Hend.euro. Regulatory News (HNE)

HENDERSON INVESTMENT FUNDS LIMITED

HENDERSON EUROTRUST PLC

LEGAL ENTITY IDENTIFIER: 213800DAFFNXRBWOEF12

27 March 2019

HENDERSON EUROTRUST PLC

Unaudited results for the half year ended 31 January 2019

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

· The net asset value ("NAV") per share total return (including dividends reinvested and excluding transaction costs) was -9.5% compared to a total return from the benchmark index, the FTSE World Europe (ex UK) Index of -9.8%.

· As at 31 January 2019 the Company's shares were trading at a discount to NAV of 9.6% in comparison to a discount of 8.2% at the year end.

Total Return Performance

1. Calculated as the total value of equity share capital, reserves and bank loans

2. Net asset value per ordinary share total return (including dividends reinvested and excluding transaction costs)

3. FTSE World Europe (ex UK) Index expressed on a total return basis and in Sterling terms

4. Share price total return (including dividends reinvested and excluding transaction costs) using mid-market closing price

5. Arithmetic average net asset value total return for the AIC Europe Sector

Sources: Morningstar for the AIC, Janus Henderson, Datastream

Interim Management Report

Chairman's Statement

The half year under review saw unusually volatile markets across the world, with European markets being no exception. Up to the end of September 2018 equity market sentiment had remained reasonably positive. There were, however, concerns that market valuations left little room for disappointment. In October a combination of concerns over a trade war between the US and China, and data pointing to slowing momentum in the wider global economy resulted in a dramatic change of sentiment, leading to the worst quarter for equity markets since 2011. January saw a significant recovery, which has continued since the end of the half year, as it became clear that expected rises in interest rates, most particularly in the US, were to be deferred, at least in the short term.

Performance

This volatile market environment has been exceptionally challenging for equity investors, with both the benchmark European index, and your portfolio, declining in value over the half year by nearly ten percentage points. The portfolio suffered no underperformance relative to the index, however, and we feel this provides a degree of comfort with regard to the underlying robustness of the portfolio.

Performance Fee

With effect from 1 January 2019 the performance fee arrangements were removed. The base management fee is now calculated at the rate of 0.65% per annum of net assets up to £300m and 0.55% for net assets above £300m. No further performance fees will be payable.

Share Capital

One of the consequences of the adverse market sentiment, particularly towards investment in Continental Europe, has been that the Company's shares have traded at a discount to the Company's Net Assets; in this environment, no shares have been issued or repurchased. We keep under active review consideration of measures to reduce the discount to Net Asset Value.

Gearing

In most market circumstances, we would expect the portfolio to be at least modestly geared. However, the decision as to use of gearing is driven by the perceived opportunities in existing and new holdings; hence, as at the year end, there will be times when the portfolio is not geared. Following the Company's year end and the downturn in late 2018 an additional commitment to securities of nearly five percentage points was made. This was a period in which we were able to benefit from flexible, rather than fixed, gearing.

Dividend

An interim dividend of 8.0p (2018: 8.0p) will be paid out of revenue on 26 April 2019 to shareholders on the Register of Members on 12 April 2019. The shares will go ex-dividend on 11 April 2019.

Fund Manager Succession

As I reported in my Chairman's Statement in October 2018, Tim Stevenson, who has managed the Company's portfolio for an exceptional 25 years, and achieved an outstanding long term track record, had indicated his intention to retire in 2019. Tim departed on 28 February 2019, and Jamie Ross, previously joint Fund Manager, is now the Fund Manager of the Company's portfolio. While we are of course sad to see Tim go, we are delighted to be working with Jamie; he has a similar commitment to the search for quality companies able to achieve sustainable and consistent growth, but brings his own approach to the selection and implementation process.

Outlook

How, when and if the era of ultra-cheap money will unwind is the great financial issue of our time. We believe that an actively managed portfolio, focused on fundamental value and sustainable growth, provides the opportunity for equity investors with longer time horizons to benefit from changing circumstances. Furthermore, the Company's closed ended structure is supportive of the generation of returns from long term investment.

