term auditor, Ernst & Young GmbH. The Board is of the opinion that it is in the best interests of shareholders to pursue these class actions, as the marginal cost of participating in these actions is outweighed by the potential receipt of compensation for shareholders. Given that Wirecard had been a significant holding of the Company, the Board requested that the Investment Manager provide additional reporting on the Company's significant holdings on an ongoing basis, with a particular emphasis on any holdings which grow in value to represent more than 10% of total assets, so as to ensure that investment risk continues to be managed appropriately. The Board has determined that no single holding may constitute more than 10% of the Company's total assets at the time of investment. The Board will continue to evaluate portfolio risk and work with the Investment Manager to ensure that controls evolve to safeguard shareholder assets.
· Succession planning : Following notifications from Philip Best and Andrew Sutch of their intention to retire as Directors of the Company with effect from the conclusion of the 2021 and 2022 AGMs, respectively, the Nomination Committee reviewed the Board's succession planning. The Board, on recommendation from the Nomination Committee, engaged an independent search agent to undertake a search for an additional non-executive Director who would replace and enhance the overall skills and experience of the Board and its committees. The outcome of the Board's search for an additional non-executive Director can be found in the succession planning section in the Annual Report & Accounts.
· Gearing : After discussion with the Investment Manager, on 10 September 2021 the Board entered into a new £100 million loan facility with The Bank of Nova Scotia, London Branch. The new loan facility will enable the Investment Manager to implement the Company's stated gearing policy, as further described in the section entitled 'Borrowing Limits' in the Annual Report & Accounts. It is hoped that through the careful use of gearing, the Investment Manager can increase shareholder returns.
· Discount management : During the year under review, the Board has continued to monitor the Company's share price discount to NAV. When necessary, the Investment Manager has bought back shares from the market in order to narrow the discount. |
The structure of the Board and its Committees and the decisions it makes are underpinned by the duties of the Directors under the Companies Act, 2006 and the provisions of the AIC Code.
Capital Gains Tax information
The closing middle market price of ordinary shares on the first date of dealing (20 November 2000) for Capital Gains Tax purposes was 101.5p.
For and on behalf of the Board
Andrew Sutch
Chairman
22 September 2021
Income Statement
for the year ended 31 May 2021
|
|
Year ended |
Year ended |
||||
|
|
31 May 2021 |
31 May 2020 |
||||
|
|
|
|
|
|
|
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gain/(loss) on investments |
- |
2,047 |
2,047 |
- |
(3,268) |
(3,268) |
|
Other exchange gain/(loss) |
- |
38 |
38 |
- |
(315) |
(315) |
|
Income from investments |
12,435 |
- |
12,435 |
16,303 |
- |
16,303 |
|
Total income/(loss) |
12,435 |
2,085 |
14,520 |
16,303 |
(3,583) |
12,720 |
|
Investment management fee |
(7,694) |
- |
(7,694) |
(8,331) |
- |
(8,331) |
|
Other expenses |
(999) |
- |
(999) |
(1,016) |
- |
(1,016) |
|
Total expenses |
(8,693) |
- |
(8,693) |
(9,347) |
- |
(9,347) |
|
Net return/(loss) before finance costs and taxation |
3,742 |
2,085 |
5,827 |
6,956 |
(3,583) |
3,373 |
|
Finance costs |
(496) |
- |
(496) |
(1,357) |
- |
(1,357) |
|
Return/(loss) on ordinary activities before taxation |
3,246 |
2,085 |
5,331 |
5,599 |
(3,583) |
2,016 |
|
Taxation |
(907) |
- |
(907) |
(941) |
- |
(941) |
|
Net return/(loss) after taxation* |
2,339 |
2,085 |
4,424 |
4,658 |
(3,583) |
1,075 |
|
Return/(loss) per ordinary share |
2.12p |
1.89p |
4.01p |
4.13p |
(3.17)p |
0.96p |
* There is no other comprehensive income and therefore the 'Net return/(loss) after taxation' is the total comprehensive income/(loss) for the financial year.
The total column of this statement is the income statement of the Company, prepared in accordance with IFRS.
The supplementary revenue return and capital return columns are both prepared under guidance produced by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations.
No operations were acquired or discontinued during the year.
