Hend.eur.focus Regulatory News (HEFT)

HENDERSON EUROPEAN FOCUS TRUST PLC

Annual Financial Report for the year ended 30 September 2018

This announcement constitutes regulated information.

Investment Objective

The Company seeks to maximise total return from a portfolio of stocks listed in Europe.

Performance highlights

· Net Asset Value1 ("NAV") per ordinary share total return was 2.0% (2017: 21.7%) in line with the benchmark2 of 2.0% (2017: 22.7%)

· Ordinary share price total return3 was -8.6% (2017: 35.9%) reflecting a deterioration in the sector rating

· NAV per ordinary share total return for the five years ended 30 September 2018 was 79.7% compared to a total return from the benchmark of 59.1%.

· Increased proposed annual dividend: interim and final dividends of 9.50p and 21.50p per ordinary share respectively, making a total of 31.00p (2017: 29.50p).

· The ordinary shares were trading at a discount to NAV of -9.3% (2017: premium of 1.3%) as at 30 September 2018.

Financial highlights

1. Net Asset Value 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

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, Datastream

CHAIRMAN'S STATEMENT

Performance

In the financial year to 30 September 2018, the Company produced a net asset value total return per ordinary share of 2.0% (2017: 21.7%) in line with the benchmark total return of 2.0% (2017: 22.7%). The share price total return per ordinary share over the period was -8.6%, as the shares moved from a premium rating to a discount partly reflecting a deterioration in the rating of European equities, which also affected other peer group companies. In addition, as our Fund Manager outlines in his review, this last year has also been a difficult one for stock selection and a number of our smaller and medium sized company exposures have performed poorly. Over the longer term however, the net asset value total return per ordinary share for the five-year period to 30 September 2018 was 79.7% compared with 59.1% for the benchmark.

In the early part of the financial year, whilst the shares traded on a premium, the Company issued 165,000 new shares, raising £2.3m.

Dividend

The Board is recommending a final dividend of 21.50p per ordinary share which, subject to shareholder approval at the AGM, will be paid on 8 February 2019. When added to the interim payment of 9.50p (2017: 9.00p) this brings the full year dividend to 31.00p, an increase of 5.1% (2017: 11.7%) over last year's distribution.

Management fees

The Board is pleased to announce that, following constructive discussions with Janus Henderson, it has been agreed that the annual management fee will be charged at 0.65% of net assets for up to £300m of net assets, and at 0.55%for net assets in excess of £300m, effective from 1 October 2018 (as at 10 December 2018, the Company had net assets of £260.7m).

The former performance fee arrangements (capped at a total fee (inclusive of any performance fee) of 1.3% of net assets payable in any one year) have been removed, and there is no residual amount payable under these arrangements. Whilst the base fee of 0.65% of net assets remains unchanged on net assets of up to £300m, the tiering of the fees will represent a reduction in fees payable over £300m. The management fees continue to include portfolio management, company secretarial and administrative services for the Company.

The Board believes that these are very competitive fee arrangements for the Company and as these changes are supported by your Fund Manager, will continue to provide the requisite incentive for him to perform in both looking after the portfolio and growing the assets of the Company for the benefit of all of its shareholders.

Board changes

We were pleased to welcome Vicky Hastings to the Board as a non-executive director. Her appointment became effective on 1 September 2018. Vicky brings a wealth of investment management experience from her 30 years in the industry and the Board is pleased to recommend her election to shareholders at the upcoming annual general meeting.

The Board has undergone substantial change in the last few years, with a number of departures and new appointments, Vicky and Robin Archibald being the most recent appointees. The Board has been conscious throughout the changes of the importance of continuity in Company experience and knowledge, which largely resides in the Chairman and previous Audit Committee Chairman. The aim is to refresh both these positions, with the transition already complete on the Audit Committee Chairman and serious planning for succession to my role underway. We are very conscious of AIC Code guidance on tenure but remain acutely conscious too of our responsibilities to maintain a balance of experience, skill and continuity on the Board, which is what we aim to achieve in a constructive way. The current intention is to achieve a Board of no more than five fully independent members and having six Board members currently is part of that transition planning.

On behalf of the Board I should like to thank Alec Comba for his outstanding contribution as Audit Committee Chairman. Alec has been an exceptional asset to your Company and has agreed to continue as a director until the Board changes are fully in place over the course of the next twelve months.

