Hend.eur.focus Regulatory News (HEFT)

HENDERSON EUROPEAN FOCUS TRUST PLC

Annual Financial Report for the year ended 30 September 2022

This announcement constitutes regulated information.

Investment objective

The Company seeks to maximise total return (a combination of income and capital growth) from a portfolio of stocks listed in Europe.

· Net asset value1 per share total return was -13.1% (2021: +22.6%), slightly behind the benchmark2 figure of ‑12.8 (2021: +22.0%).

· Share price total return3 was -18.3% (2021: +28.8%).

· The Company's NAV total return was ahead of its peer group averages: the AIC Europe sector4 was ‑19.3% and the IA OEIC Europe ex-UK sector was -16.0%5.

· Total dividend increase of 31.4% from prior year: proposed final dividend of 3.15p per share (2021: 2.35p), making a total dividend of 4.35p per share (2021: 3.31p).

· Special dividend of 0.50p per share (2021: no special dividend).

· NAV and share price outperformance of the benchmark index over 3, 5, 7 and 10 years.

· The shares were trading at a discount to NAV of 14.0% (2021: 8.3%) at 30 September 2022.

· Long-term structural debt secured during the year at 1.57% blended interest rate.

· The share price at 6 December 2022 was 149p, which is 17.3% higher than at the year end, reflecting a recovery in the value of the underlying investments and narrower discount at 10.4%.

Financial highlights

1. Net asset value ("NAV") per ordinary share (including dividends reinvested and excluding costs of reinvestment) and calculated with debt at par

2. FTSE World Europe ex UK index in sterling terms

3. Share price using mid-market closing prices

4. Simple average NAV for the AIC Europe sector which comprised seven investment trusts during the year

5. Investment Association Europe ex UK sector for open-ended investment companies ("OEICs"), which comprised 146 funds during the year

NOTE: Comparative figures for 2021 have been restated above where relevant due to the subdivision of each ordinary share of 50p into 10 ordinary shares of 5p each on 7 February 2022

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

CHAIR'S STATEMENT

War in Europe, an acute energy and cost of living crisis, and lingering Covid-related supply chain disruptions have conspired to stoke the fierce inflationary forces we see today, constituting some of the most difficult operating - and therefore investing - conditions in a generation. The European Central Bank, having sought to protect against the worst of the Covid crisis, has been slow to react with tighter monetary policy but is now doing so, with both higher interest rates and the end of quantitative easing. Unlike a year ago, there is no longer talk of whether inflation is transient or structural - markets are now trying to assess how long it will take to get inflation under control, the length and severity of ensuing recessions, how long it will take to get back to long-term 'core' targets, and indeed whether these are even still relevant.

In addition to the macro headwinds, rising bond yields have prompted a fundamental reappraisal of valuations hitherto favouring rapidly growing companies. The style rotation we have seen in the leadership of our markets in the last twelve months has been extreme: from 'growth' stocks in the latter part of 2021, to 'value' stocks in the first half of calendar 2022, through to those with a 'quality bias' now that recessionary fears are rising. Throughout this very tricky time, your Fund Managers have remained true to their investment principles and valuation consciousness. The Company's significant and well-timed exposure to cheap, highly cash-generative European oil companies at 15% of total assets is tangible evidence of these beliefs. Further, it offers a good example of how the Company practises a form of 'inclusive' ESG: one which appears to be gaining more traction in the wake of Russia's invasion of Ukraine and the vulnerabilities it exposed in Western society. You will find further detail on the Company's responsible investing philosophy in the Annual Report.

The Fund Managers' commentary explains their belief in cycles, be it the sector-level variety or the era of cheap financing, the latter of which appears to have finally, and rather aggressively, turned. In this environment, sizeable losses have been inflicted across almost all assets and asset classes, particularly those whose valuations soared - or in many cases defied gravity - courtesy of the 'free money' regime.

It will not come as a surprise that our results are down in this reporting period and that our shares have given back some of the excellent performance we reported last year. Whilst the headline NAV performance is broadly in line with the index, the much more disappointing fact to report is that our share price has fallen further as the discount at which the shares trade has widened out substantially, along with the average for our investment company sector as a whole.

