Hend.euro. Regulatory News (HNE)

HENDERSON INVESTMENT FUNDS LIMITED

HENDERSON EUROTRUST PLC

LEGAL ENTITY IDENTIFIER: 213800DAFFNXRBWOEF12

2 October 2020

HENDERSON EUROTRUST PLC

Annual Financial Results for the year ended 31 July 2020

This announcement contains regulated information

Investment objective

Henderson EuroTrust plc ("the Company") aims to achieve a superior total return from a portfolio of high quality European (excluding the UK) investments.

Performance highlights

1 Net asset value ('NAV') per ordinary share total return (including dividends reinvested)

2 Share price total return (including dividends reinvested) 

3 FTSE World Europe (ex UK) Index

4 AIC Europe Sector

5 Including the 8.0p interim dividend paid on 24 April 2020 and the 17.0p final dividend which will be put to shareholders for approval at the Annual General Meeting on 18 November 2020

6 Excluding the nil value position in OW Bunker and Cellnex Rights Issue (2019: excluding OW Bunker)

7 Based on the share price at the year end

8 Calculated using published daily NAVs including current year revenue

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

CHAIRMAN'S STATEMENT

Performance

In the latest financial year the Company has delivered strong absolute performance in both share price and net asset value ('NAV'), and has also materially outperformed our peer group (the AIC Europe Sector). The net assets of the Company rose by 10.4% on a total return basis, and share price total return including dividends by 9.0%. By contrast, the return on benchmark, the FTSE World Europe (ex UK), was a negative 2.8%. The share price total return of 9.0% was ahead of the 1.1% return for the peer group. NAV increased by more than the share price total return, as the discount to NAV widened, from 10.0% as at 31 July 2019 to 11.4% at the year end.

I am particularly pleased that we have been able to deliver this outperformance to shareholders given the backdrop of the COVID-19 crisis and extreme market volatility which accompanied the spread of the pandemic in the first quarter of the calendar year. I reiterate the point I made in the half-year report, that our core investment approach - seeking growth, quality and consistency through a disciplined framework for analysing and comparing companies - has proved to be of real value during the market crisis. As markets came to terms with a previously unthinkable lockdown, massive changes to many areas of everyday life and the potential demise of previously viable business models, our Fund Manager, Jamie Ross was able to use this framework and update his assumptions and forecasts company by company. As he explains in his Report, this approach provided the basis to determine which companies still justified their place in the portfolio, and to assess potential replacement holdings where this was not the case.

Dividend

The Board is aware how important dividends are to shareholders. As the COVID-19 pandemic took hold, many companies in Europe and elsewhere chose, or were obliged, to conserve cash instead of paying out excess cash by way of dividends. At the interim stage we did not have visibility on the final amount of dividends from our portfolio constituents, as many European companies declare their dividends at around the time of our half-year results announcement in March. At that stage, therefore, we decided to keep the interim dividend unchanged. In the event, total dividend income for the year fell by nearly a quarter, from £6.1m in the previous year to £4.7m.

In the last two Annual Reports, I have flagged that the pace of dividend growth produced by the Company was likely to moderate. This was a reflection of the fact that the growth companies of the future, which your Fund Manager has been identifying so successfully, often choose lower dividend payout ratios in order to invest more cash in profitable growth - I am referring in large part to healthcare, communications, IT technology and platform businesses which you will find in our portfolio. However, due to the economic and political impact of COVID-19, the anticipated lower payout ratios from the portfolio of companies we choose to hold has coincided with cuts in dividends which were simply not contemplated a year ago. Indeed, the level of revenue after tax may still be lower in four years' time than it was in the year to 31 July 2019.

Some commentators take the view that the dividend cuts are optional for investment trusts, due to the power to pay dividends out of capital. The Board is of the opinion that, for a trust which focuses on delivering a superior total return, rather than on income, such an approach does not make sense and would also impose adverse tax consequences on many of the individual shareholders. After very careful consideration, the Board has decided to move from targeting a progressive dividend to a strategic policy of paying out substantially all of the dividend income generated by the Company in the financial year. Reflecting the fact that the Company currently has a significant revenue reserve, the Board is proposing to smooth the transition to this new policy by paying out the majority of the current revenue reserve over the next three to four years. Therefore, as a shareholder, you can think of the dividend over the next few years as being the sum of two components; an ongoing 'normal' payout of substantially all of the income generated by the companies held by the Company, combined with a 'special' payout of a portion of the revenue reserve.