Fund Manager

We were also pleased to approve the appointment of Andrew McCarthy as Co-Fund Manager for the Company's portfolio, alongside John Bennett. This follows Janus Henderson's recruitment of Andrew in July 2018 to work alongside John on his European long-only funds and mandates. John will continue to manage the Company's portfolio and we welcome the breadth of experience, and support, which Andrew brings to the European Equities team.

Governance

We note the UK Corporate Governance Code issued by the Financial Reporting Council in July 2018. The Board is in the process of reviewing its governance arrangements in light of the provisions, but I have already undertaken to resign my membership of the Audit Committee. This became effective from 29 November 2018. We further expect to implement such changes as are required by the new AIC Code, following its publication in the near future.

Annual General Meeting

The AGM will be held on 30 January 2019 and the Directors will again be seeking to renew the authorities previously granted permitting the allotment and repurchase of the Company's ordinary shares. Details on these resolutions are provided in the enclosed Notice of Meeting. The Board encourages voting participation at the AGM, particularly from private investors, and hopes that those who do not hold their shares directly, but through nominees, will take the time to instruct their nominees to vote on the Company's business.

Outlook

Reading last year's report, investors will have noted that our Fund Manager sounded a cautious tone on the prospects for market direction. That caution appears to have been warranted, based upon market moves of the past twelve months. If one were to focus entirely on politics, it would be hard to adopt any stance other than extreme caution.

Investing in public market equities is forever at the mercy of fashion swings, but we believe that we have grounds for tempering any extreme emotions. Valuation, as well as investor sentiment, gives us grounds for a more constructive approach than is in our view the consensus position towards European equities. As you will see in our Fund Manager's report, he considers these issues and places them in the context of managing your portfolio and selecting individual stocks.

It is worth restating that stock selection is the key guiding principle for managing the portfolio. The macro-economic and political issues will impact on sentiment, valuation and performance but, in the longer term, the success of the portfolio will be determined by investing in good businesses, which is why your Fund Manager remains entirely focused on stock picking in these otherwise challenging market conditions.

Rodney Dennis

Chairman

FUND MANAGER'S REPORT

As a fund manager I've never been too fond of the idea of "talking up the asset class". In my case this would have meant extolling the virtues of European equities - a hard shift at the best of times.

My reluctance hasn't simply been down to the prospect of a daunting shift; it is due to the fact that doing so risks becoming an apologist for a region or an asset class, thereby risking at least some element of self-serving disingenuousness.

It is therefore something of a departure to use the occasion of this report to discuss "Europe", as opposed to limiting the discussion to our own portfolio. The departure is due to what we perceive as the prospect of an inflection point on the horizon.

Let's face it, from an asset allocator's perspective, performance of European equities has been awful. At least, that is the impression we get if we limit ourselves to that superficial measure - "the index".

The extinction threatened breed of contrarian or mean reversionist or value investor might, at this juncture, be tempted to take the other side: he or she might plead with a disinterested audience that European equities offer a great investment opportunity. Such temptation is surely understandable when we remind ourselves that, in the world of investing, fashion plays a regular and often cruel role. Right now, it is fashionable to declare that the future belongs to "the disrupters" and the past to "the disrupted". Indeed, one currently popular investor is predicting "a great corporate extinction". There seems no doubt about it: Europe is home to many of these putative relics, dinosaurs and fossils: banks, telecoms, utilities, oil, pharmaceuticals; anyone?

The above, then, sets a scene of apparently interminable and well-justified underperformance by European versus US equities. And yet, a fund manager schooled in a belief that extrapolation is one of the greatest hazards to successful investing finds it terribly difficult to endorse the notion that, in markets, the past ten years is the next ten years. Based upon corporate earnings growth, Europe has deserved to underperform America. Of that there is no doubt. However, it is worth questioning whether the die really is cast.

Dear old Europe is home to a paltry number (and value) of technology companies, while America demonstrates its prowess in all things "tech". Those of us with memories of previous boom sectors are reminded that 30% of a mainstream index has tended to mark the peak for such darlings. We are reminded of financials in the US and Europe back in the debt-fuelled, regulation-light, covenant-light days of the mid-2000s. In the UK the period was notable for Gordon Brown's infamous "end to boom-bust", a refrain he was happy to sing as he presided over a banking deregulation, which many believe fanned the flames of that era's debt binge. Politicians have a canny knack of distancing themselves from the scene of the crime: much easier to let the mob bay for "greedy bankers" to deflect attention.