Performance[1]

In the financial year to 30 September 2022, the Company's net asset value ("NAV") total return per share fell by 13.1% (2021: +22.6%), a very minor underperformance of the Company's benchmark index, the FTSE World Europe ex UK Index, which provided a total return of -12.8% (2021: +22.0%). The share price ended the period at 127p. Including the re-investment of the interim dividend, this gave a total return to shareholders of -18.3%, at the end of September 2022 (2021: +28.8%) as the discount at which the shares traded relative to NAV widened.

The Company's long-term track record remains strong, with its NAV outperforming the benchmark over three, five, seven and ten years. (Over a ten-year period, the share price total return from the Company has produced an annualised return of 10.7%.) Our results compare favourably with our competitors, be they in the investment trust or the Investment Association OEIC (open-ended funds) sector. The average NAV total return of the AIC Europe investment company sector (comprising seven companies) was -19.3% in the year under review, and the OEIC Europe ex-UK sector average (comprising 146 funds) was -16.0% for the same period.

The closing share price at 6 December 2022 was 149p, which is 17.3% higher than at the year end. This reflects both a recovery in the value of the underlying investments as well as a narrowing of the discount to 10.4% (from 14.0% year end).

Dividends

Income generation from the portfolio remains robust, largely as a result of the types of companies in which we invest. However this year dividend receipts have also been bolstered on translation by weak sterling, as well as a release of a tax provision no longer required, which we are including in a special dividend.

The Board is, therefore, pleased to recommend an increased final dividend for the year of 3.15p per share (2021: 2.35p) which, subject to shareholder approval at the Annual General Meeting ("AGM"), will be paid on 6 February 2023 to shareholders on the register at 6 January 2023. When added to the interim payment of 1.20p (2021: 0.96p) this brings the full-year dividend to 4.35p per share, a 31.4% increase from the 2021 full-year distribution of 3.31p per share. With the year-end share price at 127p, this represents a yield of 3.4% on the interim and final dividend.

The Board is also recommending a special dividend of 0.50p per share for the year, payable on 6 February 2023 to shareholders on the register at 6 January 2023, subject to approval at the AGM.

Structural gearing

As mentioned in the half-year report, we took on structural debt at the start of this year with a placement of EUR 35 million of loan notes, in two tranches of 25 and 30 years duration. Using structural debt to enhance returns for shareholders is a key advantage of the investment trust structure. Locking in a weighted average interest rate of 1.57%, this financing provides extremely attractive long-term debt to be deployed for many years to come (we estimate that were we to try to raise similar funding today, we would be paying at least 3.5%).

For the purpose of daily NAV calculations and performance reporting, the NAV is calculated including debt at par value. We have shown the impact on our NAV of estimating debt at fair value in note 15.4 on page 71 and will show this semi-annually.

At the time we took on the debt, it was the equivalent of 8.0% of our net asset value; at the year end it was 9.7%. In addition to our structural debt, we also have access to flexible borrowings, but gearing will never exceed the limits imposed in our investment policy of 20% of net assets. Whilst in the recent past our net gearing levels have been lower to reflect the extreme uncertainties and heightened volatility in markets, our Fund Managers are of the view that the investment opportunities available are meaningful and that we might expect the Company to have higher gearing in the coming year if and when these opportunities are taken. However, the flexibility of the gearing remains important, consistent with our Manager's approach in the past.

Share rating and subdivision

Along with other investment companies, we are experiencing wide fluctuations in the discounts at which our shares trade relative to NAV, starting the year at 8.3%, reaching a high of 16.8% and low of 5.7% and ending the year at 14.0%. This was a very similar story across the investment trust universe: the geopolitical and macro factors referred to earlier result in uncertainty and market volatility, undermining investor confidence and the pricing level at which shares trade.

During the year, the Company bought back 912,658 shares (2021: none) to be held in treasury, at an aggregate cost including expenses of £1,324,000, representing 0.4% of the issued capital of the Company at the start of the year. Whilst this small amount is only marginally enhancing to NAV, the buyback should act as a sign that your Board is willing to be active in the market whilst mindful not to shrink assets needlessly. In our view, share repurchase (and issuance) remain vital structural tools in the closed-ended sector, both in helping manage the supply and demand for shares and pricing, and as deployment of capital.

Since the year end, 145,000 further shares have been bought back, leaving a total of 1.7% of the Company's shares in treasury.

