Fidelity European Values Regulatory News (FEV)

Fidelity European Trust Plc - Annual Financial Report

PR Newswire

London, March 16

FIDELITY EUROPEAN TRUST PLC

Final Results for the year ended 31 December 2020

Financial Highlights:

The Board of Fidelity European Trust PLC (the “Company”) recommends a final dividend of 3.90 pence per share which together with the interim dividend payment of 2.60 pence per share (totalling 6.50 pence) represents a modest increase over the dividend paid in the prior year

The net asset value (“NAV”) of the Company increased by +9.7% for the year ended 31 December 2020, outperforming the Benchmark Index, the FTSE World Europe (ex UK), which returned +8.6%.

The discount narrowed markedly during the year from 6.2% to 3.6% over the period, as result of the share price total return of +13.1%.

The Board has agreed a revised fee with effect from 1 April 2021. The current tiered rate of 0.75 per cent on net assets in excess of £400 million will reduce to 0.65 per cent, thus achieving useful savings on overall percentage costs for shareholders.

With effect from 1 September 2020, the Board agreed with Fidelity to appoint Marcel Stotzel as a Co-Portfolio Manager alongside Sam Morse, the Company’s Portfolio Manager.

Contacts

For further information, please contact:

Smita AminCompany Secretary01737 836347FIL Investments International 

CHAIRMAN’S STATEMENT

The year under review has been an extraordinary one, with individuals and businesses in Europe, as around the world, facing some of the most challenging circumstances in decades because of the Coronavirus (COVID-19).

Against this testing backdrop, the Board and Portfolio Manager remained focused on the core objective of the Company, namely the achievement of long term growth in both capital and income by predominantly investing in equities (and their related securities) of continental European companies.

The Portfolio Manager’s preference for companies with well-formed, long-standing foundations stood shareholders in good stead. Europe is home to some of the most stable and resilient companies in the world, feted for standing the test of time. Whilst, inevitably, few names remained entirely unscathed, the Portfolio Manager’s ability to select proven business models at attractive valuations has proved its worth, as it has done across the years.

COMPANY NAME CHANGEAs announced on 1 October 2020, the Company changed its name from Fidelity European Values PLC to Fidelity European Trust PLC. As explained in last year’s Annual Report and also the Half-Yearly Report for the six months ended 30 June 2020, the reason for the change was to align the Company’s name more closely to its objective, and to avoid confusion with value products. There is no change to the way the investment portfolio is managed as a result of the name change and the Company retains its existing ticker (FEV.L), SEDOL (BK1PKQ9) and ISIN (GB00BK1PKQ95).

PERFORMANCEThe net asset value (“NAV”) of the Company increased by 9.7% for the year ended 31 December 2020, outperforming the Benchmark Index, the FTSE World Europe (ex UK), which returned 8.6%. A pleasing result, it may nevertheless be a rare case of it being better to ‘arrive’ than to ‘travel’, given the somewhat volatile journey. The discount narrowed markedly during the year and the share price return for the period was 13.1%, marking a significant outperformance of the Benchmark and NAV of the Company. The Company’s NAV and share price total return performance over three and five years remains well ahead of the Benchmark Index, as can be seen from the chart on the Financial Highlights page in the Annual Report.

By the end of the first quarter of 2020, Europe had become the epicentre of the COVID-19 crisis, resulting in economic contraction. Among the worst affected sectors were hospitality, retail, leisure and tourism amid rounds of lockdowns and restrictions. The European Central Bank was quick to implement quantitative easing, with programmes of money printing and bond buying coming to characterise the year. European equities plunged in line with global stock markets more broadly in March, before quickly retracing lost ground as the year progressed. Among the best performers were healthcare stocks, especially successful on the announcement of a vaccine, as well as utility companies. Technology names, too, were notable beneficiaries.

