Last checked at 
9 Dec 2019 16:20
HENDERSON EUROPEAN FOCUS TRUST PLC
Annual Financial Report for the year ended 30 September 2019
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.
Performance
·; Net asset value1 ("NAV") per ordinary share total return was 4.3% (2018: 2.0%), above the AIC Europe sector average total return of 3.1%, but below the benchmark2 figure of 6.4% (2018: 2.0%)
·; Ordinary share price total return3 was 3.1% (2018: -8.6%)
·; NAV per ordinary share total return for the five years ended 30 September 2019 was 63.8%, ahead of the total return from the benchmark of 59.3%
·; 1.0% increase in proposed annual dividend: interim and final dividends of 9.60p and 21.70p per ordinary share respectively, making a total of 31.30p (2018: 31.00p)
·; The ordinary shares were trading at a discount to NAV of 10.5% (2018: 9.3%) as at 30 September 2019
Cumulative total return performance for the year to 30 September 2019 | ||||
| 1 year % | 3 years % | 5 years % | 10 years % |
NAV1 | 4.3 | 29.3 | 63.8 | 172.3 |
Benchmark2 | 6.4 | 33.1 | 59.3 | 114.6 |
Share price3 | 3.1 | 28.2 | 46.5 | 165.6 |
AIC Europe sector average4 | 3.1 | 34.0 | 69.8 | 177.4 |
Ranking in sector4 | 4 | 6 | 5 | 3 |
Financial highlights
| At 30 September 2019 | At 30 September 2018 |
Shareholders' funds |
|
|
Net assets attributable to ordinary shareholders (£'000) | 299,010 | 293,790 |
Net asset value per ordinary share | 1,390.86p | 1,366.57p |
Mid-market price per ordinary share | 1,245.00p | 1,240.00p |
|
|
|
| Year ended 30 September 2019 | Year ended 30 September 2018 |
Total return to equity shareholders |
|
|
Net revenue return (£'000) Net capital return/(loss) (£'000) | 5,767 | 6,789 (967) |
6,139 | ||
| ----------- | ----------- |
Net total return (£'000) | 11,906 | 5,822 |
| ====== | ====== |
Total return per ordinary share |
|
|
Revenue return | 26.83p | 31.60p |
Capital return/(loss) | 28.55p | (4.50p) |
| ----------- | ----------- |
| 55.38p | 27.10p |
| ====== | ====== |
Ongoing charge for year | 0.84% | 0.84% |
1. Net asset value ("NAV") per ordinary share total return (including dividends reinvested and excluding costs of reinvestment)
2. FTSE World Europe ex UK index on a total return basis in sterling terms
3. Share price total return using mid-market closing prices
4. The AIC Europe sector comprises eight trusts
Sources: Morningstar for the AIC, Janus Henderson, Refinitiv Datastream
CHAIRMAN'S STATEMENT
Performance
In the financial year to 30 September 2019, the Company's net asset value ("NAV") total return per ordinary share rose by 4.3% (2018: 2.0%), above the AIC Europe sector average total return of 3.1%, but below the benchmark total return of 6.4% (2018: 2.0%), in what has been a challenging year for equity markets. The share price total return per ordinary share over the period was 3.1% (2018: -8.6%). The discount to NAV ended the year at 10.5% compared with 9.3% at the end of the prior year. Over the longer term, the NAV total return per ordinary share for the five-year period to 30 September 2019 was 63.8% compared with 59.3% for the benchmark.
Dividends
The Board is recommending a final dividend of 21.7p per ordinary share which, subject to shareholder approval at the annual general meeting ("AGM"), will be paid on 7 February 2020. When added to the interim payment of 9.6p (2018: 9.5p) this brings the full year dividend to 31.3p, an increase of 1.0% over last year's distribution of 31.0p.
Whilst the Company is managed for total return rather than income per se, the Company is using some of its revenue reserve to pay this year's full dividend, ensuring that our long-term record of progressing the absolute dividend amount remains intact. Dipping into the reserve partly reflects the Fund Manager's decision to eliminate portfolio exposure to the European banking sector, which tends to be higher yielding. The Board and Manager are mindful of paying covered dividends but also that the benefit of having revenue reserves is to be able to use them where appropriate, rather than chasing yield in the portfolio to maintain dividends.
Proposed investment policy change
Your Fund Manager and Board are as one in believing that closed-ended funds should stay in the vanguard of active fund management, for both institutional and private investors' interests. As the Fund Manager's Report discusses, active management is under considerable pressure on a number of fronts. The closed-ended investment company structure lends itself well to the most potent of weapons in money management: the longer-term perspective, as well as the ability to use gearing to good effect and smooth income through use of reserves, all features which the Company applies. Unfettered by the vagaries and the fashion swings of subscriptions and redemptions that affect open-ended vehicles, an investment trust manager can take longer-term views on how a portfolio is constructed, and do so with some conviction.