At last year's AGM, shareholders approved the subdivision of each of our 50p ordinary shares into 10 ordinary shares of 5p each to assist the liquidity of the shares in the secondary market and to help saving schemes with dividend and share saving investment. The share split took effect on 7 February 2022 and prior year figures reported in the Annual Report have been adjusted for the share split. Whilst we believe the share split will, over the longer term, aid liquidity, we also hope that it will allow every shareholder with a dividend reinvestment plan to participate more fully in the long-term growth of the Company.

Board changes

As reported in our half-year results announcement, we now have a Board of five members, with the recruitment of Marco Bianconi who joined on 1 June 2022. Mr Bianconi brings both a Continental European perspective, and direct and relevant investment experience, gained from within the investment industry and from a range of senior roles with public companies in Italy. Mr Bianconi, apart from introducing diversity of experience to the Board, also brings his experience as a chartered accountant.

Our Audit and Risk Committee Chair Eliza Dungworth has indicated that at some stage later during 2023 she will step down from the Board as she is now resident in Luxembourg. The Board has factored this into its succession planning.

Governance, shareholder engagement and Annual General Meeting ("AGM")

We are pleased to invite shareholders to attend the AGM in person at our registered office on Thursday, 26 January 2023 at 2.30 pm. This is an opportunity to meet the Fund Managers, Tom O'Hara and John Bennett, and the Board. For any shareholders unable to travel, we will also be welcoming you to join by conferencing software Zoom. As is our normal practice, there will be live voting for those physically present at the AGM.

We are not able to offer live voting by Zoom, and we therefore encourage all shareholders, and particularly those who cannot attend physically, to submit their votes on the resolutions, all of which come with the Board's endorsement, ahead of the deadline of 24 January 2023, to ensure that their vote counts at the AGM.

If you have questions for either the Board or the Fund Management team in advance of the AGM - or at any time of the year - please get in touch (contact details can be found in the Annual Report). You can use our website at www.hendersoneuropeanfocus.com which has regular updates, and subscribe for regular information using the sign-up function. We are keen to have as much direct contact as we can from our investors, including those who hold their shares through platform nominees, and efforts will be made to reach out to our private investors in coming months.

Outlook

While there are many sources for concern for investors, our Fund Managers make a strong case for a European equity market that has to a large extent already priced in a 'normal' recession. In the near term there could well be further tumult, not least as central banks test the resilience of the global financial system by reversing over a decade of loose monetary experimentation. But, on any longer-term horizon - for which the closed-end structure is designed - Europe now abounds with opportunities to invest in quality, cash-generative companies, which are able to pass through the scourge of inflation.

Most importantly, if as we think, the price of money does warrant a return to valuations based on realism rather than euphoria, then these investment opportunities come at attractive valuations. Such conditions are well suited to the valuation-conscious, bottom-up stock-picking philosophy of our Fund Managers.

Vicky Hastings

Chair of the Board

FUND MANAGERS' REPORT

It is an often-humbling activity to review the prior year's report before sharing our latest thoughts with shareholders. Inevitably, certain assertions do not come to pass. The investment landscape does not always develop in the way one, cautiously, argues that it might. Often, it has been our futile lament of the growth style's dangerous dominance in equity investment; that is, the tendency over the last few years for all things technology, unprofitable and 'disruptive' to bulldoze through valuation levels that already made little sense to us. The market saw heroes where we saw literal zeroes. Other times it has been the bemusement at perfectly good companies bestowed with the hallowed 'bond-proxy' label, as the market sought a narrative to justify ever-higher multiples. That bemusement has not always been benign, not when it has ultimately forced our hand. Could a style-agnostic, pragmatic, valuation-conscious team of European stock-pickers really own no shares at all in benchmark titans like Nestlé and ASML, solely on the basis of valuation? That would be exactly the kind of dogmatic investment approach that we eschew. The pause for reflection then, before once again putting pen to paper, serves to remind us: never dig in.

