Fidelity European Values Regulatory News (FEV)

Fidelity European Trust Plc - Annual Financial Report

PR Newswire

London, March 17

FIDELITY EUROPEAN TRUST PLC

Final Results for the year ended 31 December 2021

Financial Highlights:

Contacts

For further information, please contact:

Smita Amin

Company Secretary

01737 836347

FIL Investments International

CHAIRMAN’S STATEMENT

This year was affected by yet another set of challenges stemming from COVID-19, including the new Omicron variant. An energy crisis hit European businesses and households, while supply chain disruption affected various industries. Inflation surpassed levels not seen in the Eurozone area since 2008.

Fortunately, Sam Morse and Marcel Stötzel, your Portfolio Managers, adopt a cautious investment approach, building a balanced portfolio which aims among other things to manage the risk of adverse developments. The focus on attractively valued dividend growers with strong balance sheets has remained an appealing feature of the Company. The Portfolio Managers’ rigorous approach to stock selection has benefited shareholders during these difficult past two years, and I believe that it will continue to do so in the future.

PERFORMANCEThe net asset value (“NAV”) of the Company increased by 23.5% for the year ended 31 December 2021, outperforming the Benchmark Index, the FTSE World Europe (ex UK), which returned 17.4%. The discount widened over the course of the year but has narrowed in recent months. This resulted in a share price total return for the period of 21.7%, comfortably ahead of the Benchmark Index. The Company’s NAV and share price total return performance over one, three, five and ten years remains well ahead of the Benchmark Index, as can be seen from the chart on the Financial Highlights page in the Annual Report. These are pleasing results for the Company, which continues to outperform the Index over multiple time periods.

Continental European equity markets built on the rebound of the second half of 2020 to stage a strong 2021, helped by higher vaccination rates, earnings upgrades and improving investor sentiment. Most sectors ended the year in positive territory, with IT, Energy and Financials leading the way. From a style perspective, growth stocks outperformed value and large capitalisation stocks marginally outperformed smaller companies. A key influence was that the European Central Bank took a more cautious approach to reducing asset purchases, indicating that it also expects rates to rise more gradually than in the US and UK.

OUTLOOKThe Ukrainian crisis and accompanying Western sanctions on Russia, together with any tit-for-tat measures, threaten to inhibit economic growth in Europe as a whole. While one’s first thoughts in such circumstances are for the suffering of the Ukrainian people, it happens to be true that Ukraine is a major world supplier of a wide range of agricultural and mineral commodities. More limited supply of these could exacerbate inflationary pressures worldwide, as could unpredictable Russian oil and gas exports. This makes for a cautionary background. I would like to stress, however, that the Company has no direct investments in Russia and the Ukraine.

A rising trend in US inflation and interest rates also inhibits the prospects for European equities in 2022 but there are some optimistic pointers as well. The fight against COVID-19 gets stronger with each passing year as vaccination and booster rates increase and treatments for those affected improve. This should help economies continue to reopen in a manner where people and businesses become accustomed to operating as normal with COVID. In particular, Europe has a strong export sector and is therefore poised to benefit from the global recovery. The Continent in general, however, is not immune from inflationary pressures being felt elsewhere in the world, and supply chain shortages remain a prominent feature. This serves to provide another cautionary note and your Portfolio Managers will accordingly be vigilant regarding sectors which suffer pressure on earnings as a result.

Your Portfolio Managers’ approach to dealing with an uncertain economic and geo-political environment should continue to serve shareholders well. Attractively valued dividend growers with strong balance sheets have outperformed over the long term. The Portfolio Manager and Co-Portfolio Manager reflect on their investment approach and their learning experiences over the past year in the Portfolio Managers’ Review below.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”) INVESTMENTCOP26 was an important, global event in November 2021 where governments, businesses, climate experts and campaigners gathered for discussions and negotiations to tackle climate change. It provided a platform to attempt to align and co-ordinate international efforts in the fight against the climate crisis. There is increasing concern about global warming, and a focus on serious efforts to counter its effects. There was progress in the form of commitments and initiatives across a wide range of matters from deforestation to clean energy transition but more needs to be done. Businesses for their part are under pressure to ensure that their activities are environmentally sustainable, as well as demonstrating social responsibility and good corporate governance. Continuing deterioration in the climate brings investment risk into our portfolio. We have a responsibility to make sure that we are being rewarded for the risk that we are taking on behalf of our investors and you will expect us to do that. Fidelity International continues to evolve its approach to ESG and has a new climate investing policy as well as sustainable investing voting principles and guidelines and further improvements to its proprietary forward-looking ESG and climate ratings.

Sam Morse outlines Fidelity International’s approach to this important subject in his report and what this means for the Company’s investment portfolio. The Fidelity group of companies (including the Manager) has embedded ESG factors in its investment decision making process. Further details are in the Annual Report which show how the Company is positioned in terms of ESG.

OTHER MATTERSREVISED MANAGEMENT FEEThe Board reviews the Company’s management fee structure with the Manager each year to ensure that the terms of the fee are competitive and reasonable for shareholders. As part of this review, I am pleased to inform shareholders that the Board agreed a reduced management fee with the Manager, FIL Investment Services (UK) Limited, which was effective on 1 April 2021. The first tier of the previous fee structure of an annual rate of 0.85 per cent on the first £400 million of the Company’s net assets remained unchanged. However, the previous rate of 0.75 per cent on net assets in excess of £400 million reduced to 0.65 per cent, thus achieving useful savings on overall percentage costs for shareholders.

There is no change in the investment process as a result of the new fee arrangement.