OUTLOOKWith the pandemic continuing to evolve, it is evident that the arrival of vaccines does not necessarily spell an end to the story of COVID-19. Variants of the disease are appearing and it is potentially a tough job for the formulations of the various vaccines to keep up. Economically, this may result in a stop/start pattern for some time to come, mirrored by market fluctuations. These are likely, however, to present opportunities for your Managers to acquire or add to shares which meet their long standing criteria. Most of all, perhaps, it should be emphasised that European companies and Europe’s economy are not one and the same and for talented stock-pickers, the opportunity set within European equities remains compelling. In particular, it should always be remembered that most of the companies in which the Company invests are global in nature. Sam Morse, our Portfolio Manager, provides more colour on his current thinking in his Portfolio Manager’s Review, which follows my Chairman’s Statement. Among other things, he reiterates his view that the Brexit trade agreement between the UK and EU has limited significance for the portfolio.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INVESTMENTThere continues to be increasing concern about global warming, and a focus on serious efforts to counter its effects. 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. Sam Morse outlines Fidelity’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 below and in the Annual Report which show how well the Company is positioned in terms of ESG. In addition this year, there is in the Annual Report a case study of EssilorLuxottica, a holding in the portfolio, where Fidelity has engaged with management during the year on ESG matters. I hope this example will illustrate how ESG works in practice, and how it is intrinsic to Fidelity’s investment process.

OTHER MATTERSIntroduction to Co-Portfolio ManagerWith effect from 1 September 2020, the Board agreed with Fidelity to appoint Marcel Stotzel as a Co-Portfolio Manager alongside Sam Morse, the Company’s Portfolio Manager. Marcel and Sam have worked closely together in recent years. Marcel is a very talented analyst and investor, with extensive experience in European companies. Marcel will help Sam with oversight of his different strategies and mandates and also assist in client servicing and marketing.

The move to a Co-Portfolio Manager structure strengthens the investment process by introducing greater challenge and also increases the ability to meet more companies and, effectively, be in two places at once. Marcel as Co-Portfolio Manager will share a common investment approach and complementary investment experience. The appointment will not result in any changes in terms of investment philosophy, investment process or portfolio characteristics.

Sam remains the Lead Portfolio Manager and will continue to be accountable for portfolio construction.

Revised Management FeeI am pleased to report that, following a review of the management fees payable to Fidelity, the Board has agreed a revised fee with effect from 1 April 2021. The current tiered fee structure involves an annual rate of 0.85 per cent on the first £400 million of the Company’s net assets. This will remain unchanged. However, the current rate of 0.75 per cent on net assets in excess of £400 million will reduce to 0.65 per cent, thus achieving useful savings on overall percentage costs for shareholders.

DividendsThe Board has not sought to influence the Portfolio Manager 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. Investment trusts have an income advantage which is particularly important during these difficult times, when the dividends of many companies in the portfolio are under pressure. 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 to shareholders at a time when companies in the portfolio may be cutting or cancelling their dividends. This pattern is likely to continue while the virus remains in broad circulation. The Board has over the past few years augmented revenue reserves and also has the authority to pay from capital reserves if required. Accordingly, the Board’s intention in the medium term is to pay nominal increases in total annual dividends, utilising reserves if necessary. Once things return to normal, however, should dividend practices be judged to have changed on a permanent rather than temporary basis, then the Board will reconsider its dividend paying policy at that time.

The Company’s revenue return for the year to 31 December 2020 was 5.12 pence per share (2019: 7.00 pence), and an interim dividend of 2.60 pence per share was paid on 30 October 2020 (2019: 2.59 pence). With this in mind, the Board recommends a final dividend of 3.90 pence per share for the year ended 31 December 2020 (2019: 3.88 pence) for approval by shareholders at the Annual General Meeting (“AGM”) on 11 May 2021. The interim and final dividends (total of 6.50 pence) represent a modest increase over the 6.47 pence paid for the year ended 31 December 2019. The current year’s total dividend comprises 5.12 pence earned in the reporting year and 1.38 pence to be paid from revenue reserves.

The final dividend will be payable on 18 May 2021 to shareholders on the register at close of business on 26 March 2021 (ex-dividend date 25 March 2021). Shareholders may choose to reinvest their dividends for additional shares in the Company. Details of the Dividend Reinvestment Plan are set out in the Annual Report.

Discount Management and Treasury SharesThe Board operates 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 forthcoming AGM.

In the reporting year and up to the date of this report, the Company has not repurchased any ordinary shares into Treasury or for cancellation

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 2020, the Company’s gross gearing was 11.8% (2019: 7.1%) whilst net gearing was 9.4% (2019: 4.7%). 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. The Board has recently agreed with the Portfolio Manager that if he is able to find attractive opportunities in the market, then the Company’s gearing should be allowed to rise, provided the opportunities remain attractive. With this in mind, the Board’s internal guideline for net gearing has been increased and will continue to be reviewed regularly.

Board of DirectorsAfter serving on the Board for over ten years as a non-executive Director, Dr Robin Niblett stepped down from the Board at the conclusion of the AGM on 12 May 2020. Robin’s successor, Sir Ivan Rogers, was appointed as a non-executive Director on 1 January 2020. He was elected by shareholders at the same AGM.