Inflation is real

This time around we can claim some consistency between what we said last year and what we see today. Inflation has proven to be more durable, as we suspected it might, bringing with it a central bank retreat from the monetary largesse of the past decade. Accordingly, being valuation conscious has served us well relative to a predominantly 'growthy' peer group. We believe this should continue to be the case. However, we could not have foreseen the contribution to inflation from Russia's invasion of Ukraine, nor the aggression with which central banks would then proceed to tighten financials conditions once they finally conceded and retired the 'transitory' trope. The global financial system has been forced to go 'cold turkey' in monetary rehab, by the very institutions that spent half a generation enabling our growing addiction to cheap money. This combination of factors - representing an unprecedented squeeze on household finances through higher energy, food and finance costs - has largely put paid to the 'consumer V-shape' thesis we detailed last year.

People simply will not have the means to let loose in the way we all hoped we would after our long period of enforced confinement. Pandora, one of our case studies last year, is no longer held and indeed was a top ten detractor for us. Hugo Boss, on the other hand, retains its place in the Company courtesy of the strength of stock specific idiosyncrasies.

Holcim cements its place

Conversely, our detractor case study last year, Holcim, was this year a top ten contributor. This is especially noteworthy in a market which has been all too eager to abandon cyclical exposure, more so that which comes with a European flavour. Indeed, we believe the more macro-sensitive areas of the European equity market are now priced with such pessimism that they represent tremendous value for the long-term investor. But more on that later. Strand 5 of our Investment DNA (detailed in the 2020 Annual Report) is 'give yourself time'. Holcim has duly begun to reward our patience thanks to a combination of: 1) first-class execution from a management team whose competence we spotted almost five years ago, and 2) what appears to be the de-emphasis of a form of simplistic, dogmatic ESG which cancels carbon emitters from equity portfolios simply on the basis that they emit. Such an approach has given scant regard to a carbon-intensive company's role in supporting an orderly energy transition, nor its economic, social and strategic importance to our Western way of life. Cement and associated building materials are going to continue to be very important in society, for a long time to come. Many companies, such as Holcim, are making significant strides in decarbonising their activities, which delivers a tangible positive for society. We think, or hope, that the penny may have finally dropped.

A responsible reckoning

Most worryingly of all perhaps, 'ESG by exclusion' appears to have neglected a primary duty of active management: portfolio construction. As our Chair notes in her report, the losses inflicted in both bond and equity markets have been severe and highly correlated, such has been the dependence of almost all asset valuations on the continuation of a historically loose and unconventional monetary policy regime. Many ESG-labelled funds have faced a similar performance fate because, in essence, they were 'growth' funds with a trendy label. We are not so sure investors were fully aware that such a rate-sensitive risk profile was inherent in their investments. There is also the issue of 'greenwashing' - given the regulator's interest in the activities of many of these funds that purport to be 'doing good', we expect this to change. 2022 is therefore likely to prove a pivotal year in the development of responsible investing. We welcome this.

It does not feel excessive to suggest that the war has jolted us all out of this fallacy, whether it is the practitioners who are frantically re-writing their investment policies to allow ownership of oil companies on the basis that they are critical energy enablers (the market-leading share price performance of these stocks in 2022 is surely mere coincidence…), or those passively endorsing the movement because that was simply the way the industry was heading. Asset management is often a fashion industry; growth investing and ESG investing were the future. We take the view that they are now the past, at least in their current guise. Strand 4 of our Investment DNA is 'believe in cycles'. The cycle that enabled the investing fashions and the many excesses of the last decade - the price of money - has turned.

The era of energy insecurity

We believe there is another profound cycle underway, this one within the oil and gas industry. A lack of upstream investment in oil and gas extraction - for which ESG damnation of these businesses is partially responsible - has tightened the market. OPEC is firmly back in control and its leader, Saudi Arabia, appears committed to protecting a price of $90 per barrel. The European-listed oil companies we hold in size (14.7% of assets at the year end) - Shell, TotalEnergies, BP and the smaller Aker BP - are exceptionally cheap on 15-20% free cash flow yields. This provides us with a significant valuation margin for error, all the more important when the price of money has increased. Of course, this is a sector with a reputation for profligacy. And deservedly so. You don't have to go back too far in history to find evidence of value-destructive behaviour through misallocations of capital. So, what has changed this time? Through our meetings with the management teams of each of our investee companies, there is a resounding consistency: unwavering capital discipline. Those prodigious free cash flows are largely being delivered directly to shareholders through dividends and buybacks.