DIVIDENDSThe Board does not influence the Portfolio Managers by imposing any income objective in any particular year and the investment focus on companies capable of growing their dividends remains. The Board acknowledges that both capital and income growth are components of performance, as reflected in the investment objective of the Company. It therefore has a policy whereby it seeks to pay a progressive dividend in normal circumstances and to pay dividends twice yearly in order to smooth dividend payments for the reporting year. The Company’s revenue return for the year to 31 December 2021 was 7.50 pence per share (2020: 5.12 pence), and an interim dividend of 2.65 pence per share was paid on 29 October 2021 (2020: 2.60 pence).

The Board recommends a final dividend of 4.18 pence per share for the year ended 31 December 2021 (2020: 3.90 pence) for approval by shareholders at the Annual General Meeting (“AGM”) on 10 May 2022. The interim and final dividends (total of 6.83 pence) represent an increase of 0.33 pence (5.1%) over the 6.50 pence paid for the year ended 31 December 2020. In the prior year, the dividends of many companies were under pressure, with dividends either being cut or cancelled, and the Company therefore utilised revenue reserves built up in prior years to cover the final dividend. Unlike open-ended funds, investment trusts can hold back some of the income they receive in good years, thereby building up revenue reserves, which can then be used to supplement dividends during difficult times. Conversely, once company dividends are restored or increased again, it is appropriate to seek to replenish revenue reserves, and we are accordingly returning to our policy of retaining a small proportion of earnings in order to help achieve this.

The final dividend will be payable on 17 May 2022 to shareholders on the register at close of business on 1 April 2022 (ex-dividend date 31 March 2022). Shareholders may choose to reinvest their dividends for additional shares in the Company.

DISCOUNT MANAGEMENT AND TREASURY SHARESThe Board has an active discount management policy, the primary purpose of which is to reduce discount volatility. It seeks to maintain the discount in single digits in normal market conditions. Buying shares at a discount also results in an enhancement to the NAV per share.

In order to assist in managing the discount, the Board has shareholder approval to hold ordinary shares repurchased by the Company in Treasury, rather than cancelling them. Shares in Treasury are then available to be re-issued at NAV per share or at a premium to NAV per share, facilitating the management of and enhancing liquidity in the Company’s shares. The Board is seeking shareholder approval to renew this authority at the AGM on 10 May 2022.

In August 2021, the Company repurchased 450,000 ordinary shares into Treasury when the discount widened. Since then, the discount has remained in single digits and no further shares have been repurchased.

GEARINGThe Company continues to gear through the use of derivative instruments, primarily contracts for difference (“CFDs”), and the Manager has flexibility to gear within the parameters set by the Board. As at 31 December 2021, the Company’s gross gearing was 11.1% (2020: 11.8%) whilst net gearing was 11.1% (2020: 9.4%). In the reporting year, gearing made a positive contribution to performance, as can be seen from the attribution analysis table in the Annual Report.

The Board monitors the level of gearing and the use of derivative instruments carefully and has defined a risk control framework for this purpose which is reviewed at each Board meeting. It should be stressed that all gearing is subject to the Portfolio Managers’ confidence in identifying attractive investment opportunities, and to them remaining attractive.

BOARD OF DIRECTORSAfter serving on the Board for nine years, Marion Sears will step down from the Board at the conclusion of the AGM on 10 May 2022. I would like to thank her on behalf of the Board and all of the Company’s stakeholders for her invaluable contribution to the Company. We have been very fortunate to have benefited from her extensive corporate experience, her well-judged advice and her perspective, all delivered with a combination of tact and incisiveness. She takes with her our very best wishes for the future. As Marion’s successor, Milyae Park was appointed a non-executive Director on 1 January 2022. Milyae is a non-executive Director of the Museum of London and chairs the related Museum of London (Trading) Ltd Board, which governs the Museum’s commercial interests. Prior to this, she held senior global executive positions in a career that has spanned investment banking, financial services, retail and fashion, after beginning her career as a Chartered Accountant in the US. She holds an MBA from The Wharton School.

I am delighted that Paul Yates has agreed to succeed Marion as Senior Independent Director with effect from 10 May 2022.

We continue to review Board composition and Directors’ succession on a regular basis to ensure that we have a Board with a mix of tenures and one which provides diversity of perspective together with the range of appropriate skills and experience for your Company. In accordance with the UK Corporate Governance Code for Directors of FTSE 350 Companies, all Directors, with the exception of Marion Sears, will be subject to annual re-election at the AGM on 10 May 2022. Milyae Park, having been appointed on 1 January 2022, is subject to election at the same AGM. The Directors biographies can be found in the Annual Report, and between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company.

ANNUAL GENERAL MEETING – ATTEND ONLINE OR IN PERSONSadly, as a result of COVID-19, we have not been able to meet in person for our Annual General Meetings since 2019. Whilst we were sorry not to engage directly with shareholders, we were pleased to be able to do so online, broadcasting a live presentation and taking written questions posed in real time, using the internet. We were also delighted with the level of online attendance and have received positive feedback on this approach from shareholders who were unable to travel to London. Learning valuable lessons from the pandemic, the Company updated its Articles of Association at the AGM in May 2021 so that ‘hybrid’ general meetings can be held from this year and in future years. Hybrid meetings allow attendance and voting in person and also remotely in real time. The presentations and formal business will be filmed and simultaneously streamed online. We will welcome questions from those in the room and also those investors attending online on an equal footing. In this way, we hope to provide a best-in-class choice to shareholders wherever they are located. More details are set out below and in the full Notice of Meeting in the Annual Report. We look forward to welcoming as many of you as possible in person or online on the day.

ANNUAL GENERAL MEETING – TUESDAY, 10 MAY 2022 AT 12 NOONThe AGM of the Company will be held at 12 noon on Tuesday, 10 May 2022 at Fidelity’s offices at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St. Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.