Perhaps the strongest competitive force bearing down on active managers is the inexorable rise of "passive" investing. This has meant that most investors can now buy "the index" very inexpensively. However, your Fund Manager and Board believe that it is timely to remind investors - current and potential - that the Company is an investment trust which seeks to offer something different from "the index" - genuine active management and the scope for outperformance over the longer term.
As the name of the Company suggests, Henderson European Focus Trust plc offers a concentrated portfolio, currently of potentially up to 60 stocks. Your Board and Fund Manager believe that now is the time to focus that portfolio further.
Consequently, shareholders will be asked to approve amendments to the investment policy principally to reduce the portfolio range to between 35 and 45 stocks, down from its current range of 45 to 60 stocks. Shareholders will also be asked to approve an increase to the limit for stocks weighted at 5% or more of the portfolio from 40% to 50%. The proposed investment policy showing the changes to the existing investment policy is set out in full in the Annual Report and in the accompanying Notice of AGM.
We believe that these proposed changes give the management team ample scope to continue to demonstrate their stock-picking skills, and yet remain true to the discipline of a suitably diversified portfolio. Importantly, it also ensures that we offer our shareholders differentiation from mainstream European indices and passive investment management. It is our aim for the Company to remain at the forefront of genuinely active investment management.
The European environment has also been challenging, particularly post the 2008 banking crisis. As your Fund Manager points out regularly, despite the political and macro-economic uncertainties, Europe is home to some extremely attractive companies that are often world leaders in their product ranges. Their performance reflects the economic growth and general prosperity of world markets and not merely of European ones.
Your Company's longer-term performance remains very strong, particularly when compared to the large universe of European funds in the open-ended sector. Whilst our shorter-term performance is more lacklustre, we are confident of maintaining our long-term record into the future.
Apart from a longer-term perspective, the closed-ended structure also provides for selection of stocks with smaller market capitalisations. Your Company will aim to continue to deliver solid long-term alpha through stock selection and active management from a universe of well-researched European-listed companies of varying size and sector.
Board changes
The Board has been engaged in succession planning over the last few years, with the addition of new members increasing the diversity and skill base of the Board, and now the imminent retirement of three of our longer-serving members of the Board at the forthcoming AGM: Alain Dromer, Alec Comba, our senior independent director, and myself as Chairman.
We believe that we leave behind a strong Board and it gives me great pleasure to introduce the new Chairman, Robert Jeens, who has considerable experience in the closed-ended sector, in fund management more generally and of serving in senior positions on listed company boards. Robert will succeed me as Chairman of the Board from the conclusion of the AGM. His appointment as director takes immediate effect. I wish my colleagues who are continuing on the Board every success in what is the constant challenge for an investment trust board to provide an investment company that serves shareholders' investment needs.
Annual General Meeting
The AGM will be held at 2.30 pm on 31 January 2020 at the Company's registered office. It will also be possible to view the AGM online. Your Board encourages voting participation at the AGM and hopes that those who do not hold their shares directly will instruct their nominees to vote on the Company's business. Your Board would encourage as many shareholders as possible to attend for the opportunity to meet the Board and the Fund Manager and enjoy the Fund Manager's presentation reviewing the year and looking forward to the year ahead.
Outlook and concluding remarks
As this is my final report to shareholders as Chairman, I will take the opportunity to thank my current and former Board colleagues for all the constructive challenge and support over the years. I would like to pay particular tribute to Alec Comba who has been my colleague since 2003 and who has unfailingly supported me in dealing with the challenges the Company has faced over the years. He has been an exceptional director and we, the Board and shareholders alike, owe him a debt of gratitude.
I would also like to thank Alain Dromer, who after completing his preferred tenure of two terms of three years and contributing as a wise and able Board colleague during that time, will also be stepping down from the Board at the AGM. Alain will focus on his role as Chairman of a newly launched investment management company. We wish Alain every success in his new venture.
I am pleased to report that with John Bennett as your Fund Manager, supported by his colleagues at Janus Henderson, your Company is in excellent shape for the future. We cannot control markets, nor predict with accuracy how they will move, but with a good Manager and determined focus on active management in a well-structured closed-ended company, we believe that we can continue to serve our shareholders well over the longer term, which has been our aim for the sixteen years I've been proud to serve on the Board of Henderson European Focus Trust plc.
Rodney Dennis
Chairman
9 December 2019
FUND MANAGER'S REPORT
Performance
The past year can be split between the final quarter of calendar 2018 and the 9 months to 30 September 2019, the Company's year-end. The former period saw our NAV underperform the benchmark index during the savage fall in world equity markets. In particular a number of our smaller cap holdings came under pressure in what increasingly resembled a panic sell off into Christmas Eve 2018. Throughout calendar 2019 the portfolio participated nicely in the rebound and produced some outperformance of its benchmark. The end result was that the reporting year to 30 September 2019 saw the NAV rise by 4.3%, a modest underperformance of the benchmark's 6.4% rise, but reflective of the volatile environment, as witnessed by the AIC European sector average return of 3.1%.