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, and being a FTSE 350 Company, I together with the rest of the Board will be subject to annual re-election at the AGM on 11 May 2021. Biographical details of all Directors standing for re-election 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.

Changes to the Articles of AssociationAmong the temporary measures forced upon us by the COVID-19 pandemic was the closed session AGM we held last year. With restrictions still in place, this year’s AGM on 11 May 2021 will once again be a closed session. However, at 2.00 pm on 29 April 2021, the Portfolio Manager and I will deliver an online presentation on the “Year in Review” which should provide useful colour on all aspects of the Company. You will also have the opportunity to put your questions to us live. Details will be made available nearer the time at www.fidelity.co.uk/europe. If anything changes then we will advise shareholders via the website.

With the intention of providing the very best experience for shareholders longer term and mindful of potential future restrictions, the Board is proposing amendments to the Articles of Association (the “Articles”) to enable the Company to hold ‘hybrid’ general meetings. ‘Hybrid meetings’ involve both the physical attendance by shareholders as well as by shareholders via electronic means. It is the current expectation of the Board that hybrid meetings would only be used where a solely ‘physical meeting’ is impracticable or unworkable. By changing the Company’s Articles, the Board will have the ability to determine whether an AGM or general meeting should be held as a ‘physical meeting’ or as a ‘hybrid meeting’.

My fellow Directors and I greatly enjoy the opportunity to meet and exchange views with shareholders and a physical meeting will remain our default format as long as Government guidance permits it, but we are also keen to provide additional virtual facilities for those shareholders who may not wish to or are unable to attend AGMs in person.

We have also taken the opportunity to update certain other provisions within the Articles, including for example, in relation to retirement of Directors and regulatory restrictions and information. A full tracked version of all the changes proposed to the Articles is available at www.fidelity.co.uk/europe. The principal changes proposed to the Articles are set out in more detail in the Directors’ Report section in the Annual Report.

ANNUAL GENERAL MEETING – TUESDAY, 11 MAY 2021 AT 12 NOONIn response to the continuing widespread nature of COVID-19, the current Government guidance stipulates that large gatherings of people are prohibited.

With this in mind, and to fulfil the legal obligation to have an AGM, this year’s AGM will be conducted as a closed session at FIL Investments International, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP, and will be restricted to the formal business of the meeting as set out in the Notice of Meeting in the Annual Report and voting on the resolutions therein. Among the resolutions will be a continuation vote, which happens every two years. Back in 2019, 100 per cent of shareholders’ votes were in favour of continuation and I hope there will be a similarly decisive outcome this year.

Ahead of the AGM on 11 May 2021, an online presentation by the Portfolio Manager and me will be held at 2.00 pm on 29 April 2021 which will cover a review of the year and the outlook for 2021. You will also have the opportunity to put your questions to us live. Details will be made available nearer the time at www.fidelity.co.uk/europe. If anything changes then we will advise investors via the website.

Copies of the Portfolio Manager’s 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.

Protecting the health of all investors, workforce and officers must be paramount at the current time. We urge all shareholders to vote and make use of the proxy form provided. If you hold shares through the Fidelity Platform or a nominee (and not directly in your own name), proxy forms are not provided, and you are advised to contact the company with which you hold your shares in order to lodge your voting instructions.

We encourage all investors who have any questions or comments to contact the Secretary so that she can relay your comments to the Board, and we will respond in due course.

We thank you for your cooperation and sincerely hope to resume the meeting’s usual format in the future.

VIVIAN BAZALGETTEChairman16 March 2021

PORTFOLIO MANAGER’S REVIEW

QUESTIONIn the shadow of a global pandemic, the period under review has been extraordinary in every sense of the word. As an investor, how have you been navigating this environment?

ANSWER2020 was indeed an extraordinary year but the outcome, in terms of investment returns, ended up being quite normal with both the portfolio and Benchmark Index rising usefully. In getting there, however, the Fidelity European Trust team – the FIL research department, Marcel and myself -- had to negotiate a steep switchback with the market falling precipitously as the pandemic spread only to recover strongly thanks to an awesome barrage of fiscal and monetary easing. Our guiding light, while staying fully invested, remained the tried and tested investment approach of focusing on companies with strong balance sheets which can grow dividends consistently. This light dimmed as the pandemic took hold and many companies abandoned their dividend policies in the face of political, regulatory and fundamental pressures. We spent much of the year, thereafter, sorting out which companies were facing more structural issues, likely necessitating further reductions in dividends, which companies would bounce back quickly if the pandemic receded and which companies might go from strength to strength despite or because of the pandemic. We looked to act accordingly, in terms of reshaping the portfolio, but we tend to be cautious and tread carefully during periods of extreme volatility. With hindsight, maybe we were too timid, in the midst of the panic, and missed a few tricks but we are long term investors with a multi-year investment horizon, not traders.