Balance Sheet
as at 31 May 2021
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Fixed Assets |
|
|
|
Investments |
936,972 |
913,329 |
|
Current assets |
|
|
|
Debtors |
3,942 |
4,045 |
|
Cash and cash equivalents |
9,892 |
25,503 |
|
|
13,834 |
29,548 |
|
Total assets |
950,806 |
942,877 |
|
Current liabilities |
|
|
|
Creditors - amounts falling due within 1 year |
(71,817) |
(19,960) |
|
Total assets less current liabilities |
878,989 |
922,917 |
|
Capital and reserves |
|
|
|
Called up share capital |
1,129 |
1,129 |
|
Share premium |
204,133 |
204,133 |
|
Special reserve |
33,687 |
33,687 |
|
Capital redemption reserve |
45 |
45 |
|
Reserves |
639,995 |
683,923 |
|
Total shareholders' funds |
878,989 |
922,917 |
|
Net asset value per ordinary share |
824.29p |
817.72p |
The accounts were approved by the Board of Directors on 22 September 2021 and signed on its behalf by:
Andrew Sutch
Chairman
Company Registration Number 4056870
Statement of Changes in Equity
for the year ended 31 May 2021
|
|
|
|
|
Capital |
|
|
|
|
Share |
Share |
Special |
Redemption |
|
|
|
For the year ended |
Capital |
Premium |
Reserve |
Reserve |
Reserves |
Total |
|
31 May 2021 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Balance as at 1 June 2020 |
1,129 |
204,133 |
33,687 |
45 |
689,923 |
922,917 |
|
Net return after taxation |
- |
- |
- |
- |
4,424 |
4,424 |
|
Repurchase of ordinary shares into treasury |
- |
- |
- |
- |
(44,461) |
(44,461) |
|
Dividends declared and paid* |
- |
- |
- |
- |
(3,891) |
(3,891) |
|
Balance at 31 May 2021 |
1,129 |
204,133 |
33,687 |
45 |
639,995 |
878,989 |
|
|
|
|
|
Capital |
|
|
|
|
Share |
Share |
Special |
Redemption |
|
|
|
For the year ended |
Capital |
Premium |
Reserve |
Reserve |
Reserves |
Total |
|
31 May 2020 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Balance as at 1 June 2019 |
1,128 |
203,485 |
33,687 |
45 |
689,137 |
927,482 |
|
Net return after taxation |
- |
- |
- |
- |
1,075 |
1,075 |
|
Ordinary share issue |
1 |
648 |
- |
- |
- |
649 |
|
Repurchase of ordinary shares into treasury |
- |
- |
- |
- |
(81) |
(81) |
|
Dividends declared and paid* |
- |
- |
- |
- |
(6,208) |
(6,208) |
|
Balance at 31 May 2020 |
1,129 |
204,133 |
33,687 |
45 |
683,923 |
922,917 |
* Dividends paid during the financial year were paid out of revenue reserves.
Cash Flow Statement
For the year ended 31 May 2021
|
|
2021 |
2020 |
|
|
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
Investment income received (gross) |
10,972 |
18,067 |
|
Deposit interest received |
- |
1 |
|
Investment management fee paid |
(7,763) |
(8,119) |
|
Investment performance fee paid |
- |
(7,185)* |
|
Other cash expenses |
(1,137) |
(900) |
|
Net cash inflow from operating activities before taxation and interest |
2,072 |
1,864 |
|
Interest paid |
(444) |
(1,544) |
|
Overseas tax (incurred)/recovered |
935 |
235 |
|
Net cash (outflow)/inflow from investing activities |
693 |
555 |
|
Cash flows from investing activities |
|
|
|
Purchases of investments |
(208,841) |
(168,639) |
|
Sales of investments |
186,203 |
243,016 |
|
Net cash (outflow)/inflow from investing activities |
(22,638) |
74,377 |
|
Cash flows from financing activities |
|
|
|
Ordinary shares issued |
- |
649 |
|
Repurchase of ordinary shares into treasury |
(39,813) |
(81) |
|
Equity dividends paid |
(3,891) |
(6,208) |
|
Repayment of loan |
- |
(100,000) |
|
Drawdown of loan |
50,000 |
40,000 |
|
Net cash inflow/(outflow) from financing activities |
6,296 |
(65,640) |
|
(Decrease)/increase in cash |
(15,649) |
9,292 |
|
Cash and cash equivalents at start of year |
25,503 |
16,526 |
|
Realised gain/(loss) on foreign currency |
38 |
(315) |
|
Cash and cash equivalents at end of year |
9,892 |
25,503 |
* The performance fee paid in the financial year ended 31 May 2020 relates to a previous financial year.