Investors, on the other hand, can rarely do that; we have to live with the consequences. Thus, while Chancellor and then Prime Minister Brown might perhaps look the other way when reflecting on what became of the binging banking behemoths - epitomised, some might say, by his countrymen at RBS - investors who extrapolated puffed up profits were left nursing generational losses. Oh, and taxpayers too.

Returning to today's darlings, we recall that tech itself (then labelled "TMT" or "the new economy") scaled the peaks of 25-30% of indices both sides of the Atlantic back in 1999-2000. There is, of

course, nothing to say that tech must stop now, at 30% of American market cap. However, it is worth noting that it has doubled its weighting since 2004. It is also worth noting that 2018 was a record year for IPOs of loss-making businesses in the US equity market. The mean reversionist cannot help but reflect - that is a lot of benefit of the doubt granted to the mooted winners of the future.

The corollary is that little benefit of the doubt is being given to the widely forecast losers. We offer no resistance to the premise that many a physical retailer is unlikely to be with us in a few years' time. Their models are indeed being hollowed out and it is a sector we simply avoid. From America's Sears Robuck to Britain's Debenhams and House of Fraser, the effects of digital disruption and changing consumer behaviours are in plain sight. On the Continent, not even Inditex, owner of the retailer Zara, nor Hennes & Mauritz have managed to tempt us to part with investors' capital. Once considered growth stars these stocks too have lost their shine in recent years. It's not the first and it won't be the last time we've seen growth become value. Fashion, after all.

Yet, in the rush to embrace "the future", we do think some babies have been thrown out with the bathwater: we think here of certain auto parts businesses such as TI Fluid Systems, one of our few UK holdings, whose shares are valuing the business at a paltry 0.7x sales and 5x EBITDA. We know we will require patience.

Europe has never been infused with - nor enthused by - the equity culture so eagerly embraced across the Atlantic. Thus, buybacks have never been that popular on the Old Continent. Nevertheless, emboldened by executive compensation schemes, together with plentiful supplies of low-cost debt, corporate America has gorged itself at the buyback feast. Add to that the bottom-line boost from equity-friendly President Trump's tax reforms and maybe, just maybe, America's stock market boom isn't all down to vastly superior operating models. In other words, sufficient evidence exists to suggest that the age-old inputs - and potential nemeses - of investor crowding (fashion) artificially boosted earnings (cheap money, leverage, buybacks and tax breaks) are at work. As sure as night follows day, those factors will not always be in the investor's favour.

Portfolio

The year under review saw the paper and packaging sector yield good returns for our portfolio via our holdings in Smurfit Kappa (+32.0%) and UPM Kymmene (+53.3%). Having reduced our holding in Smurfit Kappa following the failed bid by International Paper, we note the subsequent share price weakness in the target company. Further weakness may well provide an opportunity to

rebuild our exposure. Our holding in Marine Harvest initially tested our patience, since we were temporarily nursing losses as the weak salmon price caused investor jitters in late 2017. Our resolve paid off via a 16.8% share price rise over the year.

Small and mid-cap holdings

In previous Annual Reports we have used this section to laud the contribution made by our small and medium-cap selections. The year under review was more mixed in this department. On the plus side, holdings in Teleperformance (+30.5%), IMCD (+30.7%) and Diasorin (+21.3%) led the pack, while disappointments came in the shape of Tessenderlo (-22.2%), United Internet (-21.4%), Tarkett (-40.7%), Lenzing (-24.3%), Vestas (-21.5%) and Indra (-26.0%). The latter four holdings as well as Teleperformance have been sold.

Notwithstanding a disappointing year in this part of the portfolio, we continue to view small-mid caps as forming a key part of our strategy, as the table below demonstrates.

*Excludes cash

Outlook

What has been outlined above is merely a picture: a picture of how we see things at this particular time in markets. Our perspective is inevitably one that is formed by, or even clouded by, a refusal to believe that trees grow to heaven. We are, of course, too chastened by experience to proclaim that a turning point is at hand, that "value" is set to outperform "growth", that the moribund Eurostoxx 50 Index of large caps (which in our opinion is indeed home to some stranded value) is set for a comeback or that wider Europe stands on the verge of outperformance and renewed investor favour.