The Board has adopted this new dividend policy because we believe that it is in the best interests of the shareholders for the Fund Manager to continue with his stated investment approach, rather than shifting the portfolio towards companies with higher dividend yields. The Company's focus, after all, is investing in growth stocks.

We have therefore proposed a final dividend for the year of 17.0p which compares with 23.0p for the year ended 31 July 2019. This brings the total dividend for the year to 25.0p (year ended 31 July 2019 - 31.0p). In order to pay this amount, we will be using £0.637m of the revenue reserve.

Discount to NAV

Yet again, despite excellent investment and share price performance, the Company's shares have continued to trade at a significant discount to NAV. The discount has averaged 10.7% over the financial year (2019: 9.2%). My contacts with shareholders, and those of our Manager and broker, convince us that this is not driven by any negative view of the investment team, the investment performance or the investment approach, nor of the Manager or the governance of the Company. Rather it appears to be a consequence of a lack of enthusiasm for investing in European equities, and concern that our size does not facilitate sufficient liquidity in the Company's shares. Liquidity is a particular issue for larger wealth managers who increasingly find it difficult to build or unwind a holding in the size required by their business.

We are well aware that a number of investment companies have been successful in reducing or even eliminating their discounts, so that they are able to issue stock and grow the size of the company, thus enhancing liquidity and reducing per share costs. However, many of those trusts have a very different investment profile from ours; many invest in less liquid alternatives, or have adopted highly distinctive, often specialised strategies. Furthermore, in my experience, there is no consensus amongst current and potential shareholders as to how the discount could be narrowed or eliminated on a sustainable basis. Nonetheless, I can assure shareholders that the Board keeps under active review all options in respect of reducing the discount. The Company has traded at a premium to NAV and issued new stock as recently as 2016, prior to the Brexit vote, and we seek to be in a position to do so again.

Investing sustainably

Environmental, Social and Governance ('ESG') considerations are a key component in the investment process of your Company. Such considerations are an inherent element in the process of identifying sustainable business practices to generate long-term value. In recent years companies have become increasingly aware of the importance of ESG issues as a key component of their business practice and governments, especially in Europe, are pushing them further into that direction.

We take the view that companies with a robust ESG approach will consistently produce better and more consistent returns over time, thus attracting a lower cost of capital. Over the last year, your Board and Fund Manager have reviewed the approach to ESG considerations in depth and have articulated more specifically what the Board and the Fund Manager mean by sustainability in the investment process. We have come to the conclusion that, rather than using external services which provide ESG ratings (with the risk of window dressing or greenwashing, and of stark inconsistencies between the ratings of different providers), the Fund Manager will continue to assess, through his proprietary investment process and Ranking Framework, which companies offer attractive long-term investment returns as a result of their sustainable business practices. Your Company will be biased towards companies that score more highly on ESG considerations within the Ranking Framework and we will be transparent with regards to our exposures in our communications to you. Analysing sustainability is an integral and fundamental part of the active management process of your Company.

The surprising benefits of active management

I have already referred to the outperformance of the Company's NAV in the year to 31 July 2020, with a total return 13.2% ahead of the benchmark index, net of all costs. This is a large amount by any standards. As was the case last year, over the previous decade net asset performance has exceeded the index benchmark in all but one year (2017), when the net asset performance was 0.3% behind the comparator. Performance continues to be driven by stock selection decisions; as shown in the performance drivers over the year ended 31 July 2020 table below, stock selection (as opposed to sector selection) accounted for almost all outperformance in the year under review. This is as we would expect from our Fund Manager's approach, which is covered amply in his Report.

So why do I refer to the surprising benefits of active management? We hear a great deal about the challenges of active management, for example, 'closet indexing' (charging active fees for portfolios which are simply too similar to the index to deliver much added value), over-commitment to illiquid securities in open-ended funds, managers who are whip-sawed by changing circumstances or who simply 'follow the wrong horses' too frequently. Such concerns are often justified. There is a danger, though, that investors draw the unhelpful conclusion that outperformance is either impossible or, if it is achieved, must be a lucky accident or the result of excessive risk. Author and economist John Kay, drawing on his experience as director of another investment trust, wrote in the Financial Times on 29 August 2020 that there were 'two compelling models for an investment trust [one being] to pursue a style derived from a well-articulated investment philosophy. Such a strategy is based on a view about business, rather than assets or markets, and on a view about the future of particular firms and products, rather than a macroeconomic prediction about the future policy of the Federal Reserve Board'. This is a good description of the approach followed by your Fund Manager, which has led to very positive results in terms of performance over both the short and the long term.