The risk of material windfall taxes is limited in our view, as these are globally diversified businesses across many tax jurisdictions. They have little appetite to grow upstream volumes when the stock market doesn't reward it and when government, media and various climate movements vilify them for doing so. Change is often borne of pain and here we see a strong parallel with the listed mining sector's transformation over the last six years: near-death experiences, equity raises and dividend cancellations were followed by a period of rapid deleveraging and generous returns to shareholders, a new-found capital discipline that persists even to this day. A cursory glance at the share price chart of any major mining company is sufficient to see just how lucrative that journey has been for shareholders since 2016. Likewise, from the dark days of negative oil prices in 2020 and widespread public condemnation, we believe a new, more disciplined listed oil sector emerges, one which incidentally nurtures globally significant renewable energy portfolios. It is interesting to note that since 2000 the oil sector peaked at almost 14% of the global equity market in 2008, then troughed at 2.5% in 2020. It is currently back to only 5%. As a result of both the monetary cycle and the oil sector cycle, we believe we are in the midst of a multi-year rehabilitation of oil majors within global equity portfolios.

Performance

The NAV total return declined by 13.1%, 0.3 percentage points behind the benchmark index. The strong 3, 5, 7 and 10 year track record of outperformance remains firmly intact. Our biggest 'winners' were Orron Energy (formerly Lundin Energy, with the oil and gas assets now trading as Aker BP, a case study in last year's report), which, along with our other large energy exposures in Shell, BP and TotalEnergies, drove a sector contribution of nearly 2%. ASR Nederland (insurance) and UPM-Kymmene (pulp, paper and increasingly biofuels) rounded out the top three with high double digit basis point contributions, both due to strong execution from their management teams. At the other end of the table our biggest detractor was Nokian Renkaat, an unfortunate casualty of Russia's abrupt economic isolation from the West as 80% of its tyre production capacity resided within the country. Spanish healthcare company Grifols and German chemical and pharmaceutical conglomerate, Bayer, round out the bottom three. We retain a smaller position in Grifols, while Bayer has since exited the portfolio.

Outlook

There are more reasons than ever to dismiss Europe as a region worthy of equity investment. And dismissed it is. We have never known it to be more disliked than it is now, which is quite a feat. The constraints to doing business we have referenced since the onset of Covid are now even more acute due to Russian aggression next door. Consumers face a tougher set of disposable income choices than they have for decades, with the further possibility of winter blackouts leaving households without heat and power and our industrial complex compromised.

Added to this, we cannot rule out the potential for an accident in a financial system increasingly under stress due to: 1) the speed of retreat from the free money era, and 2) the multiples of debt now in existence compared to the last time interest rates reached these levels. The tantrum caused in UK gilts and sterling by the fiscal ill-discipline of the uniquely short-lived Truss premiership, may well just be a dress rehearsal for something bigger on other shores. It goes without saying that such an event would be bad news for most assets in the short term.

However, we do not build a portfolio based on tail risks or disaster scenarios. More broadly, we never build a portfolio that requires a specific macroeconomic outcome, hence the begrudging acceptance of "bond-proxy" stocks within the Company during periods when the onslaught of monetary extravagance - and its upward pressure on valuations - felt too great to fully resist. We build a portfolio on what we regard as strong stocks, selected for their positioning and prospects.

And so, taking a dispassionate view of what is in front of us today, while acknowledging the many short-term tangible and tail risks, we can only conclude one thing: Europe is too cheap. Not all of it, of course, certainly not many of the darlings of the low interest rate paradigm, where investors appear to be in denial as to just how seismic the shift in the valuation regime really is. Muscle memory exerts strong influence in markets and we expect many investors to keep returning to the familiarity of what made them warm and cosy before. Eventually they will learn new behaviours. Where we see opportunity is in the sectors so brutally jettisoned that they already price in a 'normal' recession and worse in some cases: quality, cash generative champions across energy, materials and industrials, with strong management teams and, most importantly, pricing power. This latter point is critical for us since we continue to believe inflation will settle at structurally higher rates than pre-Covid, driven by socio-political and geo-political factors; labour will command a bigger share of the economic pie as the Western world 'onshores' critical aspects of industrial supply chains, energy included.

As such, we have been adding, carefully, to the existing names within the portfolio which possess those attributes. These are companies whose idiosyncrasies we already endorse and therefore have greater conviction that the blanket approach to macro-sensitivity with which the market has punished them, is unwarranted. Arkema, Holcim and Atlas Copco are good examples.