Notes to the Accounts
1. Accounting Policies
The Accounts comprise the financial results of the Company for the year to 31 May 2021. The functional and reporting currency of the Company is pounds sterling because that is the currency of the prime economic environment in which the Company operates. The accounts were authorised for issue in accordance with a resolution of the Directors on 22 September 2021. All values are rounded to the nearest thousand pounds (£'000) except where indicated.
The accounts have been prepared in accordance with International Financial Reporting Standards (IFRS) in conformity with the Companies Act 2006.
Where presentational guidance set out in the Statement of Recommended Practice (SORP) for Investment Trusts issued by the Association of Investment Companies (AIC) in November 2014 (as amended in February 2018 and again in October 2019) is consistent with the requirements of IFRS in conformity with the Companies Act 2006, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The accounts have also been prepared in accordance with the Disclosure and Transparency Rules issued by the Financial Conduct Authority (FCA).
The Accounts have been prepared under the historic cost modified by revaluation of financial assets and financial liabilities held at fair value through profit and loss. The accounting policies have been consistently applied throughout the year ended 31 May 2021 and in the prior year other than where new policies have been adopted.
The Board continues to adopt the going concern basis in the preparation of the financial statements.
(a) Income recognition
Ordinary dividends from investments are recognised when the investment is quoted ex-dividend on or before the date of the Balance Sheet. All overseas dividend income is disclosed net of withholding tax.
Ordinary dividends receivable from equity shares are taken to the revenue return column of the Income Statement.
Deposit and other interest receivable are accounted for on an accruals basis. These are classified within operating activities in the Cash Flow Statement.
Special dividends are reviewed on a case by case basis to determine if the dividend is to be treated as revenue or capital.
(b) Presentation of Income Statement
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the Association of Investment Companies (AIC), supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented. In accordance with the Company's Articles of Association, net capital returns may not be distributed by way of dividend.
An analysis of reserves broken down into revenue (distributable) items, and capital items (non-distributable) is given in the notes to the annual accounts in the Annual Report & Accounts.
All other operational costs (but with the exception of any investment performance fees which are charged to capital) are charged to revenue.
(c) Basis of valuation of investments
Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under contract whose terms require delivery of the investment within the timeframe established by the market concerned. Investments are included initially at fair value which is taken to be their cost, excluding expenses incidental to purchase which are written off to capital at the time of acquisition.
The investments are designated as fair value through profit or loss on initial recognition as this as these investments are held for trading. This is consistent with the Company's documented investment strategy.
All investments are classified as held at fair value through profit or loss. All investments are measured at fair value with changes in their fair value recognised in the Income Statement in the period in which they arise. The fair value of listed investments is based on their quoted bid price at the reporting date without any deduction for estimated future selling costs.
Foreign exchange gains and losses on fair value through profit or loss investments are included within the changes in the fair value of the investment.
For investments that are not actively traded and/or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques.
These techniques may draw, without limitation, on one or more of: the latest arm's length traded prices for the instrument concerned; financial modelling based on other observable market data; independent broker research; or the published accounts relating to the issuer of the investment concerned.
(d) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to insignificant risks of changes in value.
(e) Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At the Balance Sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on that date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the Income Statement with the revenue or capital column depending on the nature of the underlying item.
(f) Borrowing and finance costs
Interest bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs and subsequently measured at amortised cost.
Interest on the loan facility is accrued at the rate specified by the lender on renewal date.
Bank interest is recognised in the Income Statement in the period in which they are incurred.
All finance costs are directly charged to the revenue column of the Income Statement.
(g) Expenses
Expenses are accounted for on an accruals basis. Management fees, administration and other expenses are charged fully to the revenue column of the Income Statement. Due to changes to management arrangements during the previous financial year, performance fees are no longer payable by the Company from 15 November 2019 onwards. Expenses which are incidental to the purchase or sale of an investment are charged to capital, along with any foreign exchange gains and losses.
(h) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other periods and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the date of the Balance Sheet.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the accounts and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised.
Investment trusts which have approval under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation of capital gains.
Irrecoverable VAT is included in the expense on which it has been suffered. Recoverable VAT is calculated using the partial exemption method based on the proportion of zero rated supplies to total supplies.
Accounting developments
At the date of authorisation of the financial statements, the following amendment to the IAS Standards and Interpretations was assessed to be relevant and is effective for annual periods beginning on or after 1 January 2020:
IAS 1 and IAS 8 amendments: Definition of Material Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.