Nicola Ralston

Chairman

27 March 2019 

Fund Manager's Report

This is my first Fund Manager's report for the Company and I would like to start by thanking Tim for all of the help and advice that he has given me over the nearly 12 years that we have been colleagues. He has done a fantastic job in managing the Company's portfolio and has produced excellent returns for shareholders over a 25 year period. I will strive to emulate his success by identifying and investing in high quality, growing companies from across the European markets.

Over the first six months of the financial year, the Company's Net Asset Value ("NAV") fell by 9.5% whilst the index declined by slightly more (9.8%); this has been a very difficult period for equity markets and delivering 0.3% of relative outperformance is scant consolation to us.

I will not dwell too long on the reasons why markets have been so weak and will instead devote far more time to two much more interesting topics; first, a discussion of where we have found opportunities to deploy capital as markets fell, and second, a summary of the operational (rather than share price) performance of some of our largest positions.

As regards to the market weakness in the first half of the financial year, the major areas of concern for short-term investors seemed to be the combination of weakening global economic conditions (as clearly observed in money supply data, Purchasing Manager Indices and numerous other commonly viewed data sets) together with increasingly worrying political rhetoric being directed from the White House towards Beijing. Both of these issues, although concerning for various reasons are not something that should have a material impact on the longer term return on capital being generated by our portfolio companies and it is this with which we are always far more concerned. In fact, as I will go on to explain, we were able to increase our exposure to some of our existing holdings (and some new ideas) at what we would regard as very attractive levels in the latter part of the period in question.

At the start of the period, we were in the slightly unusual position of having a 3.2% net cash balance on the Company. This situation arose simply because over the second half of the last financial year, we had found more opportunities to reduce existing exposures than we had found opportunities to add to existing (or new) positions. To some extent, this was reflective of market valuations, although, as ever, we are far more fixated on the valuations of the companies that we own (or want to own). By the end of the period, we had moved to a small position of gearing (1% of NAV); this was the result of being able to use the market sell-off to add to both existing positions and new positions. I discuss below some of these new positions.

First, and of particular note, we participated in two Initial Public Offerings ("IPOs") during the period. This is unusual for us and our participation reflects our view on the unusually high quality of both companies. The first was the Swiss packaging company SIG Combibloc. SIG is a peer of Tetrapak; its business model is based around 'placing' filing machines at consumer goods companies with an attached multi-year contract to provide the sleeves that are used by the filing machines in the aseptic packaging process. This razor/razor blade model brings a predictable revenue stream from a captive customer and client retention rates tend to be very high indeed (>95% at the end of contracted periods). In addition, end market demand is defensive in nature (consumers tend not to stop buying soup or milk in an economic downturn) and the industry structure, with two large global players, creates an environment of strong pricing power. We see SIG as a business capable of generating >20% return on invested capital well into a medium term time horizon. The second IPO was Knorr-Bremse, a German manufacturer of high quality braking systems for trains and commercial vehicles. This is a much more cyclical business than SIG but has a few characteristics in common; market position is strong, the selling of equipment attracts a multi-year after-market revenue stream and return on invested capital is high and, in our view, sustainable.

Other new positions that attracted our attention during the volatile markets towards the end of the period were Vivendi and Bayer. To some extent, both of these are opportunistic, special situation investments. Vivendi is a complex conglomerate that houses an extremely attractive music content business in the form of Universal Music Group ("UMG"). We find the business of music content ownership to be very attractive (how many times have you listened to your favourite music album?), especially given the rising prominence of streaming as opposed to the physical ownership of music. With Chinese per capita music revenues sitting at around 1/80th of the level seen in the US, there is a huge amount of room for the overall music revenue and profit pool to grow. Within the music value chain, we see the power as lying with the owners of content given the consolidated market structure (UMG, Warner, Sony etc.) when compared to the distributors of content (Spotify, Apple Music etc.). Bayer is not the kind of business that we are usually attracted to (average return on invested capital, questionable capital allocation decisions historically and underperforming assets). However - and it is a big however - the business is exceptionally inexpensive and we believe that there are upcoming catalysts that should cause the market to positively reappraise the value of the business.