QUESTIONAnd how has the Company performed over the twelve months under review?

ANSWEROur investment objective is to outperform the Benchmark Index steadily and consistently over a number of years. We are not trying to shoot the lights out. The Company will have good years and it will have bad years but over longer periods of time steady outperformance of the Benchmark should deliver returns competitive with the peer group average. It was pleasing that 2020 was another year where the Company, with the NAV total return rising by 9.7% in UK sterling terms, did better than its Benchmark which was up by 8.6% on the same basis. It was, however, a wild ride with the Company substantially ahead of its Benchmark after nine months before lagging significantly in the final quarter. It was as if we were five nil up going into the last twenty minutes of a football match only to edge it five to four at the final whistle. The Company had a poor October when SAP issued a warning (more on this below) and then the Company failed to keep pace with the market in the sharp rally which followed the welcome news that the first two vaccines were more effective than expected. Despite this, the discount narrowed significantly in the last quarter of the year such that the share price, which rose more than 13% on the same basis, did significantly better over the year than both the Benchmark and the NAV of the Company.

QUESTIONWhat have been the key contributors to performance? And detractors?

ANSWERAlthough the Company outperformed its Benchmark for the year, the contribution from stock picking was mixed. Swedish Match performed strongly thanks to the continuing success of its nicotine pouch product Zyn which is taking full advantage of its first mover status in this market in the United States. ASML, the Dutch semiconductor equipment business, performed strongly again this year — benefiting from a reappraisal of the potential for its new EUV technology and a general buoyancy in the valuation of technology assets given the acceleration of the digital economy. By contrast, the Dutch bank ABN AMRO Bank fared badly as bad debt provisions, due to poor lending decisions, and a large loss in its settlement business wiped out most of its earnings. Banks generally suffered given the further lurch down in interest rates and the regulator’s decision to restrict dividends. We believe that the other banks we hold and ABN AMRO Bank will be able to resume sizeable dividends when this ban is lifted which should catalyse stronger share prices. Sodexo, the global contract caterer, was one of a number of holdings that were directly impacted by the pandemic, as noted in the Company’s Half-Yearly Report. Finally, SAP (as mentioned above) performed particularly poorly in the last quarter due to a significant downgrade of its medium term financial guidance as it accelerates its shift away from ‘on-premise’ sales to a more ‘cloud-based’ business model. We think SAP management are doing the right thing for the longer term sustainability and growth of their business but it does come at a cost to medium term profitability as up-front licence fees, coupled with maintenance contracts, are substituted gradually by annual subscription fees.

QUESTIONWhat have been the major changes to the portfolio over the period?

ANSWERAs you know, we seldom make major changes to the portfolio. Our investment horizon is long so turnover tends to be low. The portfolio will, however, evolve over time with stock selection. The crisis threw up some opportunities that were already on our radar. A new holding was started, for instance, in Zurich Insurance Group, which fell to an attractive valuation during the early days of the pandemic. Analysts worried about the cost of business interruption and other claims and potential defaults in their investment portfolio. This led to concerns that Zurich Insurance might not be able to grow or sustain its attractive level of dividend. We decided, however, that the claims were manageable and that the bond market would be supported by the liquidity released by monetary easing. In our view, this was, therefore, a good time to buy a steady long term dividend grower at an attractive level of yield. We expect Zurich Insurance to get a further boost as pricing in commercial lines, particularly in the United States, moves up to compensate for the increased claims. Similarly, we added to our holdings in the private equity companies (3i Group, Partners Group and EQT) when their share prices fell sharply in the first part of the year. By contrast, we sold out of Andritz, the Austrian industrial conglomerate, because we were concerned that the pandemic would exacerbate unfavourable structural trends and given that the company had already reduced its dividends. Late on in the year, we started a holding in Prosus, a holding company which has major investments in some of the world’s leading on-line consumer franchises such as Tencent and Delivery Hero. We believe that the pandemic has accelerated a change in consumer habits such that strong on-line businesses like these will continue to grow faster than anticipated even when lockdowns end. Worries about regulation and government interference have provided an attractive entry point.