Board

As part of the Board's succession plan and having completed the maximum permitted term of nine years under the Board's tenure policy, David Marsh will be retiring as a Director at the conclusion of the Annual General Meeting. Over his nine year tenure as a Director, David has made a major contribution to the Company. His depth of experience and understanding of European politics and economics has been invaluable, but I have particularly appreciated David's willingness to express his views on important matters in a supportive manner, but untrammelled by consensus. On a small Board such as ours, every individual's contribution is significant, but David's unique mix of experience and personal qualities will be very much missed.

I am, however, very pleased to welcome Stephen King, who was appointed as a Director on 1 December 2019. Having been HSBC chief economist for 17 years until 2015, Stephen is currently senior economic adviser to HSBC on a part-time basis. Stephen has held senior economist positions at the Treasury. Fortunately, Stephen was able to attend his first Board meeting in person, at the end of January, before the pandemic resulted in subsequent meetings being conducted by video-conference. Stephen rapidly established himself as an integral member of your Board and has already been making a positive contribution to its deliberations; he also helped to lighten lockdown by sharing some of his piano performances with us online. Stephen will stand for election at the Annual General Meeting in November 2020.

Annual General Meeting ('AGM')

The Company's AGM is currently scheduled to take place at 2.30pm on Wednesday 18 November 2020. In view of the ongoing restrictions on public gatherings, the Board invites shareholders to attend the AGM via webinar. Shareholders are strongly encouraged to submit their proxy forms ahead of the proxy-voting deadline at 2.30pm on 16 November 2020 to ensure their vote counts, as there can be no live voting. The statutory business of the AGM will be conducted on a poll, counting the Directors in the quorum, and the Chairman will hold the proxy votes. The Fund Manager will present his review of the year and thoughts on the future during the webinar, and will be pleased to answer shareholder questions, as will the Board.

The Board commits to holding physical meetings in future when restrictions are not in place and these can be held safely; however in case of any further extraordinary crises such as the COVID-19 lockdown, the Company is putting a proposed amendment to the Company's articles of association to shareholders to enable a combination of virtual and physical shareholder meetings to be held in the future.

Instructions on joining the meeting and details of resolutions to be put to the AGM are included in the Notice of Meeting sent to shareholders with the 2020 Annual Report and are on our website at www.hendersoneurotrust.com. If shareholders would like to submit any questions in advance of the AGM, they are welcome to send these to the Corporate Secretary at itsecretariat@janushenderson.com.

Outlook

Investing in equities is all about putting a price on uncertainty; 2020 has been a lesson in the need to be able to deal with scenarios so extreme as to be barely worth contemplating. I am duly forewarned about the hazards of making any comments about the future. I would acknowledge that the overall market backdrop has, after a chaotic period in February and March, been rather more benign than one might reasonably have expected in the circumstances. Nonetheless I am heartened by the way in which our Manager has continued to operate successfully in the most challenging circumstances.

As shareholders will be aware, the Fund Manager does not seek to assess the path of economic recovery for European or indeed global markets and neither he nor your Board are experts in epidemiology. We make no forecasts regarding the likelihood of second waves nor when or if vaccines for COVID-19 will enable social and economic life to return to 'normality'. Yet, the painstaking business of company analysis continues in very much the same way as previously, even if for the moment conducted over video conference and, for the most part, from home. Despite the problems of unpredictable lockdowns and new outbreaks of COVID-19, the Fund Manager continues to identify opportunities for putting money to work in new holdings, to the extent that the Company is modestly geared (1.8% as at 30 September 2020). The speed and extent of a recovery in dividends remain uncertain but shareholders will benefit from our decision to use the revenue reserve to pay dividends in excess of those earned, over the next several years.