Appropriate social distancing and hygiene measures will be in place for those shareholders attending the AGM in person. For those shareholders who would prefer not to attend in person or for whom travel is not convenient, we will live-stream the formal business and presentations of the meeting online.

Sam Morse, the Lead Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He, the Co-Portfolio Manager and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at investmenttrusts@fil.com or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.

Properly registered shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 8 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Managers and these will be addressed on their behalf at an appropriate juncture during the meeting.

Further information and links to the Lumi platform may be found on the Company’s website www.fidelity.co.uk/ europe. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.

Please note that investors on platforms such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome online participation as a guest. Once you have accessed https://web.lumiagm.com from your web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 164-099-858. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions but you will not be able to vote.

VIVIAN BAZALGETTEChairman17 March 2022

PORTFOLIO MANAGERS’ REVIEW

QUESTION2021 marked a significant milestone for the Company as it celebrated its 30-year anniversary. Sam, you have been at the helm for more than 10 of those years. What stands out to you as you reflect on this period?

ANSWERSam: There is much to celebrate. Continental Europe is sometimes seen as a poor prospect when it comes to investing and this is understandable given newspapers filled with headlines about political upheavals and sclerotic economies. The companies of Europe have, however, done much better than many might have expected over those decades. An investment of ten thousand pounds in the Company at launch on Guy Fawkes day in 1991, would now be worth as much as half a million pounds assuming all dividends received have been reinvested – an annualised total return of almost 14% per annum in sterling terms. That is a testament to the power of compounding, the benefits of gearing (one of the great advantages of an investment trust as a vehicle) and the merits of stock-picking. The Company has had four different portfolio managers, each with their own approach to stock-picking, but the secret sauce has been Fidelity’s in-house research effort. Almost three hundred different analysts have supported the Company over that time with fantastic investment ideas. They are really the unsung heroes of this celebration.

QUESTIONAs we head into yet another year under the veil of a global pandemic, what lessons have you learnt both personally and professionally?

ANSWERSam: We are learning as we go, probably like everyone else. We are learning that like many things in life, it is often two steps forward and one step back. We must avoid being too gung-ho when optimism is ascendant and we must avoid being too despondent when bad news surfaces. Those waves in sentiment can offer good opportunities to add value through trading existing positions. Despite the pandemic, companies’ earnings and dividends are still growing and stock prices are still rising. It pays to stay invested whatever the headlines. That is because even if the pandemic dampens short term activity, the stock market rewards long term earnings and dividend potential. The pandemic’s impact has encouraged companies to pursue greater innovation and efficiency which will result in growing dividends for investors on a multi-year view. The benefits of stock-picking remain undiminished.

Marcel: Amazingly, despite having over 10 years of investment experience, this has been my first experience of a real stock market downturn given how strong markets have been since 2007. In many ways this downturn has been unique in its severity and speed, however, in other ways it has shown the same textbook opportunities and threats that we usually see when market fear is very high.

QUESTIONHow has this translated into performance over the previous twelve months?

ANSWERSam: Markets entered the year still riding a wave of exuberance which followed the news regarding the high effectiveness of anti-COVID vaccines. However, it soon became clear that despite having a growing arsenal of vaccines and drugs to protect us, new variants would still require restrictions impacting mobility and economic activity. As the year progressed, there was increasing recognition that the pandemic was reducing supply due to labour shortages, etc. and investors grew concerned that we might have to endure a period of “stagflation” (low growth and high inflation). The year ended with a curious cocktail of worries due to the emergence of a new more contagious, but perhaps less harmful variant (Omicron), and a more hawkish-sounding Federal Reserve following the reappointment of Jay Powell. This all contributed to a much more variable year in terms of stock market leadership with periods where cyclicals and value stocks did well and other periods where defensives and growth stocks shone. Overall, however, the rising tide of earnings and dividends coupled with tremendous liquidity, thanks to supportive monetary policy, propelled equity markets to new highs. Over the twelve months, the Company’s NAV rose by 23.5% outperforming the Benchmark Index which rose by 17.4%. The Company’s share price lagged the rise in the NAV due to a widening of the discount but still returned a very healthy 21.7%, also outperforming the Benchmark. All performance data is in sterling and on a total return basis.

QUESTIONWhat stock picks have done well, which ones not so well, and why?

ANSWERSam: It was quite a varied list of outperformers this year with representatives from many different sectors. In technology, ASML was a standout performer as a result of the announcement of big increases in capital expenditure by semiconductor customers in the wake of on-going shortages. Hermes International and LVMH Moët Hennessy both rose strongly in 2021 with high-end consumers redirecting their spend from experiences and holidays, due to restrictions, to luxury goods. Private equity names, EQT and Partners Group, enjoyed an exceptional year of rising values and accretive transactions. By contrast, in healthcare, Grifols and Fresenius Medical Care struggled due to on-going headwinds resulting from the pandemic. The industrials sector was also an area of relative weakness for the Company’s portfolio, especially elevator companies Kone and Schindler Holding, due to a deteriorating outlook for the Chinese new installation market given the balance sheet problems faced by Evergrande and other Chinese property developers. Enel performed poorly during the year too as investors grew increasingly concerned that returns from renewable energy projects would suffer from growing competition and that governments, particularly in Spain, would seek to mitigate high electricity prices by requiring utility companies to shoulder some of the burden.

Marcel: A stock that performed well and one that is interesting is Novo Nordisk. While Novo Nordisk’s core insulin drugs continued to perform strongly during the year, we also saw very encouraging numbers from their obesity products; an area we continue to be very positive about with regard to its long term potential. MTU Aero Engines performed poorly, as did most of the aerospace sector, from the view that Omicron could cause the COVID pandemic to be longer and more severe (interestingly, this view has changed entirely in 2022, with the view now being that Omicron could result in COVID becoming endemic much more quickly than the Delta variant would have).