Shareholders will be aware that we like to commit a good proportion of our assets to medium-sized companies, subject to a minimum market capitalisation of £1 billion at the time of purchase. While this has served the Company well over the long term, the last two years have been underwhelming in this portion of the book. In particular, holdings in the "value end" of the small-mid cap space have been a drag on performance. We would highlight positions in Nokian Renkaat (1.54%), Kion (2.27%) and Tessenderlo (2.53%). It is notable that these stocks are at the cyclical end of the spectrum. Yet, despite a disappointing period of share performance we continue to back these companies. Our faith is down to a belief in their franchises, their market positions and, crucially, the valuation of their equity. In each case we firmly believe that patience will be rewarded. In the specific case of Nokian Renkaat, it may be that a change in management is required to yield the rewards we anticipate from this fundamentally sound business. This is the beauty of the closed-end structure - we don't need to be fashion victims - more of which later.
Things on our minds
Throughout the past year we have engaged in conversation with our shareholders on the subject of disruption. First and foremost, from the standpoint of what it means to us as investors. There are two key aspects of the disruption phenomenon as it affects us: first, its implications for our investment universe (listed European businesses) and, second, what it means for us as active investors.
It is fair to say that the threat - and opportunity - presented by disruption occupies front and centre of our minds when we are considering any investment. Indeed, one very simple question we ask ourselves when looking at a company is "would we invent it today?" If readers of this report were to apply that poser to many of today's household names, the answer, perhaps sadly, would be a resounding no. Choose your poison but would venerable names currently inhabiting sectors such as physical retailing, autos, energy and banking get off the drawing board? In other words, are they relevant to the future?
This is why we refer to companies and, possibly, whole industries in run-off. As noted above, we can envisage an outcome where major parts of a typical European equity index represent the past and not the future. This is far from an imaginary outcome when one considers the challenges facing department stores and shopping malls. Just as they risk losing relevance to the consumer, so it is easy to imagine at least some automobile companies "in run off". This is not just because the days of the internal combustion engine look numbered but the very practice of buying and owning a car, instead of renting or sharing, looks increasingly outdated, at least among the urbanised. Thus, the sprawling global automobile industry is scrambling to re-engineer its business model, with profound implications for its R&D and capital expenditure needs as well as sales and financing model.
As we have developed our disruption thoughts, we have done so against the backdrop of extraordinary outperformance by US equities, with notable lift off from around 2011. It is understandable that some have concluded from this picture that "America is the future, Europe the past". This is a refrain I first heard when entering this business in the late 1980s. If it was valid then it appears all the more so now, in this disruptive, disrupted, disturbing world. After all, if it's technology you want, you go to America, not to Europe.
Forever smitten, or burdened, by the notion that our business is subject to fashion and its inevitable swings, we can't help but be reminded of the quote, attributed to Benjamin Graham, widely recognised as the 'father' of value investing, that "in the short term the stock market is a voting machine, in the long term a weighing machine". In that context the investor votes have been cast: once again, choose your poison but France's listed companies for the price of Amazon and Google? Or, if you prefer something a little less intoxicating, Ireland for the price of Starbucks?
None of this is to belittle, or even dispute, that the business models of Amazon and Google represent the future and much of France's CAC 40 the past. It may well turn out right that investors value Apple and Walt Disney almost as highly as the whole of the MSCI Germany. But it may not turn out right. Our point is that, if mean reversion is not as discredited as many now seem to contend, then at least some of today's superstar American companies will falter. They will even be disrupted. After all, it wouldn't be the first time that a technology darling becomes obsolete and its shareholders wiped out. Conversely, not all of the CAC, or the DAX, or listed Europe is doomed. We remind ourselves that we need only find 45 companies in the construction of our portfolio.
Talk of fashion brings us to another of today's in-vogue outlets for asset allocators: private equity. In our view, fewer observations better sum up the surge into this asset class than the following:
"The defining shift in allocation by asset owners over the last five years has been the passivization (sic) of investment in public markets and the rotation to expressing active risk in public markets instead".1
Taken from a research piece written by Bernstein in May 2019, this succinctly captures what may come to be seen as an expensive irony in the years ahead. It is little wonder that investors are disillusioned with active asset managers. High profile disappointments haven't helped but the twin forces of fees deemed too high and an apparent inability to beat equity indices seem to have combined to reach a tipping point. Thus, "the expression of risk" in public markets has inexorably moved toward low-cost passive strategies.
The same research piece was notable in questioning the fashion for private equity and a few quotes seem apt in capturing the author's thesis:
"If an investment is deemed alternative, it can be easier to set long term time horizons for assessing it and different criteria for determining what returns to expect".