Of course one ingredient which would turn things in the investment world upside down - and catalyse a resurgence of value stocks - would be the return of inflation. Here, too, we watch from the sidelines, too long in the tooth to make forecasts. But we must stay alive to the prospect.

What we are really saying is that one doesn't need to be a diehard mean reversionist to question the zeitgeist. A combination of investor positioning, the human tendency to extrapolate, a late-stage bull market in US equities and the US economy, not to mention valuation (it never matters until it does) suggest to us that now is not the time to give up on the Old Continent - nor indeed her equities. Now is not the time to abandon a selection of so-called "value" stocks in favour of an all-out "growth" (or momentum) portfolio. Happily, Europe offers an ample selection of both styles and our investment DNA contains the pragmatism necessary to capitalise.

It is in this context that I was happy to take advantage of the Company's widened discount (that fashion thing again) to increase my personal holding, which now stands at 333,084 shares.

Lastly, we strengthened our investment personnel substantially during the year, which included the appointment of Andrew McCarthy as Co-Fund Manager. I look forward to working with all of them in a freshly invigorated wider team and with Andrew as co-manager.

John Bennett

Fund Manager

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. The assessment included consideration of the market uncertainty arising as a result of the UK negotiations to leave the European Union. 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 these risks as far as practicable. The principal risks and mitigating steps, which remain unchanged during the year under review, are as follows:

· Market risk

The Company's performance is dependent on the performance of the companies and markets in which it invests.

Investment risk is spread by holding a diversified portfolio of companies typically with strong balance sheets and good growth prospects.

· 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 NAV and, consequently, its share price.

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 short term nature and 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 markets.

· Other financial risks

The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk, currency risk and credit and counterparty risk.

The Company minimises the risk of a counterparty failing to deliver securities or cash by dealing through organisations that have undergone due diligence by the Manager. The Company holds its liquid funds, which are mostly denominated in Euros, almost entirely in interest bearing bank accounts in the UK or on short-term deposit. This, together with a portfolio which comprises mainly investments in large and medium-sized companies, mitigates the Company's exposure to liquidity risk.

The majority of the Company's assets and liabilities are denominated in currencies other than Sterling, principally in the Euro. No hedging of the currency exposure is undertaken. Consequently, exchange rate fluctuations reduce or enhance returns for Sterling based investors.

· Operational and regulatory risks

Disruption to, or the failure of, the Manager's accounting, dealing or payment systems or the custodian's records could prevent the accurate reporting or monitoring of the Company's financial position. Janus Henderson contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting) to BNP.

The Board receives regular reports on the internal controls in place at Janus Henderson, BNP and the Depositary, HSBC Bank Plc (which appoints the custodian) to mitigate the risk of failure of the systems. These include reports on business continuity planning and the procedures in place in relation to cyber risk.

The Board monitors the services provided by its third-party service providers and receives reports on the key elements in place to provide effective control. The Board is appraised regularly of impending regulatory changes and monitors closely, through its various agents, the Company's adherence to regulatory requirements, including investment trust status.

· Key man risk

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

The Board has been assured by the Manager that the Fund Manager and the European Equities team are appropriately remunerated and incentivised in their roles in a manner consistent with industry best practice and the applicable FCA regulations. Janus Henderson has a strong European Equities team which supports the Fund Manager in the management of the Company's portfolio and looks to develop, or recruit, managers for succession purposes in the fullness of time. The Board approved the appointment of a Co-Fund Manager on 20 September 2018.

VIABILITY STATEMENT

The Board considers it is appropriate to assess the viability of the Company over a three-year period. The Directors believe this is a reasonable period 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 its continuing programme of monitoring risk. In carrying out its 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 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 three-year period as a means of assessing whether the Company can continue in operation.

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 three-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

Top 10 investments as at 30 September 2018

income statement

The total columns of this statement represents 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 other recognised gains or losses other than that disclosed in the Income Statement.

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF FINANCIAL POSITION

CASH FLOW STATEMENT

*Cash inflow from dividends net of taxation was £7,985,000 (2017: £8,387,000) and cash inflow from interest was £1,000 (2017: £229,000).

NOTES TO THE FINANCIAL STATEMENTS

For further information contact:

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