QUESTIONMany macro uncertainties remain as we head into 2022. What does this mean for the companies in the portfolio?

ANSWERSam: We do not try to predict which uncertainties will become realities. We do, however, try to build a balanced portfolio using the sector groupings as our guide, such that it is the stock-picking, with our particular focus on attractively-valued dividend growers that will drive the performance of the Company over time rather than macroeconomic or other factors. Each individual stock position is, of course, subject to macroeconomic factors but the beauty of diversification is that exposure can be dampened through portfolio construction, allowing idiosyncratic elements to determine performance. Clearly, sometimes we face stylistic headwinds in the short term. Our focus on steady growers, sometimes tagged as bond proxies, can mean we face a headwind to performance when inflation expectations or bond yields rise. Over the long term, however, these factors even out and relative performance, good or bad, is primarily a function of stock-picking.

QUESTIONMarcel, you recently wrote about Europe driving the next decade of innovation. Which sectors are you looking at most closely in 2022 to position the Company to take advantage of this?

ANSWERMarcel: The most obvious example comes from the European tech sector where we see companies such as Dassault Systèmes and ASML continuing to be amongst the most innovative companies globally. However, another recent example is European consumer goods companies which are at the leading edge when it comes to the latest tech buzzword – the “metaverse”. Put simply, the metaverse is a network of 3D virtual worlds that is facilitated by the use of virtual and augmented reality. Examples of European innovations include: EssilorLuxottica partnering with Meta (formerly Facebook) on augmented reality Ray-Ban sunglasses, Gucci (part of Kering) and Roblox partnering to offer digital outfits, Louis Vuitton selling Non Fungible Tokens (NFTs) and Adidas announcing a partnership with leading crypto exchange Coinbase and purchasing virtual real estate in The Sandbox. While these initiatives are currently small, some experts are forecasting that over the coming decade digital purchases could account for 25% of luxury goods sales, which given the high margins these products have would be very meaningful for share prices. Although clearly given the long term nature of these trends, we also should not lose sight of the short term drivers such as inflation potentially hurting luxury good spending.

QUESTIONHow are you thinking about positioning the Company’s gearing into the next year?

ANSWERSam: As mentioned in last year’s Annual Report, the Board has endorsed a new approach to the Company’s gearing. In keeping with Fidelity’s long-held conviction that it is a “mug’s game” to try to time markets, going forward, the intention is to maintain a relatively fixed level of gearing within a range that is approximately double the 6% average during my tenure as the Company’s Portfolio Manager. Gearing is, of course, one of the great advantages of an investment trust, and although it may amplify volatility in the short term, we expect it to enhance long term returns. The agreed level of gearing takes into account our cautious investment approach and allows considerable headroom in the event of a sharp sell-off in the market.

QUESTIONFidelity continues to evolve its approach to Environmental, Social and Governance (“ESG”), with a new Climate Investing Policy, sustainable investing voting principles and guidelines, and improvements to its proprietary forward-looking ESG and climate ratings. Has your investment approach adapted as a result?

ANSWERSam: ESG is becoming ever more integrated into our investment approach as our resources in this area grow. Environmental, social and governance risks have, of course, always been monitored in the quest for companies that can sustain consistent dividend growth; even well before they were tidied up into a handy acronym. Activity on this front is on-going from meetings with Nestlé regarding the use of plastic to conversations with board members of many holdings regarding the appropriateness of management incentives. At Fidelity, we strongly believe that integration and engagement will yield the best results in terms of both ESG outcomes and investment performance. Exclusion is reserved, very much as a last resort, for persistent offenders that express no intention to change.

Below we share an example of our thematic engagement in the consumer staples and plastic packaging sector and a case study on Nestlé.

QUESTIONOne of the macro uncertainties is the conflict in Ukraine. What implications does this have for the Company?

ANSWERMarcel: First and foremost clearly our thoughts go out to the people suffering as a result of the war in Ukraine. We all hope that this conflict will end peacefully soon.

With regards to the Company, we have no direct investments in the Ukraine and Russia. Having said that, the Company is clearly exposed to the wider impacts of the conflict, most obviously stock market indices declining, energy prices soaring and defence spending materially increasing among a number of EU countries (most notable Germany). While we factor all of these into our analysis, predicting how the situation plays out from here is very difficult however, and we are not positioning the Company to profit from any particular outcome. This is a good example of why we stick to bottom up stock picking – not only are macro uncertainties hard to call but even if one does call them then correctly predicting their impact is another challenging task. A small proportion of people who predicted COVID correctly in the early days would have called the resultant bull market that was soon to follow.

SAM MORSELead Portfolio Manager17 March 2022

MARCEL STÖTZELCo-Portfolio Manager17 March 2022

Thematic Engagement: Consumer Staples and Plastic PackagingBACKGROUNDIn 2021, we launched a thematic engagement on plastic packaging with nine consumer goods companies, including the Company’s holding in Nestlé. Plastic packaging from consumer products is a major source of ocean pollution and the Break Free From Plastic Coalition has identified fast moving consumer goods (FMCG) companies as the top plastic polluters. Failure to manage plastic use could impact financial performance as extended producer responsibility legislation is being considered and introduced across Europe, making companies responsible for collecting and disposing packaging waste. Investors can contribute to this process by engaging with companies to encourage the transition.

OBJECTIVE AND GOALSOur engagement objective is to reduce the impact of plastic on biodiversity by encouraging consumer companies to transition to more circular business models. Although many companies already have plastic packaging targets, few provide much detail on how they will be met. We want consumer companies to set quantifiable targets to reduce their overall plastic packaging use, to make a proportion of their plastic packaging reusable, and to clarify that plastic packaging should be 100% practically and not just technically recyclable or compostable.