Stronger assertions then followed:
"The alternative versus non-alternative distinction between asset managers is ultimately fake and we think will go away".1
"Confusing lagged prices in private equity with diversification is a fatal flaw".1
If, then, savings are flocking to passive vehicles in public markets and private equity is the flavour of the day in active management, what are the implications for the active manager in public equity? Or, to put it in the terms we have shared with investors throughout the year: "how do we stay relevant?"
In answering the question, we come back to one major weapon in the armoury of private equity funds and an advantage over those of us in the public arena: time. It is commonly accepted that asset allocators and other professional fund buyers lock onto 3-year rolling performance numbers when considering public equity funds. We are of the opinion that this is increasingly outdated. After all, a poor 12 months can make a poor 3-year "record" just as a lucky 12 months can flatter a fund's 3-year performance.
We repeat the quote from above "If an investment is deemed alternative, it can be easier to set long term time horizons for assessing it and different criteria for what returns to expect". The eye-popping fees earned by private equity practitioners are not reflective of eye-popping returns from the same vehicles. Yet, this particular diehard active manager does not believe that the future returns from said practitioners will be vastly superior to those earned on behalf of investors in well-structured vehicles in public equities. And this is where the Investment Trust comes in.
At the Company's AGM in January 2020, shareholders will be asked to vote on proposed changes to the investment policy, the principal change being to limit the number of holdings in the portfolio to 45 stocks (reducing from the current 60-stock limit). As a shareholder myself, I passionately believe in the closed-ended structure, in the opportunities that much maligned Europe offers and, crucially, in our investment process in seeking to exploit those opportunities. Given the way that we manage money - and all the more so in a relatively concentrated portfolio - we will inevitably have periods when we will lag mainstream European indices. The past 3 years represents such a period; even if the lag is hardly a yawning gap and even if our "valuation conscious" DNA has been, at times, challenged by the momentum/growth stock zeitgeist, it has still tested patience. We understand that. Yet, we remain committed believers in the strategy's ability to deliver over the long term. Thus, my own holding in the Company has risen to 344,765 shares as at 14 October 2019.
We close, then, with a final, resonant quote. This one is attributed to Sanford C. Bernstein's head of quantitative strategies. Its resonance lies in that most poignant of reminders to those of us who are entrusted with the management of other people's money: we can only be as patient as our clients.
"Where equities are quite fully valued, credit is pretty expensive, sovereign bonds are expensive, private equity is really, really expensive, maybe the only cheap thing I can go buy is value. With the enormous caveat that it's very important that I have absolutely no clients at all." 2
John Bennett
Fund Manager
9 December 2019
1 Source: Bernstein, The next 10 years of investing, May 2019
2 Source: Twitter, 14.10.2019
MANAGING OUR RISKS
The Board, with the assistance of the Manager, regularly carries out a robust assessment of the principal risks facing the Company, including those which would threaten its business model, future performance and liquidity in its shares. 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 matrix of risks facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate the decision-taking risks as far as practicable.
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 their velocity and proximity to the Company.
We define 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 significant risks.
The Board receives regular and detailed reporting on specific and emerging risks from the Manager, in particular the Fund Manager, Investment Trust sales and marketing teams, the corporate secretary, investment and financial risk teams, and internal controls teams within Janus Henderson, the corporate broker and the statutory auditor, in addition to any reports on specialist topics from professional advisors such as lawyers and tax agents. The internal reports to the Board at its regular meetings, ad hoc reporting as required between board meetings, and external insights gained from their attendance at and feedback from industry and shareholder events, as well as drawing upon their own experience, all enable the Board to effectively monitor the changing risk landscape and potential threats to the Company on an ongoing basis. Moreover, the directors ensure that the culture of the Board supports and encourages constant horizon scanning, sharing of information and challenge, to optimally identify and manage risks.
The principal risks and mitigating steps, which remain unchanged during the year under review, though have been re-presented in the drafting of the annual report, are as follows:
·; Market
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 on by currency and interest rate movements, as well as by political and economic events.
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
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, requires 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.
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 being applied.
The Board meets the Manager on a regular basis and keeps investment performance, in terms of both capital and income returns, under close review, as well as having an annual review of the Manager's performance by the Management Engagement Committee. 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.
·; Business strategy and market rating
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 on how the shares are priced in relation to the Company's underlying net asset value per share.
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 try and 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.
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 purposes of a closed-ended fund, particularly if the Company were to exercise share buy-backs.
·; Gearing
The Fund Manager has 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.)
The Board has set a limit on gearing of 20% of net assets and monitors the level of gearing at each meeting.
In practice, gearing is of a flexible, short-term nature, with minimal early repayment or drawdown costs, and gearing tends to fluctuate between zero and ten per cent of net assets depending on the Fund Manager's views of investment opportunities and views on the direction of European equity markets.
·; Operational
The Company is reliant on third-party service providers for all of its operational activities, including reliance on Janus Henderson as investment manager, company 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 on 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 sub-contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting) to BNP.