Nicola Ralston

Chairman

1 October 2020

FUND MANAGER'S REPORT

What an extraordinary year we have just witnessed. The COVID-19 pandemic, which emerged halfway through the period, has had a dramatic and tragic impact. Over 1,000,000 people have died and much of the world has experienced periods of severe social restrictions over the past few months. These are unprecedented times and the long-lasting impacts upon society, governments, the economy and individual businesses will be manifold and only fully revealed over a multi-year period. As an equity fund manager, my professional concern lies mainly in the analysis of how individual business will be impacted by this crisis over the long term; and on this subject, I have formed some early conclusions which I will discuss later.

The Company has performed well over the past twelve months and we have demonstrated resilience throughout the period in volatile market conditions. On a NAV basis, we outperformed a strong market during the first half of the year, we then suffered a less severe fall than the market in February and March 2020 before also outperforming during the recovery period over the balance of the year. Over the year as a whole, against the benchmark index decline of 2.8%, the Company's NAV rose by 10.4% and the share price advanced by 9.0% on a total return basis.

The investment process in action and portfolio activity

I have spoken and written extensively on our investment process in the past. We place a very high degree of importance upon depth of research, producing an Investment Thesis, a Model and a Ranking Framework score for each potential investment. By doing this, we ensure consistent, thorough analysis as well as providing a means to debate and discuss what to own and in what size. We will generally consider trading when our analysis of a potential investment points to a company that is more attractive than some businesses that we already own and thus has a higher Ranking Framework score, or when a material event happens which significantly impacts our view, and hence Ranking Framework score, of an existing investment. The discipline and rigour of this process has proved to be beneficial during the volatile market conditions that we have witnessed during this period.

During the early part of 2020, when it was becoming clear that the COVID-19 virus was going to have a significant global impact, we made several Ranking Framework-driven trading decisions. A good example is the sale of our position in the French airport operator ADP. Our original Investment Thesis had been based on two primary things. First, we liked the exposure to steady, structural growth in air traffic volumes, and second, we felt that a privatisation of the company at a high valuation was a strong possibility. COVID-19 forced us to reassess both views and our refreshed analysis of the company resulted in a significant deterioration in our Ranking Framework score, and as a result, we decided to sell the position towards the end of February 2020; the shares are now significantly lower than when we sold them.

Moving onto the extreme market falls of February and March 2020, the discipline of our Investment Process helped in two major ways. Firstly, by forcing us to focus on the cold, hard facts of our analysis, it played a role in preventing us from trading 'on emotion' and from letting behavioural factors influence our decision making. This is a primary aim of our approach; we want to minimise subjectivity and maximise objectivity. Secondly, in the teeth of the crisis, our analysis identified several potentially attractive investment opportunities that produced very high Ranking Framework scores. Confident in the rigour of our analysis, we initiated positions that went on to produce very strong returns for the Company. The three positions were AMS (where we reinitiated a position in April 2020 at approximately CHF10 per share, having sold our holding in February 2020 at approximately CHF40-45 per share), Enel and Kion (which we bought in May); these positions have since rallied 51%, 25% and 45% respectively. The major point here is that without the rigour of our analysis, we may not have had the confidence to buy positions in cyclical business at a time when 'others are fearful'.

There are several other companies that we bought or sold during the past twelve months and the table below shows the ten largest investments and divestments made.

Performance attribution

This has been a successful period for performance. The table below shows a breakdown of our gross NAV outperformance by sector (using the Janus Henderson European Equities Team's estimates). The column entitled 'Sector allocation effect' shows how our sector positioning has contributed to outperformance and the column headed 'Stock selection effect' shows how our stock picking within each sector has contributed to our outperformance. The 'Total effect' column is these two columns added together. What is clear from looking at the table below is that the vast majority of our performance has been driven by stock-picking. This is intuitive since we do not target sector weightings, nor do we concern ourselves too much with them so long as we are sensibly diversified across a range of sectors. Our Ranking Framework-driven approach is aimed at picking the right stocks; the success of this over the past 12 months is reflected in this performance attribution.