Strand 3 of our Investment DNA is 'believe in change'. We believe we are seeing profound change: in inflation, in the price of money, in the energy complex and ultimately in asset valuation. Europe is not easy to love, but it is not broken. And it is now exceptionally cheap in pockets. The investment trust structure offers shareholders the perfect vehicle to look through the short-term tumult, to the medium-term value that is increasingly on offer. As your Fund Managers, it is our duty to be resolutely focused on that opportunity, regardless of how tempting it is to become intoxicated by the bleakness of current public discourse.

Tom O'Hara and John Bennett

Fund Managers

MANAGING OUR RISKS

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company, including those which would threaten its business model, future performance, solvency, liquidity in its shares and reputation. The assessment includes consideration of economic and political risks, most of which are outside the Board's direct control. The Board has drawn up a detailed matrix of risks facing the Company, together with a strategic heat map charting the top ten risks, which it has distilled into six categories of principal risks, as shown in the Annual Report. To assist in mitigating the decision-taking risks as far as practicable, it has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, which it reviews at each board meeting.

The Board considers closely changes to the risk profile of the Company, arising from both internal and external triggers, and examines emerging risks as part of its regular review of the Company's risk profile, including the assumption of structural debt in the last year. The Board defines emerging risks as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. Once the emerging risks become sufficiently clear, they may be treated as specific risks and enter the Company's matrix of risks.

The Board receives regular and detailed reporting on specific and emerging risks from the Manager and other service providers. In addition, the Board receives reports on specialist topics from professional advisers, including lawyers and tax agents. These reports, as well as the directors' own experience, enable effective monitoring of the risk landscape and changes to it. The Board encourages a culture of anticipating and scanning for direct and indirect market events and constructive challenge to identify and manage risk, where it can, including external risks which need a rapid response. The Board does not consider the principal risks to have changed during the course of the reporting period and up to the date of this report, although the impact of certain external risks, such as interest rates and inflation, have heightened.

Throughout the year the Board has considered the impact of macroeconomic events on the Company, notably Covid-19 and the broader ramifications of the Russian invasion of Ukraine. The Board has concluded that the portfolio, investment approach and operational requirements of the Company have, to date, proven resilient and the investment approach remains unchanged. The Board has also considered emerging risks, with specific reference to inflation, supply pressures and interest rate rises, as referred to in the Chair's Statement.

Principal risks

The Company's principal risks and mitigating steps are as follows:

· Market

Risk

The Company's absolute performance in terms of net asset value total return and share price total return is dependent on the performance of the companies and markets in which it invests and is also impacted by currency and interest rate movements, as well as by political and economic events.

Controls and mitigation

Investment risk is spread by holding a diversified portfolio of companies, typically with strong balance sheets and good growth prospects. The Company does not currently embark on any currency or market movement hedging strategies, though it has the ability to do so.

The Company's investment strategy is reviewed formally by the Board at least annually, and takes into account shareholder views, developments in the marketplace and how the structure of the Company is positioned to meet them.

· Investment performance

Risk

The relative performance of the Company against its benchmark and European open and closed-ended peers depends principally on asset allocation and stock selection, which, in turn, require investment skills. In exercising these skills, the Manager is responsible for adhering to the investment policy and investment guideline restrictions set by the Board and amended from time to time.

Controls and mitigation

The Board is responsible for ensuring that the investment policy is met. The day-to-day management of the Company's assets is delegated to the Manager under investment guidelines, with close monitoring of the guidelines. The Board meets the Manager on a regular basis and keeps investment performance, in terms of both capital and income returns, under close review, and the Management Engagement Committee reviews the Manager's performance annually. Although the Company is not invested against any income criteria, the net income of the Company and the revenue reserves are monitored against dividend pay-outs and anticipated future net income.

Investment performance is monitored over the short, medium and longer term against the Company's benchmark and against a wider peer group of open and closed-ended investment vehicles investing in listed European equities. The Board also reviews the performance attribution analysis against benchmark in detail, to understand the main drivers of performance in reporting periods.

The Fund Managers keep the global political and economic picture under review as part of the investment process and provide the Board with frequent updates to enable the directors to monitor and manage risks of geopolitical disruption, such as those arising from the Ukraine conflict and increasing energy costs. Climate risk is assessed within the individual stock selection process and is reported further within quarterly Fund Manager board reports.

