JEO.L Regulatory News (JEO)

European Opportunities Trust plc (the 'Company')

Legal Entity Identifier: 549300XN7RXQWHN18849

Half Yearly Financial Report for the six months to 30 November 2020

Financial Highlights for the six months to 30 November 2020

*Alternative performance Measure.

1A dividend of 3.5p was paid on 27 November 2020.

Chairman's Statement

I am pleased to present your Company's interim report for the six months to 30 November 2020. As at 19 February 2021 your Company had total assets (with loans added back) of £911 million, the NAV per share was 816.13p and the middle market price per share on the London Stock Exchange was 728.00p, representing a 10.8% discount to NAV.

Investment Performance

After sharp declines in stock markets in early 2020, following the onset of the COVID-19 pandemic, there was a rally in the middle of the year, although this was tempered later by an increase in infections and the imposition of new lockdowns. Markets improved again with the introduction of vaccination programmes in many countries, including in Europe; most of the gains occurred from November onwards, towards the end of the half-year period.

Over the six months to 30 November 2020 the total return on the NAV per share, with dividends added back, was -4.3%. This performance was behind the total return on the Company's primary benchmark, the MSCI Europe Index, of 11.1%.

The Board recognises the short-term underperformance. Our performance during the six months under review was particularly undermined by our former exposure to Wirecard AG, which I commented on in my Chairman's statement in the annual report published in November. The background to your Company's more recent performance is considered in depth by our portfolio manager, Alexander Darwall, in his report.

The impact of COVID-19 and the policy responses to it, and continuing low interest rates, have created unprecedented investment challenges. The Board has had frequent contact with the Investment Manager where the strategy and gearing policy have been discussed. These meetings have informed our view that the Investment Manager is applying the strategy consistently and sensibly and we are confident that, with due patience, the strategy should once again deliver good performance.

Indeed, despite the underperformance in the period under review, long term performance continues to be strong; over the life of the Company the annualised total return on the net asset value, with dividends added back, has been 11.5% and 10.7% on the Company's share price (as at 19 February 2021).

ESG

In summary, the principal aim of the Company remains that of achieving good financial returns over time. The Investment Manager does not explicitly target ESG or sustainability investments. However, it recognises the importance of good corporate governance, good working conditions, training and good quality products and these considerations are woven into the investment process. New regulations will shortly require us to disclose whether we claim that the Company can be termed an 'impact' investment in the context of ESG. We do not make this claim. 

Devon Equity Management

The decision to move the investment management mandate to Devon Equity Management in November 2019 was done after a due diligence process, led by the Board and with external specialist advice, was carried out. In the year since the transition a further review of systems and controls at Devon has been carried out which has shown them to be satisfactory.

FundRock Partners

In order to position the Company for any change in the regulatory environment in the United Kingdom post Brexit, in November 2020 the Board elected to switch the entity within the FundRock group that acts as its AIFM from FundRock Management Company SA (in Luxembourg) to FundRock's wholly owned and UK regulated entity, FundRock Partners Ltd. There was no change in the terms of engagement or the fees payable to the AIFM in this context.

Discount management

The Board considers that it is not in shareholders' interests for the ordinary shares of the Company to trade at a significant discount to the prevailing net asset value. The Board's policy is to maintain the discount in single digits, in normal market conditions. A total of 4,290,471 shares were repurchased for treasury since the financial year end (as at 19 February 2021) pursuant to its discount management policy. We review the trading activity and discount of the Shares on a regular basis and are committed to maintaining the discount within the stated range.

Gearing

At the end of the period under review the gross gearing level on the Company's investments was 2.9% and its net gearing, after taking into account cash held on deposit, was 2.3%. The Investment Manager tends to increase gearing at times of perceived low valuations, while reducing it as markets recover. This approach has added sustained value over the course of your Company's history and we continue to encourage the Investment Manager to consider the use of gearing as a tactical tool to improve returns. The Company retains its loan facility which is currently drawable to a maximum amount of £75 million.