Failure of controls could also impact on the Company meeting its regulatory obligations.
The Management Engagement Committee reviews each service provider at least annually, and, in conjunction with the Audit 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 individual Fund Manager 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 of its agents and meets with representatives of all the agents throughout the year to make enquiry on the systems and controls.
·; Regulatory and reporting
The Company operates in a highly regulated environment which could inter alia affect the listing in 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.
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 practical adheres to corporate governance guidelines that are applicable to an investment company.
VIABILITY STATEMENT
The Board considers it is appropriate to assess the viability of the Company over a five-year period for the year ended 30 September 2019, having previously reported on a three-year assessment period. The directors believe that five years is a reasonable timeframe reflecting the longer-term investment horizon of the Company, as well as that of its investors, and the inherent shorter-term uncertainties in equity markets.
The Board considers the Company's viability as part of their continuing programme of monitoring risk. In carrying out their assessment, the Board takes account of the likely impact of the principal risks and uncertainties facing the Company materialising in severe, but plausible scenarios. The effectiveness of any mitigating controls currently in place is considered as part of the process.
The Board takes into account the liquidity of the portfolio, the gearing and 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 on 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.
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 Board concluded that the Company's assets are liquid, its commitments are limited and that the Company intends to continue operating as an investment trust. No significant changes to the Company's principal risks, or the mitigating controls in place, are anticipated over the period, and the Board is not aware of any events that would prevent the Company from continuing to operate in its current capacity.
Based on this assessment, the Board has 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-year period.
RELATED PARTY TRANSACTIONS
The Company's transactions with related parties in the year were with the directors and the Manager. There have been no material transactions between the Company and its directors during the year other than amounts paid to them in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business, which included marketing services, there have been no transactions with the Manager affecting the financial position of the Company during the year under review.
STATEMENT OF DIRECTORS' RESPONSIBILITIES UNDER DTR 4.1.12
Each of the Directors confirms that, to the best of his or her 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 profit and loss 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.
For and on behalf of the Board
Eliza Dungworth
Director
9 December 2019
Top 10 investments as at 30 September 2019
Company |
Sector | Country of listing | Valuation £'000 | Percentage of portfolio |
LafargeHolcim | Construction & Materials | Switzerland | 26,288 | 8.40 |
Nestlé | Food Producers | Switzerland | 14,705 | 4.70 |
UPM-Kymmene | Forestry & Paper | Finland | 13,506 | 4.32 |
Roche | Pharmaceuticals & Biotechnology | Switzerland | 10,092 | 3.23 |
Autoliv | Automobiles & Parts | Sweden | 9,934 | 3.17 |
SAP | Software & Computer Services | Germany | 9,729 | 3.11 |
STMicroelectronics | Technology Hardware & Equipment | France | 9,667 | 3.09 |
Novartis | Pharmaceuticals & Biotechnology | Switzerland | 9,618 | 3.07 |
ASML | Technology Hardware & Equipment | Netherlands | 9,351 | 2.99 |
Merck | Pharmaceuticals & Biotechnology | Germany | 8,891 | 2.84 |
Total (10 largest) |
| 121,781 | 38.92 | |
Sector exposure as at 30 September 2019 | 2019 % | 2018 % |
Consumer Goods | 27.4 | 25.4 |
Health Care | 20.4 | 14.7 |
Industrials | 18.6 | 21.0 |
Basic Materials | 11.2 | 8.4 |
Technology | 9.2 | 7.1 |
Telecommunications | 4.6 | 1.7 |
Oil & Gas | 4.5 | 5.3 |
Financials | 3.1 | 14.5 |
Consumer Services | 1.0 | 1.0 |
Utilities | - | 0.9 |
Geographic exposure as at 30 September 2019 | 2019 % | 2018 % |
Switzerland | 21.0 | 11.9 |
Germany | 17.2 | 15.2 |
Netherlands | 13.3 | 12.1 |
France | 9.7 | 7.8 |
Finland | 8.4 | 7.0 |
Sweden | 8.1 | 11.1 |
United Kingdom | 5.3 | 4.1 |
Denmark | 4.8 | 6.4 |
Spain | 2.7 | 3.1 |
Norway | 2.6 | 4.3 |
Belgium/Luxembourg | 2.5 | 5.3 |
Italy | 2.2 | 4.9 |
Portugal | 2.2 | 3.0 |
Ireland | - | 2.5 |
Austria | - | 1.3 |
INCOME STATEMENT
| Year ended 30 September 2019 | Year ended 30 September 2018 | ||||
| Revenue return £'000 | Capital return £'000 | Total return £'000 | Revenue return £'000 | Capital return £'000 | Total return £'000 |
Gains/(losses) on investments held at fair value through profit or loss | - | 8,166 | 8,166 | - | (68) | (68) |
Exchange (losses)/gains on currency transactions | - | (278) | (278) | - | 1,075 | 1,075 |
Income from investments (note 3) | 7,550 | - | 7,550 | 8,705 | - | 8,705 |
Other income | 14 | - | 14 | 1 | - | 1 |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
Gross revenue and capital gains | 7,564 | 7,888 | 15,452 | 8,706 | 1,007 | 9,713 |
Management fee (note 4) | (454) | (1,362) | (1,816) | (466) | (1,398) | (1,864) |
Other fees and expenses | (542) | - | (542) | (573) | - | (573) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
Net return before finance costs and taxation | 6,568 | 6,526 | 13,094 | 7,667 | (391) | 7,276 |
Finance costs | (124) | (309) | (433) | (192) | (576) | (768) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
Net return before taxation | 6,444 | 6,217 | 12,661 | 7,475 | (967) | 6,508 |
|
|
|
|
|
|
|
Taxation on net return (note 5) | (677) | (78) | (755) | (686) | - | (686) |
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
Net return after taxation | 5,767 | 6,139 | 11,906 | 6,789 | (967) | 5,822 |
| ====== | ====== | ====== | ====== | ====== | ====== |
Return per ordinary share (note 6) | 26.83p | 28.55p | 55.38p | 31.60p | (4.50p) | 27.10p |
| ====== | ====== | ====== | ====== | ====== | ====== |
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.