1 Estimates are based on a daily buy and hold approach, gross of all fees and costs

2 Total for the Company includes gearing

Source: Bloomberg

Our strongest performing individual companies over the period included Cellnex, Delivery Hero and Novo Nordisk. Cellnex, the Spanish towers company, has become the consolidator of choice in Europe. Telecommunication companies are increasingly predisposed to selling their tower infrastructure to realise valuations that are far in excess of their group-wide valuation multiples. There is also industrial logic in these tower assets being owned by independent companies who can then more fully utilise the towers by bringing in additional tenants. Cellnex has delivered solid operational earnings progression as well as a number of deals during the period. Delivery Hero, the German food delivery platform business, has had a strong twelve months. They have made moves to consolidate their loss-making South Korean operations and have seen extremely strong order growth trends across their core markets. Having been through a period of intense competition from loss-making logistics platforms, funding appears to be drying up and the easing competitive environment is beginning to show itself in improved economics for Delivery Hero. Novo Nordisk, the Danish diabetes focused company, is shifting its product exposure away from insulin and towards Glucagon-like peptide-1 products. Growth is reaccelerating and the area of obesity represents a very exciting future growth opportunity for Novo's semaglutide molecule.

Amongst our biggest single stock detractors from performance were Crédit Agricole, Telecom Italia and Equinor. We have cut down on our banks' weightings during the period, but Crédit Agricole (which we sold in April) was still a major detractor from performance. All European banks have suffered from the low interest rate environment, weak economic conditions and investor apathy exacerbated by the ECB-mandated dividend 'holiday'. Telecom Italia has performed poorly in the face of an ongoing tough competitive environment in its domestic market, but we continue to see significant upside potential and near-term potential catalysts; we have continued to increase the size of this position. Finally, Equinor, an oil company that we sold in February, has since suffered from a weak environment for the oil price and from decreasing interest from investors in carbon-heavy businesses.

Our thoughts around the long-term impact of COVID-19 and current positioning

This has been a major topic of debate for us over the past six months. In many ways, we see many of the lasting impacts of COVID-19 as involving an acceleration in existing structural trends. There are many areas that will be materially impacted by this crisis, but I have singled out the three most important themes that we are investing in.

Studying generational differences in social behaviour reveals a clear pattern of more and more social interaction taking place virtually. The rise of social media, the increase in time spent gaming, the decline in traditional working patterns and the increased usage of dating apps all support this premise. The trend towards virtual social interaction was in place well before COVID-19, but has seen an acceleration during the crisis. We expect this shift in behaviour to continue. Within the portfolio, we own Prosus, a Dutch holding company that owns a large stake in Tencent which in turns owns the social communication app WeChat. WeChat facilitates communication, shopping, payments, gaming and other services for its over 1 billion monthly active users. Its usage is fast growing both in terms of user numbers and the variety of functions that can be performed on the platform. We also own two specialist gaming companies which both happen to be Swedish; Embracer and Stillfront. Both companies are experiencing strong demand growth as the younger generations increasingly choose to entertain themselves and interact with one another through gaming platforms. I have previously referred to the change in working patterns as the 'virtualisation of business life'. As with other forms of social interaction, business was moving online long before the onset of COVID-19 but this existing trend has been dramatically accelerated over the past few months as lockdown measures have taken hold. In the UK for example, prior to the crisis, approximately 1.7m people (5.2% of those in employment) reported mainly working from home, while during the recent lockdown period, 49.2% of adults in employment were working from home (source: Office for National Statistics). Over time, we expect that the percentage of employees working from home or working remotely will continue to increase meaningfully. This has several implications, ranging from negative ramifications for city-central commercial and residential property to positive signs for companies that provide telecommunications services and infrastructure. Within the portfolio, we have a large position in Telecom Italia which we expect to benefit from this trend as well a position in the Spanish towers company Cellnex which should also be well placed. In addition, we have an investment in the IT services company Atos, a company moving increasingly towards cyber security.

It is not just social interaction and working practices that are moving online. Consumer purchasing habits and the whole process of browsing and comparing products is heading in the same direction. Again, this is a well-established trend that can be witnessed across many product verticals. In the US for example, 63% of books, music and video are now consumed online, 48% of toy and hobby products and 37% of apparel (source: eMarketer). During the recent period of lockdown, many consumers have discovered, by necessity, the benefits of ecommerce and many of these habits will stick. Within the Company's portfolio, we have positions in a number of platform businesses (please refer to 'The misunderstood powerhouses of innovation' article on the Company's website www.hendersoneurotrust.com for further details). We see these businesses as prime beneficiaries of the trend towards ecommerce. We hold a position in a business that owns the German equivalent of Rightmove, Scout24; we hold a position in Delivery Hero, one of the largest global players in takeaway food delivery; and we have a position in Zur Rose, the Swiss listed business with a market leading position in mail order prescriptions in Germany at a time when that market is opening up to digital prescriptions.