QUESTIONOn Christmas Eve we learnt that a trade and cooperation agreement had at last been reached between the UK and European Union. What implications might that have for the portfolio?

ANSWERIt was certainly welcome that some sort of deal was announced — no deal would probably have rattled European markets in the short term. Obviously the devil will be in the detail and it will take some time to digest the longer term implications of what has been announced. It is important, however, to keep this in context. The UK accounts for less than five percent of continental European companies sales and earnings so changes in the exchange rate or the UK economy will have a very modest impact. There are, of course, some specific companies for whom this deal is important such as those in the auto sector or some Spanish banks or utility companies with large subsidiaries in the UK. In general, however, this deal is less significant for the majority of continental European companies that do little or no business with or in the UK. It is important, however, for investors to remember that a stronger pound will dampen capital returns on assets that are, for the most part, denominated in currencies other than UK sterling and a stronger pound will also reduce the value of overseas dividends received by the Company.

QUESTIONHow has your derivative strategy performed in the period under review?

ANSWERGearing, using long contracts of difference (“CFDs”), contributed positively to the Company’s performance. Gearing was increased during the period which helped given equity prices recovered more as the year progressed. The ability to gear is one of the great advantages, in the long term, of an investment trust over other saving vehicles. With the benefit of hindsight, the Company was too timid in this respect in the last decade with gearing averaging around six percent. At the time, it always felt uncomfortable to be more levered, as continental Europe lurched from one crisis to another. It is, of course, often like that so we have decided, in future, to stick to a structurally higher level of gearing, while staying within the parameters set by the Board. We would expect the Company to be around twice as geared, on average, as it has been in the last ten years. This level of gearing will allow a degree of flexibility such that the Company will not be forced to do the wrong thing at the wrong time.

Single stock shorting, again using CFDs, was mixed but contributed in a small way. Profits were banked on existing positions when the market collapsed but this was partly offset in the second half of the year by short positions in sectors that outperformed on the unexpectedly positive news about the vaccines: frustrating, but we believe that these businesses have weak balance sheets, exacerbated by the crisis, which will constrain dividends more than investors expect, even as growth recovers.

QUESTIONEnvironmental, Social and Governance (“ESG”). How do you think about it and have the challenges thrown up this year altered your approach?

ANSWERSustainable dividend growth has always been our investment mantra and has been the Company’s guiding light for the past ten years. To achieve this sustainability, companies have to be cognisant of all threats including those that are environmental, social or related to poor governance (ESG). Successful companies, and investors, have increasingly been on guard against these threats in recent years even if they might not have grouped them into such a tidy acronym. Companies that have flouted good ESG principles, from the East India Company to Wirecard, usually meet their comeuppance although it is hard to predict the exact timing of their demise. Fidelity’s introduction of ESG scores has helped us to sharpen our focus in this area and question why we continue to hold companies that score less well through an ESG lens. We will remain pragmatic and not dogmatic and will continue to engage with our invested companies to understand their strategy and actions regarding ESG factors. Given the Company’s long held focus on sustainability, it will not surprise you that, on average, the Company scores well on ESG factors although there may well always be individual exceptions which are scrutinised and assessed holistically and thoroughly on an on-going basis. Finally, it is important not to lose sight of other non-ESG considerations such as valuation. A company may be top of the class on ESG factors but that doesn’t mean investors can pay any price for it. In the rush to be considered ESG compliant, we must not completely disregard all other factors! What has become clear, however, over the last six months is that ESG factors, in particular environmental factors, will influence political decisions more and more particularly in Europe and also now in the United States. As such, it is more important than ever to be on top of these trends as they will directly translate into material earnings drivers for many stocks over the coming years.

QUESTIONMight you share an example of ESG engagement in action?

CASE STUDY ON ESSILORLUXOTTICA

BACKGROUNDEssilor and Luxottica merged in 2017 creating the world’s leading supplier of corrective lenses and frames. The merger was beset by delays and serious concerns emerged around the combined entity’s governance. The newly created Board included 8 directors designated by Essilor and 8 by Delfin (the majority owner of Luxottica). This parity meant no party had a deciding vote and resulted in gridlock, which was preventing effective integration and the appointment of a new CEO.

In the first quarter of 2019, key Board members released separate statements to the press exposing the bitter rift between the two camps and risking further reputational damage.