STATEMENT OF CHANGES IN EQUITY
Year ended 30 September 2019 | Called up share capital £'000 | Share premium account £'000 | Capitalreserve £'000 | Revenuereserve £'000 | Other reserves £'000 | Total £'000 |
At 30 September 2018 | 10,819 | 41,995 | 131,874 | 12,491 | 96,611 | 293,790 |
Net (loss)/return after taxation | - | - | 6,139 | 5,767 | - | 11,906 |
Ordinary dividend paid (note 2) | - | - | - | (6,686) | - | (6,686) |
| ---------- | --------- | ---------- | ---------- | ---------- | ---------- |
At 30 September 2019 | 10,819 | 41,995 | 138,013 | 11,572 | 96,611 | 299,010 |
| ====== | ===== | ====== | ====== | ====== | ====== |
|
|
|
|
|
|
|
Year ended 30 September 2018 | Called up share capital £'000 | Share premium account £'000 | Capitalreserve £'000 | Revenuereserve £'000 | Other reserves £'000 | Total £'000 |
At 30 September 2017 | 10,737 | 39,757 | 132,841 | 12,452 | 96,611 | 292,398 |
Net (loss)/return after taxation | - | - | (967) | 6,789 | - | 5,822 |
Shares issued | 82 | 2,238 | - | - | - | 2,320 |
Ordinary dividend paid | - | - | - | (6,750) | - | (6,750) |
| ---------- | --------- | ---------- | ---------- | ---------- | ---------- |
At 30 September 2018 | 10,819 | 41,995 | 131,874 | 12,491 | 96,611 | 293,790 |
| ====== | ===== | ====== | ====== | ====== | ====== |
sTATEMENT OF FINANCIAL POSITION
| At 30 September 2019 £'000 | At 30 September 2018 £'000 |
|
|
|
Fixed assets |
|
|
Investments held at fair value through profit or loss | 312,880 | 309,954 |
| ---------- | ---------- |
Current assets |
|
|
Debtors | 1,644 | 1,165 |
Cash at bank | 11,807 | 34,242 |
| ---------- | ---------- |
| 13,451 | 35,407 |
|
|
|
Creditors: amounts falling due within one year | (27,321) | (51,571) |
| ---------- | ---------- |
Net current liabilities | (13,870) | (16,164) |
| ---------- | ---------- |
Net assets | 299,010 | 293,790 |
| ====== | ====== |
Capital and reserves |
|
|
Called up share capital | 10,819 | 10,819 |
Share premium account | 41,995 | 41,995 |
Capital reserve | 138,013 | 131,874 |
Revenue reserve | 11,572 | 12,491 |
Other reserves | 96,611 | 96,611 |
| ---------- | ---------- |
Shareholders' funds | 299,010 | 293,790 |
| ====== | ====== |
Net asset value per ordinary share (note 7) | 1,390,86p | 1,366.57p |
| ======= | ======= |
Cash flow statement
| Year ended 30 September 2019 £'000 | Year ended 30 September 2018 £'000 |
Cash flows from operating activities |
|
|
Net return before taxation | 12,661 | 6,508 |
Add back: finance costs | 433 | 768 |
(Gains)/losses on investments held at fair value through profit or loss | (8,166) | 68 |
Losses/(gains) on foreign exchange | 278 | (1,075) |
Taxation paid | (1,228) | (952) |
Increase in debtors | (6) | (36) |
Increase/(decrease) in creditors | 588 | (94) |
| ---------- | ---------- |
Net cash inflow from operating activities* | 4,560 | 5,187 |
| ---------- | ---------- |
Cash flows from investing activities |
|
|
Sales of investments held at fair value through profit or loss | 217,431 | 257,387 |
Purchases of investments held at fair value through profit or loss | (212,242) | (247,683) |
| ------------ | ------------ |
Net cash inflow from investing activities | 5,189 | 9,704 |
| ------------ | ------------ |
Cash flows from financing activities |
|
|
Issue of new ordinary shares | - | 2,320 |
Equity dividends paid | (6,686) | (6,750) |
(Repayment)/drawdown of bank overdraft | (24,767) | 2,337 |
Interest paid | (453) | (993) |
| ----------- | -------- |
Net cash outflow from financing activities | (31,906) | (3,086) |
| ----------- | -------- |
Net (decrease)/increase in cash and equivalents | (22,157) | 11,805 |
|
|
|
Cash and cash equivalents at beginning of period | 34,242 | 21,362 |
(Losses)/gains on foreign exchange | (278) | 1,075 |
| ---------- | ---------- |
Cash and cash equivalents at end of period | 11,807 | 34,242 |
| ---------- | ---------- |
Comprising: |
|
|
Cash at bank | 11,807 | 34,242 |
| ===== | ====== |
*Cash inflow from dividends was £6,869,000 (2018: £7,985,000) and cash inflow from interest was £12,000 (2018: £1,000).