We wrote to nine companies requesting meetings and outlining our position on plastics. Eight of the nine companies we met are Ellen MacArthur Foundation signatories and as a result have 2025 targets for 100% of their plastic packaging to be recyclable, reusable, or compostable, as well as to increase their use of recycled or bio-based plastics and reduce their use of virgin plastic.

OUR ENGAGEMENTOur conversations helped us to understand the practices at different companies and how they plan to meet their targets. Only one of the nine companies has an overall plastic reduction target, with the others intending to meet virgin plastic targets through use of post-consumer recycled plastic (“PCR”). We learnt that there are many ways to reduce plastic use, for example, through reusable and refillable packaging, as well as collection if the company is exposed to polyethylene terephthalate (“PET”). We also discussed the barriers these companies face. One issue is the fact that the fashion industry is increasingly buying PCR to use in sustainable clothing products, which is reducing the already limited supply of these plastics for the consumer goods industry and driving up prices. The information we gathered helped us measure progress against targets and outline examples of best practice.

CASE STUDY: NESTLE

We met with Nestlé in December 2021 and were impressed by the company’s five-pillar approach to cutting its packaging footprint, which includes reducing use, developing reusable and refillable packaging, and recycling. Nestlé has an innovative packaging institute that is developing alternative plastics and packaging and has committed to invest 2 billion Swiss francs on sustainable solutions. Last year Nestlé switched its Smarties tube lids from plastic to paper, making it the first confectionary brand to use completely recyclable paper packaging. Nestlé told us it was encouraged by government initiatives to tackle plastic waste and was confident it could make progress towards its 2025 plastic reduction targets.

NEXT STEPS

We would like to talk to companies about harmonising their reporting standards and disclosing research and development (R&D) investment and plastic packaging advocacy and lobbying activity. We will keep encouraging companies to embed best practice and intend to extend our engagement to consumer goods companies in Asia, which are typically at an earlier stage in the transition to sustainable packaging.

STRATEGIC REPORT

Principal Risks and Uncertainties and Risk ManagementAs required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve the Company’s strategic objectives.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

A key emerging risk that the Board has identified is climate change. It is one of the most critical emerging issues confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. Further details are in the Annual Report. The Board will continue to monitor this.

The Board considers the following as the principal risks and uncertainties faced by the Company.

Other risks facing the Company include:

Tax and Regulatory RisksThere is a risk of the Company not complying with tax and regulatory requirements.

A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status, resulting in the Company being subject to tax on capital gains.

There is a risk that outstanding withholding tax reclaims may not be recoverable from some jurisdictions and may need to be written-off. The Manager’s tax team works closely with the Custodian to keep these under review and the Board is kept updated on the recoverability of the withholding tax reclaims.

The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.

Other Operational RisksThe Company relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements. The Registrar, Custodian and Depositary are all subject to a risk-based programme of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an annual basis and any concerns are investigated. Risks associated with these services are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company.

Continuation VoteA continuation vote takes place every two years. There is a risk that shareholders do not vote in favour of the continuation of the Company during periods when performance of the Company’s NAV and share price is poor. At the AGM held on 11 May 2021, 99.99% of shareholders voted in favour of the continuation of the Company. The next continuation vote will take place at the Company’s AGM in 2023.

Viability StatementIn accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long term growth in both capital and income. The Board considers long term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment on the viability of the Company, the Board has considered the following:

· The ongoing relevance of the investment objective in prevailing market conditions;

· The Company’s level of gearing;

· The Company’s NAV and share price performance;

· The principal and emerging risks and uncertainties facing the Company, as set out above, and their potential impact;

· The future demand for the Company’s shares;

· The Company’s share price discount to the NAV;

· The liquidity of the Company’s portfolio;

· The level of income generated by the Company; and

· Future income and expenditure forecasts.

The Company’s performance has been strong for the five year reporting period to 31 December 2021, with a NAV total return of 91.6% and a share price total return of 111.6% compared to a Benchmark Index total return of 64.5%. The Board regularly reviews the investment policy and considers whether it remains appropriate. 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 based on the following considerations:

· The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;

· The fact that the portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary;

· 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.

In preparing the Financial Statements, the Directors have considered the impact of climate change, particularly in the context of the climate change risk identified within the ESG Risk above.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement below.

GOING CONCERN STATEMENTThe Financial Statements of the Company have been prepared on a going concern basis.

The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and continue in operational existence for the foreseeable future. The Board has therefore concluded that the Company has adequate resources to continue to adopt the going concern basis for the period to 31 March 2023 which is at least twelve months from the date of approval of the Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks from COVID as set out in the Operational Resilience Risk above. The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

PROMOTING THE SUCCESS OF THE COMPANYUnder Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long term; the need to foster relationships with the Company’s 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 as between members of the company.

As an externally managed Investment Trust the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services to the Manager, but other professional service providers support the Company by providing administration, custodial, banking, depositary and audit services. The Board considers the Company’s key stakeholders to be the existing and potential shareholders, the external appointed Manager (Fidelity), and other third party professional service providers. The Board considers that the interests of these stakeholders are aligned with the Company’s objective of delivering long term capital growth to investors, in line with the Company’s stated investment objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.

The Board, with the Portfolio Managers, sets the overall investment strategy and reviews this at an annual strategy day which is separate from the regular cycle of board meetings. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.