FIDELITY’S ENGAGEMENT & PROCESSWe met with Board representatives of both sides in the second half of 2018 to understand the reasons behind the merger delays and failure to appoint a new CEO. We came to understand the extent of the gridlock.

Believing the deal was net positive, but that without resolution there was risk of further reputational damage, we engaged with the company and other shareholders to discuss paths to resolution.

Fidelity co-signed a letter to the Board in March 2019 requesting transparency and improvements on several governance matters, including an update on the CEO recruitment process, the appointment of a lead director, and consultation with shareholders on the executive remuneration policy.

In Spring 2019, Fidelity co-filed voting resolutions for the election of two independent directors to the Board for the purpose of improving quality of oversight and breaking the deadlock between the two rival factions.

Our nominees were narrowly defeated at the AGM but received majority support from non-insider shareholders.

RESULTThree days before the AGM, EssilorLuxottica announced they had signed a settlement with Delfin, waiving all current disputes and empowering management to focus on the integration process. They also confirmed the search for a new CEO.

The shareholder resolutions to nominate directors and engagement with the company helped bring the two board factions to compromise.

QUESTIONWhat should investors remain focused on in the months ahead?

ANSWERWe like the advice of Peter Lynch who said: “Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested”. Maybe we should add predictions about the pandemic to that list? Anyway, as investors, we will remain focused on the companies in which we have invested and, in particular, on their ability to continue to grow their dividends. As always, we will ask ourselves if that rate of dividend growth is already discounted in the share price. We are, of course, also always on the lookout for new opportunities to add to the portfolio at the right price. Valuation still matters. That may be a concern for the market as a whole right now because valuation levels, in aggregate, are high relative to historical norms. Clearly, that’s partly discounting a continuing recovery in earnings and dividends as vaccines are rolled out and economies emerge from the pandemic. It’s also partly due to the very low bond yields and ample liquidity supplied by supportive central bank policy. Inevitably, however, as an investor, one must expect the unexpected. And sometimes, hiccups arise when, as now, sentiment is bullish and investors least expect it. For our part, we remain confident that equities will rise in the long term and, as this year has shown, it pays to stay fully invested, or even modestly geared, through stock market cycles. As the old adage goes: it’s time in the market, not timing the market, that matters in the long run.

SAM MORSEPortfolio Manager16 March 2021

STRATEGIC REPORT

RISK FRAMEWORKPrincipal 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 its strategic objectives.

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

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 of 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. Brexit has not impacted any tax treaties between the UK and EU member states. These treaties remain in force and where applicable provide tax benefits to the Company. It has, however, lost access to tax benefits under two EU member states domestic laws; one permanently, Italy, where the tax rate on dividends has moved from 1.2% to 15%; and the other one, France, which is believed to be a temporary basis, where the rate has moved from 0% to 15%. The situation in France is complex as it is dependent upon equivalence and court rulings and, at the time of writing, it is not clear if or when the Company may be able to benefit again from a 0% rate. In addition the Company has lost access to tax benefits under Norway’s domestic laws where the tax rate on dividends has moved from 0% to?15%.

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. The last continuation vote was at the Company’s AGM held on 13 May 2019 and 100% of shareholders voted in favour of the continuation. The next continuation vote will take place at this year’s AGM on 11 May 2021. The Directors recommend that shareholders vote in favour of the continuation of the Company as they intend to do in respect of their own shareholdings.

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 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 2020, with a NAV total return of 82.4%, a share price total return of 87.1% and a Benchmark Index total return of 66.7%. 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 portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary;

· The Board’s discount management policy;

· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets; and

· The Board’s assessment of the risks arising from COVID-19 as set out in the Principal Risks 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.

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 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 interest of these stakeholders is 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 Manager, 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 Manager to present to the shareholders on the Company’s performance and future plans and, in normal circumstances, the Board encourages all shareholders to attend, and raise questions and concerns. The Chairman and other Board members are available to meet shareholders as appropriate, and shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at the address provided in the Annual Report or via the Company Secretary in writing at the same address or by email at investmenttrusts@fil.com. The Portfolio Manager meets 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 below.

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 Sir Ivan Rogers to the Board with effect from 1 January 2020;

· the decision to pay an interim dividend of 2.60 pence per share and a final dividend of 3.90 pence per share, to maintain the Board’s policy to pay progressive dividends in normal circumstances; and

· 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.

ESG IN THE INVESTMENT PROCESS

Fidelity has embedded Environmental, Social and Governance (“ESG”) factors in its investment decision making process. Fidelity has been a signatory to the United Nations Principles for Responsible Investment (UNPRI) since 2012 and submits an annual report detailing how it incorporates ESG into its investment analysis.