· Business strategy and market rating

Risk

A number of factors, including the setting of an appropriate investment proposition, changing investor demand or investment performance may lead to an increase or decrease in demand for and/or supply of the Company's shares and will impact how the shares are priced in relation to the Company's underlying net asset value per share.

Controls and mitigation

The Board monitors the Company's ordinary share price relative to net asset value per share and reviews changes in shareholdings in the Company to understand short or longer-term trends in demand for and supply of the shares. The Company is able, when appropriate, to issue or to buy back shares in order to help maintain an orderly secondary market in the Company's shares, but not against any prescribed discount or premium levels, other than avoiding dilution to existing shareholders' interests through share issuance at a discount. The Board also monitors the rating of the Company's shares against other closed-ended investment companies in the sector and continues to deploy tools at its disposal in shareholders' best interests.

The Company is 'evergreen' and does not have a liquidity event, such as periodic tenders or continuation votes. The liquidity of the portfolio is monitored and is considered sufficient for the purposes of a closed-ended fund, including instances whereby the Company buys back its own shares.

Gearing

Risk

The Fund Managers have authority to use gearing in line with the Company's investment policy. In the event of a significant or prolonged fall in equity markets any gearing in place would exacerbate the effect of the falling market on the Company's net asset value and, consequently, its share price. Gearing would have the opposite effect in the event of a significant or prolonged rise in equity markets in which the Company is invested.

Controls and mitigation

The Company's investment policy sets a limit on borrowing of 20% of net assets at the time the borrowing is assumed, and the Board monitors the level of gearing at each meeting.

Operational

Risk

The Company is reliant on third-party service providers for all its operational activities, including reliance on Janus Henderson as investment manager, corporate secretary and administrator to the Company.

The Company depends on the diligence, skill and judgement of the Manager's investment team. Continuity of service of the team and individuals in the team could impact the future success of the Company.

Failure of third parties' operational or internal control systems could prevent the accurate reporting or monitoring of the Company's financial position. Janus Henderson subcontracts some of the operational functions (principally those relating to trade processing, investment administration and accounting) to BNP Paribas.

Failure of controls could also impact the Company meeting its regulatory obligations.

Controls and mitigation

The Management Engagement Committee reviews each service provider at least annually, and, in conjunction with the Audit and Risk Committee, considers reports on internal controls, including any reported breaches, throughout the year, from all the service providers. This reporting covers such matters as continuity planning and cyber security risk as well as matters that are subject to review as part of the annual audit of the Company.

Janus Henderson has a strong European Equities team, which supports the Fund Managers in the management of the Company's portfolio. Constructive challenge, succession and continuity planning are key elements of the management of the team and are reported on to the Board.

The Board reviews the internal control structure and reporting for the Company from all its agents and meets with their representatives throughout the year to make enquiry on the systems and controls.

The risk of failure of the Manager to manage financial or administrative controls, due to the increased possibility of cyber attacks whilst many employees worked from home, was increased due to the Covid-19 pandemic. The directors report that there has been no change to the level of service provided by the Manager or the Company's other third-party suppliers and the pandemic has served to highlight the resilience and high quality of the services provided.

The Board considers climate risk in respect of operational capability in its review meetings with service providers.

· Regulatory and reporting

Risk

The Company operates in a highly regulated environment which could inter alia affect the listing of the Company's shares and the Company's tax status, as well as how the Company conducts its affairs in the market more generally. The Company also has strict reporting requirements that need to be adhered to both internally and externally to the market.

Controls and mitigation

The Board is apprised regularly of impending regulatory and reporting changes and monitors closely, through its various agents, the Company's adherence to existing requirements, including maintaining investment trust and listed company status.

The Board is also kept apprised of corporate governance guidance and, as far as practicable, adheres to corporate governance guidelines that are applicable to an investment company.

The Board is kept informed by the Manager and professional advisers of relevant regulatory and reporting changes arising as a result of geopolitical events.

Details of how the Board monitors the services provided by Janus Henderson and its other suppliers, and the key elements designed to provide effective internal control, are explained further in the Annual Report. Note 15 in the Annual Report contains further details on the Company's exposure to market risk (including market price risk, currency risk and interest rate risk), liquidity risk, credit risk and how they are managed.