The Board places great importance on communication with shareholders. The Annual General Meeting provides the key forum for the Board and the Lead Portfolio Manager to present to the shareholders on the Company’s performance and future plans and the Board encourages all shareholders to attend in person or virtually, and raise questions and concerns. The Chairman and other Board members are available to meet shareholders as appropriate. Shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary in writing at the same address or by email at investmenttrusts@fil.com. The Portfolio Managers meet with major shareholders, potential investors, stock market analysts, journalists and other commentators during the year. These communication opportunities help inform the Board in considering how best to promote the success of the company over the long term.

The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.

Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of Environmental, Social and Governance (“ESG”) issues aligns with the objective to deliver long term capital growth, and the Board’s review of the Manager includes an assessment of their ESG approach, which is set out in detail in the Annual Report.

In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of this report, have included:

· as part of ongoing Board succession, the appointment and induction of Milyae Park to the Board with effect from 1 January 2022;

· the decision to pay an interim dividend of 2.65 pence per share and a final dividend of 4.18 pence per share (a total of 6.83 pence per share), to maintain the Board’s policy to pay progressive dividends in normal circumstances. The Company has paid an increased dividend for 11 years in a row;

· agreeing a reduction in the management fee with effect from 1 April 2021, providing cost savings to the Company and reducing the Ongoing Charges to help the Company remain competitive. Details of the new fee arrangement can be found in the Chairman’s Statement above; and

· authorising the repurchase of 450,000 ordinary shares into Treasury in August 2021 when the Company’s discount widened.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these Financial Statements, the Directors are required to:

· Select suitable accounting policies in accordance with Section 10 of FRS 102 and then apply them consistently;

· Make judgements and accounting estimates that are reasonable and prudent;

· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· State whether applicable UK Accounting Standards, including FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

· Prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Company and the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Corporate Governance Statement and a Directors’ Remuneration Report that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at: www.fidelity.co.uk/europe. They have delegated this responsibility to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their own jurisdictions.

The Directors confirm, to the best of their knowledge:

· The Financial Statements, prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit of the Company;

· The Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties the Company faces; and

· The Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy.

The Statement of Directors’ Responsibilities was approved by the Board on 17 March 2022 and signed on its behalf by:

VIVIAN BAZALGETTEChairman

Income Statement FOR THE YEAR ENDED 31 DECEMBER 2021

The Company does not have any other comprehensive income. Accordingly the net return on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes below form an integral part of these Financial Statements.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021

The Notes below form an integral part of these Financial Statements.

BALANCE SHEET AS AT 31 DECEMBER 2021Company number 2638812

The Financial Statements above and below were approved by the Board of Directors on 17 March 2022 and were signed on its behalf by:

VIVIAN BAZALGETTEChairman

The Notes below form an integral part of these Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

1 PRINCIPAL ACTIVITYFidelity European Trust PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2638812, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 ACCOUNTING POLICIESThe Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”) in April 2021. The Company is exempt from presenting a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investments are highly liquid and are carried at market value.

a) Basis of accounting – The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence up to 31 March 2023 which is at least twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed income and expense projections, reviewed the liquidity of the investment portfolio and considered the Company’s ability to meet liabilities as they fall due. This conclusion also takes into account the Director’s assessment of the continuing risks arising from COVID-19.

In preparing these Financial Statements the Directors have considered the impact of climate change risk as an emerging risk as set out above, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with FRS 102 investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the balance sheet date and therefore reflect the market participants’ view of climate change risk on the investments held by the Company.

The Company’s Going Concern Statement above takes account of all events and conditions up to 31 March 2023 which is at least twelve months from the date of approval of these Financial Statements.

b) Significant accounting estimates and judgements – The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

c) Segmental reporting – The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income Statement – In order to reflect better the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) Income – Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

Interest received on CFDs, bank deposits, collateral and money market funds are accounted for on an accruals basis and credited to the revenue column of the Income Statement. Interest received on CFDs represent the finance costs calculated by reference to the notional value of the CFDs.

f) Investment management fees and other expenses –Investment management fees and other expenses are accounted for on an accruals basis and are charged as follows:

· The investment management fee is allocated 25% to revenue and 75% to capital in line with the Board’s expected long term split of revenue and capital return from the Company’s portfolio of investments; and

· All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital events.

g) Functional currency and foreign exchange – The functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

h) Finance costs – Finance costs comprises interest paid on collateral and bank deposits, and finance costs paid on CFDs, which are accounted for on an accruals basis. Finance costs are allocated 25% to revenue and 75% to capital in line with the Board’s expected long term split of revenue and capital return from the Company’s portfolio of investments.

i) Taxation – The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

j) Dividend paid – Dividends payable to equity shareholders are recognised when the Company’s obligation to make payment is established.

k) Investments – The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

· Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within gains on investments in the capital column of the Income Statement and has disclosed these costs in Note 10 below.

l) Derivative instruments – When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short CFDs and futures. Derivatives are classified as other financial instruments and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

· Long and short CFDs – the difference between the strike price and the value of the underlying shares in the contract; and

· Futures – the difference between the contract price and the quoted trade price.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in net income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included in gains/(losses) on derivative instruments in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within current assets or current liabilities.

m) Debtors – Debtors include accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not, they are presented as non-current assets. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

n) Amounts held at futures clearing houses and brokers – These are amounts held in segregated accounts on behalf of brokers as collateral against open derivative contracts. These are carried at amortised cost.

o) Cash and cash equivalents – Cash and cash equivalents may comprise cash at bank and money market funds which are short term, highly liquid and are readily convertible to a known amount of cash. These are subject to an insignificant risk of changes in value.

p) Other creditors – Other creditors include investment management fees and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

q) Capital reserveThe following are accounted for in the capital reserve:

· Gains and losses on the disposal of investments and derivative instruments;

· Changes in the fair value of investments and derivative instruments held at the year end;

· Foreign exchange gains and losses of a capital nature;

· 75% of investment management fees and finance costs;

· Dividends receivable which are capital in nature; and

· Cost of repurchasing shares.

Technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, states that changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date the portfolio of the Company consisted of investments listed on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash.

3 INCOME

1 Due to negative interest rates during the current and prior year, the Company received interest on its long CFDs.

Special dividends of £82,000 (2020: £nil) have been recognised in capital.

4 INVESTMENT MANAGEMENT FEES

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

From 1 April 2021, FII charges investment management fees at an annual rate of 0.85% of net assets up to £400 million and 0.65% of net assets in excess of £400 million. Prior to this date, the investment management fees were charged at an annual rate of 0.85% of net assets up to £400 million and 0.75% of net assets in excess of £400 million. Fees are payable monthly in arrears and are calculated on a daily basis.

Investment management fees have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

5 OTHER EXPENSES

1 Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

2 The VAT payable on audit fees is included in other expenses.

6 FINANCE COSTS

1 Due to negative interest rates during the current and prior year, the Company paid interest on its short CFDs and deposits.

Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

7 TAXATION ON RETURN ON ORDINARY ACTIVITIES

b) Factors affecting the taxation charge for the yearThe taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 19% (2020: 19%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:

1 The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxationA deferred tax asset of £14,046,000 (2020: £9,611,000), in respect of excess expenses of £50,680,000 (2020: £45,081,000) and excess loan interest of £5,505,000 (2020: £5,505,000), has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

In the Spring Budget the Government announced that from 1 April 2023 the corporation tax rate will increase to 25%. This rate has been substantively enacted at the balance sheet date and has therefore been applied to calculate the unrecognised deferred tax asset for the current year (2020: 19%).

8 RETURN PER ORDINARY SHARE

The return per ordinary share is based on the net return on ordinary activities after taxation for the year divided by the weighted average number of ordinary shares held outside Treasury during the year, as shown below: 

9 DIVIDENDS PAID TO SHAREHOLDERS

The Directors have proposed the payment of a final dividend for the year ended 31 December 2021 of 4.18 pence per ordinary share which is subject to approval by shareholders at the Annual General Meeting on 10 May 2022 and has not been included as a liability in these Financial Statements. The dividend will be paid on 17 May 2022 to shareholders on the register at the close of business on 1 April 2022 (ex-dividend date 31 March 2022).

10 INVESTMENTS

The Company received £139,952,000 (2020: £172,919,000) from investments sold in the year. The book cost of these investments when they were purchased was £87,893,000 (2020: £146,848,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

Investment transaction costsTransaction costs incurred in the acquisition and disposal of investments, which are included in the gains on investments above, were as follows:

The portfolio turnover for the year was 11.6% (2020: 15.9%). The portfolio turnover rate measures the Company’s trading activity. It is calculated by taking the average of the total amount of securities purchased and the total amount of the securities sold in the reporting year divided by the average investment portfolio value of the Company.

11 DERIVATIVE INSTRUMENTS

12 DEBTORS

13 OTHER CREDITORS

14 SHARE CAPITAL

* Ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

The cost of ordinary shares repurchased into Treasury during the year was £1,457,000 (2020: £nil).

15 CAPITAL AND RESERVES

The capital reserve balance at 31 December 2021 includes investment holding gains of £585,421,000 (2020: gains of £416,390,000) as detailed in Note 10 above. See Note 2 (q) above for further details. The revenue and capital reserves are distributable by way of dividend.

16 NET ASSET VALUE PER ORDINARY SHARE

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

17 FINANCIAL INSTRUMENTSManagement of riskThe Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, economic and political, discount control, operational risk from cybercrime, investment performance, key person, environmental, social and governance (“ESG”) and operational resilience. Other risks identified are tax and regulatory and other operational risks, including those relating to third party service providers covering investment management, marketing and business development, company secretarial, fund administration and operations and support functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown above.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

· Equity shares held in accordance with the Company’s investment objective and policies;

· Derivative instruments which comprise CFDs and futures on equity indices; and

· Cash, liquid resources and short term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

Market price riskInterest rate riskThe Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The level of gearing is reviewed by the Board and the Lead Portfolio Manager. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposureThe values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

Foreign currency riskThe Company’s net return on ordinary activities after taxation for the year and its net assets can be affected by foreign exchange rate movements because the Company has income, assets and liabilities which are denominated in currencies other than the Company’s functional currency which is UK sterling. The Company can also be subject to short term exposure from exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs.

Three principal areas have been identified where foreign currency risk could impact the Company:

· Movements in exchange rates affecting the value of investments and derivative instruments;

· Movements in exchange rates affecting short term timing differences; and

· Movements in exchange rates affecting income received.

Currency exposure of financial assetsThe currency exposure profile of the Company’s financial assets is shown below:

1 Debtors include amounts held at futures clearing houses and brokers.

2 Cash and cash equivalent are made up of £10,696,000 cash at bank and £670,000 held in Fidelity Institutional Liquidity Fund.

1 Debtors include amounts held at futures clearing houses and brokers.

2 Cash and cash equivalent are made up of £4,420,000 cash at bank and £2,650,000 held in Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilitiesThe Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise short positions on derivative instruments and other creditors. The currency profile of these financial liabilities is shown below:

Other price riskOther price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Managers are responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile.

Liquidity riskDue to the closed-ended nature of the Company, the liquidity risk is limited. Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short term flexibility is achieved by the use of a bank overdraft, if required.

Liquidity risk exposureAt 31 December 2021, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £nil (2020: £403,000) and creditors of £1,059,000 (2020: £955,000).