In terms of sales, we exited long standing positions in Henkel, Fresenius, Fresenius Medical Care and Atlas Copco during the period. All of these sales can be characterised by concern that we were invested in businesses where the return on invested capital profile was gradually fading.

The above provides a flavour of what we have been doing and thinking about over the past six months. It is pleasing to us that we have been able to put capital to work in these nervous market conditions.

As for the operational performance of some of our key positions, we have largely witnessed results that have increased our conviction levels. I could highlight many different companies, but I will focus on Novo Nordisk, SAP and DSM; three of our highest conviction positions. Novo is successfully transitioning its portfolio towards the GLP-1 class of drugs (a diabetes product that shows strong efficacy in blood sugar control as well as displaying weight loss benefits). Its GLP-1 products are gaining share within a very fast growing market (especially in the US) and Novo is fast developing the capabilities to sell an orally (rather than injection) administered product that looks to be best-in-class. Results during the period enhanced our confidence on all of the above. SAP has actually had a tough period if you judge a company by its share price performance alone; we don't and, operationally, SAP has been impressing us. The on-premise to cloud-based switch is happening much faster than expected and the on-premise business is holding up better than expected. Overall, we are increasingly confident that SAP can grow revenues and profits at a high-single-digit percentage level annually into the medium term, when combined with SAP's inherently sticky (enterprise software) customer base.

Finally, I will make a few comments on DSM. This business has now largely transitioned from being a commodity-chemicals company (with a history in Polymers) to a business focused on animal and human nutrition; a much better business with higher, more sustainable, return on capital. We continue to find the valuation very appealing and we are pleased to see the nutrition business growing at above-market levels and led by a strong innovation focus.

Addressing the Company's overall positioning, geographic location (i.e. where a company is listed) is not something that I see as relevant and so I have omitted the table showing this data. Sector weighting is more relevant; as can be seen from the chart, we remain healthily overweight Information Technology, Healthcare and Industrials; sectors where we have tended to be able to find high return on invested capital businesses, and we remain underweight those sectors where we find fewer such opportunities. I have included the table showing how the Company breaks down into Compounders, Improvers and Special Opportunities (the three categories of investment-type that we focus on). We currently have a dominant exposure to Compounders, but have recently found a few opportunities in the Special Opportunities category and thus its weighting has increased.

Outlook

We remain focused on finding the best opportunities within each of our three areas of focus and have started the second half of the financial year well.

Jamie Ross

Fund Manager

27 March 2019

Principal risks and uncertainties

The principal risks and uncertainties associated with the Company's business can be divided into the following main areas:

• Investment activity and performance

• Portfolio and market

• Regulatory

• Operational

Information on these risks and how they are managed is given in the Annual Report for the year ended 31 July 2018. In the view of the Board these principal risks and uncertainties were unchanged over the last six months and are as applicable to the remaining six months of the financial year as they were to the six months under review.

Directors' responsibility statement

The Directors (as listed in note 12) confirm that, to the best of their knowledge:

(a) the condensed financial statements for the half year ended 31 January 2019 have been prepared in accordance with "FRS 104 Interim Financial Reporting" and give a true and fair view of the assets, liabilities, financial position and profit or loss;

(b) the interim management report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report and condensed financial statements include a fair review of the information required by the Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

For and on behalf of the Board

Nicola Ralston

Chairman

27 March 2019

Twenty Largest Investments by Value

at 31 January 2019

Source: Factset

Source: Factset/ Fundamentals in Sterling.

 Cash is not included.

 1 Note the index median market cap is affected by the large number of small holdings in the index.

Condensed Income Statement

The total return columns of this statement represent the Condensed Income Statement of the Company, prepared in accordance with FRS104.

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

The revenue and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

The Company had no recognised gains or losses other than those disclosed in the Condensed Income Statement and the Condensed Statement of Changes in Equity.

The accompanying notes are an integral part of the condensed financial statements.

Condensed Statement of Changes in Equity

The accompanying notes are an integral part of the condensed financial statements.

Condensed Statement of Financial Position

The accompanying notes are an integral part of the condensed financial statements.

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