THE COMPANY'S VIABILITY

The AIC Code of Corporate Governance includes a requirement for the Board to assess the future prospects for the Company, and to report on that assessment within the Annual Report. The Board considers that certain characteristics of the Company's business model and strategy are relevant to this assessment:

· the Board aims to ensure that the Company seeks to deliver long-term performance;

· the Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the Company is invested mainly in readily realisable, listed securities and that the level of borrowings is restricted; and

· the Company is a closed-ended investment company and therefore does not suffer from the liquidity issues arising from unexpected redemptions.

Also relevant were a number of aspects of the Company's operational agreements:

· the Company retains title to all assets held by the custodian under the terms of formal agreements with the custodian and depositary;

· revenue and expenditure forecasts are reviewed by the directors at each board meeting; and

cash is held with approved banks.

In addition, the directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's business model, including future performance, liquidity and solvency, and considered emerging risks that could have a future impact on the Company. The Board takes into account the liquidity of the portfolio, short-term and structural gearing, the income stream from the portfolio, and the Company's ability to meet its liabilities as they fall due. This includes consideration of how the forecast income stream, expenditure and levels of reserves could impact the Company's ability to pay dividends to shareholders over that period. Detailed income and expense forecasts are made over a shorter time frame.

However, the nature of the Company's business means that such forecasts are equally valid to be considered over the longer five-year period as a means of assessing whether the Company can continue in operation. The directors assess viability over five-year rolling periods, taking account of foreseeable severe but plausible scenarios including the recent pandemic and its economic consequences. This included consideration of the duration of the Company's loan and borrowing facilities and how a breach of any covenants could impact the Company's NAV and share price. While they assess theoretical threats, the Board believes that empirically the recent experience of the technology crisis, financial crisis, Eurozone debt crisis, Brexit, Covid-19 pandemic and the heightened macroeconomic uncertainty following Russia's invasion of Ukraine have not materially affected the long-term viability of the Company in any way. The Board considers that these crises will not have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding any short-term uncertainty they have caused in the markets.

In common with investment companies generally, the viability statement does not take into account corporate events which might be initiated by the Company or to which the Company might be subject, and where the Company's circumstances might be dramatically changed. An investment company has relatively liquid assets, compared to industrial or commercial companies, and can, therefore, be subject to major and unexpected strategic change. No such event or change is known or currently in contemplation by the Company. The directors believe that a rolling five-year period best balances the Company's long-term objective, its financial flexibility and scope with the difficulty in forecasting economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period to September 2027.

RELATED-PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with the directors and the Manager. There were no material transactions between the Company and its directors during the year other than amounts paid to them in respect of remuneration and expenses, for which there were no outstanding amounts payable at the year end. Directors' shareholdings in the Company are disclosed in the Annual Report.

In respect of the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there were no material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in note 23 in the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES UNDER DTR 4.1.12

Each director, as listed in note 14, confirms that, to the best of their knowledge:

· the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards comprising FRS 102 and applicable law) give a true and fair view of the assets, liabilities, financial position and return of the Company; and

· 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 that it faces.

On behalf of the Board

Vicky Hastings

Chair of the Board

PORTFOLIO INFORMATION

Top 10 investments at 30 September 2022

Income Statement

The total columns of this statement represent the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no recognised gains or losses other than those disclosed in the Income Statement.

* Comparative figures for the year ended 30 September 2021 have been restated due to the subdivision of each ordinary share of 50p into ten ordinary shares of 5p each on 7 February 2022.

Statement of Changes in Equity

Statement of Financial Position

* Comparative figures for the period ended 30 September 2021 have been restated due to the subdivision of each ordinary share of 50p into ten ordinary shares of 5p each on 7 February 2022.

Cash flow statement

* Cash inflow from dividends was £11,266,000 (2021: £8,182,000) and cash inflow from interest was £25,000 (2021: £nil).

NOTES TO THE FINANCIAL STATEMENTS

During the year 26,030 shares were bought back into treasury prior to the 10 for 1 share split and 652,358 (2021: nil) following the 10 for 1 share split, for total costs including expenses of £1,324,000 (2021: £nil). The ordinary shares held in treasury have no voting rights and are not entitled to dividends.

The Company does not have any dilutive securities; therefore, the basic and diluted returns per share are the same.

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