The other way that we are investing in rising ecommerce volumes and card/mobile payments taking market share from cash-based transactions (another trend that has accelerated due to COVID-19) is through our holdings in two payment companies. At the start of 2020, we bought a position in the French payments company Ingenico. That company was soon bought by Worldline (this is a fast consolidating industry) and we established a large position in the acquirer. We have since added a position in the Italian payments company Nexi which we see as equally well placed to benefit from the trends described above. These businesses have certainly benefitted from the accelerating shift from cash to cashless payments that we have seen during COVID-19. Another area that we are exposed to within this broad theme is music content. The music industry saw its revenues roughly halve between 2000 and 2015 as the purchase of physical music declined. But since 2015, the industry has returned to growth, led by the rising penetration of streaming and by the devices that encourage the uptake of streaming such as wireless headphones, speakers and smartphones. We own a position in Vivendi which in turn owns one of the 'big three' music content businesses, Universal Music Group (UMG). We view this content owner as very well placed given the continued shift in consumption patterns that we are witnessing across the world; the opportunity in the developing world is especially compelling.

One of the less obvious impacts of this crisis will likely be a growing awareness of the environment around us and the realisation that how we treat our environment is inextricably linked to the future prospects for our species. For a number of years, companies have been increasingly aware of this point, and governments (especially across Europe) have been pushing them further in this direction. Investors clearly have their part to play here too and investing in companies that behave in a sustainable way has become an increasing investment focus for us. Within the portfolio, we own a position in Koninklijke DSM, the Dutch-listed food ingredients company, the renewable energy companies Vestas, Enel and RWE (a business transitioning from thermal to renewable generation), the recyclable packaging company SIG and several healthcare companies including diabetes-focused Novo Nordisk and the blood plasma company Grifols. We believe that investing in these kinds of businesses makes financial (as well as moral) sense; simply put, companies with a sustainable approach will, over time, attract an increasingly low cost of capital from investors, and the opposite can be said for those companies who refuse to think about the world outside their narrow (short term) commercial focus. In the near future, we will be disclosing more about our approach to sustainability and the themes that we are exposed to within the portfolio.

In previous years, we have split the portfolio into three investment categories for presentational purposes; Compounders, Improvers and Special Opportunities. Over the past twelve months, I have increasingly felt that there are blurred boundaries between the latter two categories, so much so that I now feel it is unhelpful to maintain a distinction between these two categories. The table below shows how the portfolio is split between Compounders and Improvers and gives you some idea as to the characteristics of these two components of the portfolio.

Classification of holdings as at 31 July 2020

1 Cash is omitted in the summary table. The weight percentages include gearing.

Source: Factset/Fundamentals in Sterling using arithmetic averages.

Our split between these two investment categories over the past twelve months is shown in the chart below (see chart in the 2020 Annual Report). We maintain a bias towards Compounders, although we ended the period with a lesser bias to this investment category than when we started the period. This is intuitive since, as a general rule, the valuation multiples of our Compounders have expanded when compared to our Improvers, therefore all else being equal, our Ranking Framework approach should have naturally moved us more towards the latter at the expense of the former; there is a certain countercyclicality embedded within our investment process.

Outlook

I am not one to spend much time trying to assess the economic outlook for Europe nor the prospects for the broad European equity market. Instead, I spend the vast majority of my time assessing the operational progress of the companies that I hold in the portfolio, the prospects for those companies' share prices to increase over the medium-to-long term as well as looking for new ideas to 'compete for capital'. I am very comfortable in our current positioning and even after a strong period of performance, I feel that a number of our positions (especially so for our largest holdings) remain materially undervalued by the market. I also feel that we have a good selection of interesting 'watch-list' ideas competing for a position in the fund and this, combined with the fact that it is increasingly difficult to find anything to sell when I am keen to initiate a new position, fills me with confidence for the year ahead. We will continue to adhere to our strict investment process and will strive to build upon what we have learnt during this extraordinary year.

Top ten contributors to and bottom detractors from absolute performance

Data illustrating the top ten contributors to absolute performance is set out below:

Data illustrating the bottom ten detractors from absolute performance is set out below:

Jamie Ross

Fund Manager

1 October 2020

PRINCIPAL RISKS AND UNCERTAINTIES

Managing risks

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks and uncertainties facing the Company, including those that would threaten its business model, future performance, solvency and liquidity.