Counterparty riskCertain derivative instruments in which the Company invests are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over The Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

For derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2021, £3,225,000 (2020: £2,170,000) was held by the brokers in cash denominated in UK sterling in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company. This collateral comprised of: J.P. Morgan Securities plc £3,225,000 (2020: £1,680,000) and UBS AG £nil (2020: £490,000). £2,962,000 (2020: £5,977,000), shown as amounts held at futures clearing houses and brokers on the Balance Sheet, was held by the Company in cash denominated in UK sterling in a segregated collateral account on behalf of the brokers, to reduce the credit risk exposure of the brokers. This collateral comprised of: UBS AG £2,962,000 (2020: £5,537,000) in cash and Morgan Stanley & Co International plc £nil (2020: £440,000).

Credit riskFinancial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions and derivative instrument contracts and cash at bank.

Derivative instrument riskThe risks and risk management processes which result from the use of derivative instruments, are set out in a documented Derivative Risk Measurement and Management Document. Derivative instruments are used by the Manager for the following purposes:

· to gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial flow of capital; and

· to position short exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Managers believe to be over valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

RISK SENSITIVITY ANALYSISInterest rate risk sensitivity analysisBased on the financial instruments held and interest rates at 31 December 2021, an increase of 0.25% in interest rates throughout the year, with all other variables held constant, would have decreased the Company’s net return on ordinary activities after taxation for the year and decreased the net assets of the Company by £299,000 (2020: decreased the Company’s net return and decreased the net assets by £178,000). A decrease of 0.25% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysisBased on the financial instruments held and currency exchange rates at the Balance Sheet date, a 10% strengthening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have decreased the Company’s net return on ordinary activities after taxation for the year and decreased the Company’s net assets by the following amounts:

Based on the financial instruments held and currency exchange rates at the Balance Sheet date, a 10% weakening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the Company’s net assets by the following amounts:

Other price risk – exposure to investments sensitivity analysisBased on the investments held and share prices at 31 December 2021, an increase of 10% in share prices, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £144,800,000 (2020: increased the net return and increased the net assets by £120,066,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Other price risk – net exposure to derivative instruments sensitivity analysisBased on the derivative instruments held and share prices at 31 December 2021, an increase of 10% in the share prices underlying the derivative instruments, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £19,019,000 (2020: increased the net return and increased the net assets by £13,579,000). A decrease of 10% in share prices of the investments underlying the derivative instruments would have had an equal and opposite effect.

Fair Value of Financial Assets and LiabilitiesFinancial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Notes 2 (k) and (l) above, investments and derivative instruments are shown at fair value. In the case of cash and cash equivalents, book value approximates to fair value due to the short maturity of the instruments.

Fair Value HierarchyThe Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Notes 2 (k) and (l). The table below sets out the Company’s fair value hierarchy:

18 CAPITAL RESOURCES AND GEARINGThe Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital and reserves, as disclosed in the Balance Sheet above, and any gearing, which is managed by the use of derivative instruments. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed above and in Note 17 above.

The Company’s gross gearing and net gearing at the year end is set out below:

1 Exposure to the market expressed as a percentage of shareholders’ funds.

2 Gearing is the amount by which gross asset exposure/net market exposure exceeds shareholders’ funds expressed as a percentage of shareholders’ funds.

1 Exposure to the market expressed as a percentage of shareholders’ funds.

2 Gearing is the amount by which gross asset exposure/net market exposure exceeds shareholders’ funds expressed as a percentage of shareholders’ funds.

19 TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIESFIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies.

Details of the current fee arrangements are given in the Directors’ Report in the Annual Report and in Note 4 above. During the year, fees for portfolio management services of £9,751,000 (2020: £8,899,000) were payable to FII. At the Balance Sheet date, fees for portfolio management services of £871,000 (2020: £806,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £126,000 (2020: £140,000). At the Balance Sheet date, marketing services of £5,000 (2020: £6,000) were accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Directors’ fees and taxable expenses relating to reasonable travel expenses paid to the Directors are given in the Directors’ Remuneration Report in the Annual Report. In addition to the fees and taxable expenses disclosed in the Directors’ Remuneration Report, £16,000 (2020: £17,000) of Employers’ National Insurance Contributions was also paid by the Company. As at 31 December 2021, Directors’ fees of £14,000 (2020: £14,000) were accrued and payable.

ALTERNATIVE PERFORMANCE MEASURES

DISCOUNT/PREMIUMThe discount/premium is considered to be an Alternative Performance Measure. It is the difference between the NAV of the Company and the ordinary share price and is expressed as a percentage of the NAV. Details of the Company’s discount/premium are on the Financial Highlights page in the Annual Report and both are defined in the Glossary of Terms in the Annual Report.

GEARINGGearing is considered to be an Alternative Performance Measure. See Note 18 above for details of the Company’s gearing.

NET ASSET VALUE (“NAV”) PER ORDINARY SHAREThe NAV per ordinary share is considered to be an Alternative Performance Measure. See the Balance Sheet and Note 16 above for further details.

ONGOING CHARGESOngoing charges are considered to be an Alternative Performance Measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and other expenses expressed as a percentage of the average net asset values throughout the year.

Revenue, Capital and Total ReturnsRevenue, capital and total returns are considered to be Alternative Performance Measures. See the Income Statement and Note 8 above for further details.

Total Return PerformanceTotal return performance is considered to be an Alternative Performance Measure. NAV per ordinary share total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. Ordinary share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.

The tables below provide information relating to the NAVs and ordinary share prices of the Company, the impact of the dividend reinvestments and the total returns for the years ended 31 December 2021 and 31 December 2020.

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 December 2021 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2020 and 2021 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2020 is derived from the statutory accounts for 2020 which have been delivered to the Registrar of Companies. The 2021 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the above results announcement will be available on the Company's website at www.fidelity.co.uk/europe within two working days.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelity.co.uk/europe where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

ENDS