ESG integration at Fidelity International is carried out at the fundamental research analyst level within its investment teams, primarily through the implementation of the Fidelity Proprietary Sustainability Rating. This rating was established in 2019 and is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities, based on sector specific key performance indicators across 99 individual and unique sub-sectors. A breakdown of the ratings of the companies in the portfolio using MSCI and Fidelity’s own proprietary ratings is in the Annual Report. In addition, Fidelity’s portfolio managers are also active in analysing the effects of ESG factors when making investment decisions.

Fidelity’s approach to integrating ESG factors into its investment analysis includes the following activities:

· In-depth research

· Company engagement

· Active ownership

· Collaboration within the investment industry

Although Fidelity’s analysts have overall responsibility for analysing the environmental, social and governance performance of the companies in which it invests, it has a dedicated Sustainable Investing Team working closely with the investment teams and is responsible for consolidating Fidelity’s approach to stewardship, engagement, ESG integration and the exercise of its votes at general meetings.

The Sustainable Investing Team have a key role in assisting the investment teams with ESG integration which includes:

· Implementing Fidelity’s proxy voting guidelines.

· Engagement with investee companies on ESG issues including attending company meetings.

· Working closely with the investment team globally across all asset classes in integrating ESG into analysis and decision-making.

· Providing internal ESG reporting including analyst reports, portfolio manager reviews and industry analysis.

· Co-ordinating and responding to specific client queries on ESG topics.

· Publishing client reporting on ESG integration and proxy voting.

· Maintaining a thorough understanding of current ESG themes and trends around the world.

· Attending external seminars and conferences focusing on trending ESG issues and ESG integration.

· Providing ESG training to the investment team and across the business.

Fidelity’s investment approach involves bottom-up research. As well as studying financial results, the portfolio managers and analysts carry out additional qualitative analysis of potential investments. They examine the business, customers and suppliers and may often visit the companies in person to develop a view of every company in which Fidelity invests and ESG factors are embedded in this research process.

Examples of ESG factors that Fidelity’s investment teams may consider as part of its company and industry analysis include:

· Corporate governance (e.g. Board structure, executive remuneration)

· 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 record, cyber security breaches)

· Supply chain management (e.g. increase in fatalities, lost time injury rates, labour relations)

· Work practices (e.g. observation of health, safety and human rights provisions and compliance with the provisions of the Modern Slavery Act)

Fidelity operates analyst training and development programmes which include modules on ESG themes, topics and strategies and attendance at external seminars on the trending ESG issues in the market globally as well as conferences to explore new ways of integrating ESG into the investment process across all asset classes.

Fidelity uses a number of external research sources around the world that provide ESG-themed reports and it subscribes to an external ESG research provider and rating agency to supplement its organic analysis. Fidelity receives reports that include company specific and industry specific research as well as ad hoc thematic research looking at particular topics. The ESG ratings are industry specific and are calculated relative to industry peers and Fidelity uses these ratings in conjunction with its wider analysis. Fidelity’s sources of ESG research are reviewed on a regular basis.

The ESG ratings and associated company reports are included on Fidelity’s centralised research management system. This is an integrated desktop database, so that each analyst has a first-hand view of how each company under their coverage is rated according to ESG factors. In addition, ESG ratings are included in the analyst research notes which are published internally and form part of the investment decision. The external research vendor also provides controversy alerts which include information on companies within its coverage which have been identified to have been involved in a high-risk controversy that may have a material impact on the company’s business or its reputation.

GOING CONCERN STATEMENTThe 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 (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt the going concern basis for 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 risks arising from COVID-19 as set out in the Pandemic Risk in the Strategic Report above. The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

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 period. Under that law they have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice, including FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the reporting period.

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

· select suitable accounting policies and then apply them consistently;

· make judgements and estimates that are reasonable and prudent;

· state whether applicable UK Accounting Standards 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 ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that 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 have delegated responsibility 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 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 that to the best of their knowledge:

· The Financial Statements, prepared in accordance with FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

· The Annual 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 it faces.

The Directors consider that 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.

Approved by the Board on 16 March 2021 and signed on its behalf by:

VIVIAN BAZALGETTEChairman

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2020

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 2020

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

BALANCE SHEET AS AT 31 DECEMBER 2020 COMPANY NUMBER 2638812

The Financial Statements on above and below were approved by the Board of Directors on 16 March 2021 and were signed on its behalf by:

VIVIAN BAZALGETTEChairman

The Notes on 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 October 2019. 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 for 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.