With the assistance of the Manager, the Board has drawn up a risk register 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 Board monitors the Manager, other suppliers and the internal and external environments in which the Company operates to identify new and emerging risks. The Board's policy on risk management has not materially changed from last year, although the inherent likelihood of the occurrence of poor investment performance, significant political and/or economic change in the UK and/or Europe, the loss of bank borrowing facilities and failure of the Manager to manage financial or administrative controls due to the increased possibility of cyberattacks or issues with bandwidth as many employees worked from home were increased due to the COVID-19 pandemic. The Board has received weekly updates from the Fund Manager during the pandemic. These have enabled the Directors to monitor and manage risks related to the pandemic. COVID-19 will continue to affect the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has triggered a sharp fall in global stock markets and created uncertainty around future dividend income. The Board notes that the Fund Manager's investment process remains unchanged by the COVID-19 pandemic and he continues to focus on long-term company fundamentals and detailed analysis of current and future investments. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

It is the Board's view that the changing nature of the institutional (non-retail) shareholder base, geopolitical risk (particularly in relation to US/China) and environmental sustainability (shareholder expectations and regulation affecting portfolio companies/stock selection and the Company's performance and demand for its shares) are emerging risks. The Board proactively monitors all of these factors and has a strong focus on continuing to educate itself about any relevant issues.

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 internal controls section of the Corporate Governance report of the 2020 Annual Report. Further details of the Company's exposure to market risk (including market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk and how they are managed are contained in the Notes to the Financial Statements within the Annual Report.

VIABILITY STATEMENT

The Company is a long term investor. The Board believes it is appropriate to assess the Company's viability over a five year period in recognition of the Company's long term horizon and what the Board believes to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented in the Strategic Report within the Annual Report.

The assessment has considered the potential impact of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark (whether from asset allocation or the level of gearing) and market risk, materialising in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Directors took into account the liquidity of the portfolio and the borrowings in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's borrowing facilities and how a breach of any covenants could impact on the Company's net asset value and share price.

The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period, as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. In coming to this conclusion, the Board has considered the current COVID-19 pandemic and the UK's ongoing negotiations during the transitional phase of leaving the European Union. The Board does not believe that they will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding the short-term uncertainty they have caused in the markets.

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.

BORROWINGS

The Company has in place an unsecured loan facility of £25 million (2019: £25 million) which allows it to borrow as and when appropriate. In February 2020, the Company drew down the maximum amount of its loan facility and temporarily went over the loan limit for two days while trades were settling. The maximum amount drawn down in the year under review was £27.1 million (2019: £12.6 million), with borrowing costs for the year totalling £128,000 (2019: £35,000). £13.5 million of the facility was in use at the year end (2019: £3.6 million). Actual gearing at 31 July 2020 was 3.2% (2019: 0.6%) of NAV. The Board has delegated responsibility for day to day gearing levels to the Fund Manager. The Fund Manager expects to maintain some level of gearing in most conditions and the normal level of gearing is expected to be between 2% and 6% of NAV, but at times it may be above or below these levels. The Fund Manager does not use gearing in an attempt to time prospective market moves. Instead, the Company's gearing will increase when the Fund Manager sees attractive, stock specific, opportunities to deploy capital and will reduce gearing when the Fund Manager is a net seller of existing positions, again for stock specific reasons.

RELATED PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with its Directors and the Manager. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the 2020 Annual Report.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there have been 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 the Notes to the Financial Statements within the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

(a) the Company's Financial Statements, which have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

(b) the Strategic Report and Financial Statements include 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.

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

For and on behalf of the Board

Nicola Ralston

Chairman

1 October 2020

TWENTY LARGEST HOLDINGS AS AT 31 JULY 2020

Market capitalisation of the portfolio by weight at 31 July 2020

Performance drivers over the year ended 31 July 2020

Source: Morningstar Direct, Janus Henderson

AUDITED INCOME STATEMENT

The total return column of this statement represents the Income Statement of the Company.

All revenue and capital items in the above statement derive from continuing operations.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the AIC.

The Company had no recognised gains or losses other than those disclosed in the Income Statement.

AUDITED STATEMENT OF CHANGES IN EQUITY

AUDITED STATEMENT OF FINANCIAL POSITION

NOTES TO THE FINANCIAL STATEMENTS

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