NOTES TO THE FINANCIAL STATEMENTS
1. | Accounting policies | |||||||||
| a) Basis of preparation | |||||||||
| The Company is a registered investment company as defined in section 833 of the Companies Act 2006 and is incorporated in the United Kingdom. It operates in the United Kingdom and is registered at 201 Bishopsgate, London, EC2M 3AE.
The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland and with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (the "SORP") issued in November 2014 and updated in February 2018 with consequential amendments.
The principal accounting policies applied in the presentation of these financial statements are set out in the full Annual Report. These policies have been consistently applied to all the years presented.
The accounts have been prepared under the historical cost basis except for the measurement of fair value of investments at fair value. In applying FRS102, financial instruments have been accounted for in accordance with Section 11 and 12 of the standard. All of the Company's operations are of a continuing nature.
The preparation of the Company's financial statements on occasion requires the directors to make judgements, estimates and assumptions that affect the reported amounts in the primary financial statements and the accompanying disclosures. These assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in the current and future periods, depending on circumstance.
The directors do not believe that any accounting judgements or estimates have been applied to this set of financial statements that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
| |||||||||
| b) Going concern The assets of the Company consist of securities that are readily realisable and, accordingly, the directors believe that the Company has adequate resources to continue in operational existence for at least 12 months from the date of approval of the financial statements. Having assessed these factors, the principal risks and other matters discussed in connection with the viability statement, the Board has determined that it is appropriate for the financial statements to be prepared on a going concern basis.
| |||||||||
2. | Dividend | |||||||||
| The Board is recommending a final dividend of 21.70p (2018: 21.50p) per ordinary share which, subject to shareholder approval at the 2020 Annual General Meeting ("AGM"), will be paid on 7 February 2020. When added to the interim payment of 9.60p (2018: 9.50p) this brings the full year dividend to 31.30p (2018: 31.00p), an increase of 1.0% (2018: 5.1%) over last year's distribution. Shareholders on the register on the record date of 10 January 2020 will be eligible to receive the dividend. The shares will be quoted ex-dividend on 9 January 2020.
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3. | Income from investments | |||||||||
|
| 2019 £'000 | 2018 £'000 |
| ||||||
| Listed investments: |
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| ||||||
| Overseas dividends | 6,983 | 8,309 |
| ||||||
| UK dividends | 567 | 396 |
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| --------- | --------- |
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| 7,550 | 8,705 |
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| ===== | ===== |
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4. |
Management and performance fees |
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| |||||||
|
| 2019 | 2018 |
| ||||||
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| Revenue return £'000 | Capital return £'000 | Total return £'000 | Revenue return £'000 | Capital return £'000 | Total return £'000 |
| ||
| Management fee | 454 | 1,362 | 1,816 | 466 | 1,398 | 1,864 |
| ||
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| ---------- | ---------- | --------- | ---------- | ---------- | --------- |
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| ||
| Management fees are allocated 25% to revenue and 75% to capital in the Income Statement. The performance fee was removed effective 1 October 2018. No performance fee was payable for the year ended 30 September 2018. |
| ||||||||
|
| Year ended 30 September 2019 | Year ended 30 September 2018 | ||||
5. | Taxation | Revenue return£'000 | Capital return£'000 | Total return £'000 | Revenue return £'000 | Capital return £'000 | Total return £'000 |
| a) Analysis of charge for the year |
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|
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|
|
| Overseas tax suffered | 677 | 78 | 755 | 686 | - | 686 |
|
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
| Total taxation for the year | 677 | 78 | 755 | 686 | - | 686 |
|
| ====== | ====== | ====== | ====== | ====== | ====== |
|
| Year ended 30 September 2019 | Year ended 30 September 2018 | ||||
| b) Factors affecting the tax charge for the year | Revenue return£'000 | Capital return£'000 | Total return £'000 | Revenue return £'000 | Capital return £'000 | Total return £'000 |
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|
|
| Return/(loss) before taxation | 6,444 | 6,217 | 12,661 | 7,475 | (967) | 6,508 |
|
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
| Corporation tax at 19.0% (2018: 19.0%) | 1,224 | 1,181 | 2,405 | 1,420 | (184) | 1,236 |
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| Effects of: |
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| Non-taxable capital profits | - | (1,498) | (1,498) | - | (191) | (191) |
| Non-taxable income | (1,360) | - | (1,360) | (1,586) | - | (1,586) |
| Current year expenses not utilised | 136 | 317 | 453 | 166 | 375 | 541 |
| Overseas tax | 677 | 78 | 755 | 686 | - | 686 |
|
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
|
| 677 | 78 | 755 | 686 | - | 686 |
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| ====== | ====== | ====== | ====== | ====== | ====== |
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| The UK corporation tax rate is 19.00% (2018: 19.00%). The tax charge for the year is lower than the corporation tax rate.