The Company’s Going Concern Statement above takes account of all events and conditions up to 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, collateral, bank deposits and money market funds are accounted for on an accruals basis and credited to the revenue column of the Income Statement.

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 comprise interest paid on bank deposits, collateral and CFDs, which are accounted for on an accruals basis, and dividends paid on short CFDs, which are accounted for on the date on which the obligation to incur the cost is established, normally the ex-dividend date. 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) 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.

p) Cash and cash equivalents – Cash and cash equivalents may comprise cash 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.

q) Capital reserve – The 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; and

· Dividends receivable which are capital in nature.

As a result of technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, 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.

3 INCOME

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

No special dividends have been recognised in capital during the reporting year (2019: £nil).

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.

FII charges investment management fees 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 year, the Company has 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% (2019: 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 £9,611,000 (2019: £7,599,000), in respect of excess expenses of £45,081,000 (2019: £39,197,000) and excess loan interest of £5,505,000 (2019: £5,505,000), has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

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 2020 of 3.90 pence per ordinary share which is subject to approval by shareholders at the Annual General Meeting on 11 May 2021 and has not been included as a liability in these Financial Statements. The dividend will be paid on 18 May 2021 to shareholders on the register at the close of business on 26 March 2021 (ex-dividend date 25 March 2021).

10 INVESTMENTS

The Company received £172,919,000 (2019: £141,886,000) from investments sold in the year. The book cost of these investments when they were purchased was £146,848,000 (2019: £95,639,000). 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 transactions 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 15.9% (2019: 12.7%). 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 £nil (2019: £1,578,000).

15 CAPITAL AND RESERVES

The capital reserve balance at 31 December 2020 includes investment holding gains on investments of £416,390,000 (2019: gains of £352,797,000) 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

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, performance, key person, economic and political, economic, social and governance (ESG), discount control, gearing and derivatives, operational risk from cybercrime and pandemic risks. 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 in the Strategic Report 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 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:

Due to negative interest rates during the year, the Company has received interest on its long CFDs and paid interest on its short CFDs and Euro amounts held as cash.

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 £4,420,000 cash at bank and £2,650,000 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 £9,444,000 cash at bank and £46,000 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 Manager is 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 2020, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £403,000 (2019: £457,000) and creditors of £955,000 (2019: £912,000).

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 2020, £2,170,000 (2019: £16,660,000) 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 £1,680,000 (2019: £nil), UBS AG £490,000 (2019: £nil), HSBC Bank Plc £nil (2019: £9,730,000) and Goldman Sachs International Ltd £nil (2019: £6,930,000). £5,977,000 (2019: £2,029,000), 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 £5,537,000 (2019: £2,029,000) and Morgan Stanley & Co International plc £440,000 (2019: £nil).

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 instruments 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 Manager believes 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 2020, an increase of 0.25% in interest rates throughout the year, with all other variables held constant, would have decreased the net return on ordinary activities after taxation for the year and decreased the net assets of the Company by £178,000 (2019: decreased the net return and decreased the net assets by £78,000). 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 the Balance Sheet date, 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 £120,066,000 (2019: increased the net return and increased the net assets by £110,870,000). 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 2020, 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 £13,579,000 (2019: increased the net return and increased the net assets by £8,495,000). 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 Note 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 in the Strategic Report 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/net asset 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/net asset 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 £8,899,000 (2019: £8,476,000) were payable to FII. At the Balance Sheet date, fees for portfolio management services of £806,000 (2019: £752,000) 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 £140,000 (2019: £189,000). At the Balance Sheet date, marketing services of £6,000 (2019: £7,000) 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, £17,000 (2019: £15,000) of Employers’ National Insurance Contributions was also paid by the Company. As at 31 December 2020, Directors’ fees of £14,000 (2019: £14,000) were accrued and payable.

ALTERNATIVE PERFORMANCE MEASURES

TOTAL RETURNTotal return is considered to be an Alternative Performance Measure. NAV 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 share prices of the Company, the impact of the dividend reinvestments and the total returns for the years ended 31 December 2020 and 31 December 2019.

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.

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

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 December 2020 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 2019 and 2020 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 2019 is derived from the statutory accounts for 2019 which have been delivered to the Registrar of Companies. The 2020 Financial Statements will be filed with the Registrar of Companies in due course.

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.fidelityinvestmenttrusts.com 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