Standards issued but not yet effective: At the date of authorisation of the financial statements, the following standards and interpretations were assessed to be relevant and are all effective for annual periods beginning on or after 1 January 2021:
IFRS 9, IAS 39 and IAS 7 amendments: Interest Rate Benchmark Reform. These will be effective for the financial statements for the year ending 31 May 2022.
There are no other accounting standards, amendments, or interpretations effective, that have or will have material impact on these financial statements. Furthermore, the Company has not been an early adopter of any such standards, amendments, and interpretations to existing standards prior to their effective date.
The Directors expect that the adoption of the standards listed above will have either no impact or that any impact will not be material on the financial statements of the Company in future periods.
Significant accounting judgements, estimates and assumptions
Management have not applied any accounting judgements, which would have a significant impact on this set of accounts or those of the prior financial year.
2. Income
|
|
Year ended |
Year ended |
|
|
31 May 2021 |
31 May 2020 |
|
|
£'000 |
£'000 |
|
Income from investments |
|
|
|
Dividends from United Kingdom companies |
4,339 |
6,991 |
|
Dividends from overseas companies |
8,096 |
9,312 |
|
|
12,435 |
16,303 |
3. Returns per share
The returns per share figure is based on the net return for the year of £4,424,000 (2020: net return £1,075,000), and on 110,313,831 (2020: 112,868,089) ordinary shares, being the weighted average number of ordinary shares in issue during the year.
The return per share figure detailed above can be further analysed between revenue and capital, as below.
|
|
Year ended |
Year ended |
|
|
31 May 2021 |
31 May 2020 |
|
|
£'000 |
£'000 |
|
Net revenue return |
2,339 |
4,658 |
|
Net capital return/(loss) |
2,085 |
(3,583) |
|
Net total return |
4,424 |
1,075 |
|
Weighted average number of shares in issue during the year |
110,313,831 |
112,868,089 |
|
Revenue return per share |
2.12p |
4.13p |
|
Capital return/(loss) per share |
1.89p |
(3.17)p |
|
Return per share |
4.01p |
0.96p |
4. Net Asset Value per ordinary share
The net asset value per ordinary share is based on the net assets attributable to the equity shareholders of £878,989,000 (2020: £922,917,000) and on 106,635,840 (2020: 112,864,311) ordinary shares, being the number of ordinary shares in issue at the year end.
5. Related parties
Devon Equity Management Limited ('Devon') has been appointed as delegated Investment Manager for the Company by the AIFM since 15 November 2019.
With effect from 1 June 2020, Devon has been entitled to aggregate management fees of 0.90% per annum of net assets (i.e. excluding drawn down borrowings under the Company's loan facilities) up to £1 billion and 0.80% per annum on any net assets over this amount (with FundRock's fee as AIFM being deducted from amounts due to Devon). No performance fee is payable to Devon.
The fee payable to Devon for the period from 1 June 2020 to 31 May 2021 was £7,694,000 (2020: £8,331,000) with £1,927,000 outstanding at period end (2020: £1,996,000).
Fees payable to the Directors for the year ended 31 May 2021 were £165,153 (2020: £159,237) with £27,000 outstanding at year end (2020: £31,000). Fees paid to Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report in the Annual Report.
Devon, as the Company's named Company Secretary, has delegated certain secretarial and fund administration services to the Company's Administrator J.P. Morgan Europe Limited. In line with good governance practice and fostered by the independence between key suppliers, the Company has put safeguards in place to ensure effective shareholder communication and engagement.
6. Contingent liabilities and capital commitments
There were no contingent liabilities or capital commitments outstanding as at 31 May 2021 (2020: nil).
7. Post balance sheet events
Since 1 June 2021 a total of 832,000 ordinary shares have been repurchased to be held in treasury (as at 14 September 2021).
On 10 September 2021, the Company renewed its revolving credit facility with The Bank of Nova Scotia, London Branch with a maximum drawable amount of £100 million available until September 2022 and credit approval for an additional 'accordion' amount available upon application for a further £50 million. The amount of £65 million was drawn down as at the financial year end on 31 May 2021.
Availability of Annual Report & Accounts
The Annual Report & Accounts will be posted to those shareholders who have elected to receive hard copies shortly. An electronic version of the Annual Report & Accounts will shortly be available on the Company's website at: www.europeanopportunitiestrust.com and on the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
For further information, please contact:
Devon Equity Management Limited
Company Secretaries to European Opportunities Trust PLC
Richard Pavry
enquiries@devonem.com
020 3985 0445
23 September 2021
www.europeanopportunitiestrust.com
[END]
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