| ||||||
| No provision for deferred tax has been made in the current or prior accounting year. At the period end, after offset against income taxable on receipt, there is a potential deferred tax asset of £3,719,000 (2018: £3,303,000) in relation to surplus management expenses. It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised. | ||||||
6. | Return per ordinary share | ||
| The return per ordinary share is based on the net return attributable to the ordinary shares of £11,906,000 (2018: net return of £5,822,000) and on 21,498,261 ordinary shares (2018: 21,486,843) being the weighted average number of ordinary shares in issue during the year. The return per ordinary share can be further analysed between revenue and capital as below. | ||
|
| 2019 £'000 | 2018 £'000 |
| Net revenue return | 5,767 | 6,789 |
| Net capital return/(loss) | 6,139 | (967) |
|
| --------- | --------- |
| Net total return | 11,906 | 5,822 |
|
| ===== | ===== |
|
|
|
|
| Weighted average number of ordinary shares in issue during the year | 21,498,261 | 21,486,843 |
| Revenue return per ordinary share | 26.83p | 31.60p |
| Capital return/(loss) per ordinary share | 28.55p | (4.50p) |
|
| ---------- | ---------- |
| Total return per ordinary share | 55.38p | 27.10p |
|
| ====== | ====== |
| The Company does not have any dilutive securities; therefore, the basic and diluted returns per share are the same. | ||
7. | Net asset value ("NAV") per ordinary share | ||
The NAV per ordinary share is based on the net assets attributable to the ordinary shares of £299,010,000 (2018: £293,790,000) and on 21,498,261 (2018: 21,498,261) shares in issue on 30 September 2019, excluding treasury shares. | |||
| |||
The movements during the year of the assets attributable to the ordinary shares were as follows: | |||
| 2019 £'000 | 2018 £'000 | |
Total net assets at start of year | 293,790 | 292,398 | |
Net return for the year after tax | 11,906 | 5,822 | |
Issue of new ordinary shares | - | 2,320 | |
Dividends paid on ordinary shares | (6,686) | (6,750) | |
| ----------- | ----------- | |
Net assets attributable to the ordinary shares at 30 September | 299,010 | 293,790 | |
| ====== | ====== | |
8. | 2019 financial information The figures and financial information for 2019 are extracted from the annual report for that period and do not constitute the statutory accounts. The Company's annual report for the year ended 30 September 2019 has been audited but has not yet been delivered to the Registrar of Companies. The Independent Auditor's Report on the 2019 annual report was unqualified, did not include a reference to any matter to which the auditor drew attention without qualifying the report, and did not contain any statements under Section 498 of the Companies Act 2006 (the "Act").
| ||
9. | 2018 financial information The figures and financial information for 2018 are extracted from the published annual report for the year ended 30 September 2018 and do not constitute the statutory accounts for that year. The 2018 annual report has been delivered to the Registrar of Companies and included the Independent Auditor's Report, which was unqualified and did not contain a statement under Section 498 of the Act.
| ||
10. | Annual Report Copies of the annual report will be posted to shareholders in December 2019 and will be available on the Company's website www.hendersoneuropeanfocus.com and in hard copy format from the Registered Office at 201 Bishopsgate, London EC2M 3AE.
| ||
11. | Annual General Meeting The Company's Annual General Meeting will be held on Friday, 31 January 2020 at 2.30pm at 201 Bishopsgate, London EC2M 3AE. | ||
For further information, contact:
James de Sausmarez Director and Head of Investment Trusts Janus Henderson Investors Tel: 020 7818 3349 | Laura Thomas Investment Trust PR Manager Janus Henderson Investors Tel: 020 7818 2636 |
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) are incorporated into, or form part of, this announcement.