Outlook

The outlook for European economies and markets remains uncertain, particularly given the resurgence of COVID-19 cases during the winter period. However, there is hope that in 2021 the distribution and efficacy of vaccines will help economies around the world recover from the damaging effects of the virus experienced in 2020. Within Europe it is hoped that the agreement reached between the EU and the UK at the end of the Brexit transition period will also bring some stability to businesses and markets. However, our portfolio manager continues to focus on what he considers to be the best individual companies, rather than investing on the basis of political or macro-economic considerations.

We are committed, as a Board, to the concentrated, high conviction approach to investment which has been consistently applied to our portfolio by Alexander Darwall since the Company was launched in November 2000. There is no reason to doubt that this consistent investment process will be vindicated in due course. We are confident that the Investment Manager has the necessary experience, resources and intent to navigate successfully through the vicissitudes of the post- COVID investment world.

Andrew Sutch

Chairman

25 February 2021

Investment Adviser's Review

Performance in the period under review was markedly worse than the MSCI Europe Index, your Company's benchmark. The Net Asset Value of the Company's ordinary shares fell by 4.3% (including dividends paid) in sterling terms, while the benchmark rose by 11.1%, during the six months to 30 November 2020. Individual stock errors (notably Wirecard) are a part of the explanation; these, and other contributors to performance, are covered later in this report. The greater part of underperformance is explained by 'style': our preference for strong balance sheets with low levels of debt, has been out of sync with the market's enthusiasm for cheap (even 'free') debt. We believe that in due course our companies, which typically have less debt and higher margins than the average company, will be valued more highly by the market. We seek to invest in companies which have resilience and flexibility and thereby can flourish in different economic scenarios. This, we consider, is a significant factor as we face extraordinary and uncertain times.

Quantitative Easing (QE), initially a short-term measure in the wake of the 2008/2009 financial crisis, has become a mainstay of policy making in the decade since, its consistent failure to stimulate inflation towards policy targets generally interpreted by Central Bankers as evidence that the QE was not big enough (never that the policy tool itself might need review). As a specific response to the economic ravages of COVID-19, European governments have also embarked on massive fiscal expansion. These policies, a combination of monetary expansion (interest rates at or close to 0%) and fiscal stimulus (governments across Europe giving grants and loans), both increase the reach of the state in economies and are likely to be inflationary. The Great Moderation before 2008 might be explained by the downward pressure on costs from China's integration into the international trading system, but that downward pressure is now reversing. Protectionist sentiment is on the rise, partly to protect European businesses from the loss of competitiveness.

The first manifestation of inflation has been in rising asset prices including quoted equities. European equity markets have risen in 2020 despite the damaging policy responses to the COVID-19 pandemic. In due course, we think that there will be consumer price inflation at which point interest rates are bound to rise. Our caution about debt is reflected in the relatively low level of gearing in the portfolio. The Company's net borrowings were £19.6 million at the end of the reporting period, representing gearing of 2.3%, a level of gearing much lower than we have had in the past.

European equity markets' buoyancy, sustained by the effect of massive fiscal and monetary stimulus, cannot disguise the sharp reversal of earnings and Gross Domestic Product ("GDP") in Europe. UBS recently estimated that European corporate earnings have fallen by 31% in 2020; they expect a 38% rebound in 2021. GDP in the European Union contracted by 7.6% in 2020 according to International Monetary Fund ("IMF") forecasts; the same forecaster expects a 5.0% rebound in 2021. Other regions of the world appear to have resisted the COVID-19 effects more successfully, especially Asian countries. The ASEAN 5 countries suffered only a 3.4% reduction in GDP in 2020 according to the IMF. The Chinese economy even grew, it is estimated, 1.9% in 2020; the US economy contracted by 4.3%; and Brazil by 5.8%. Yet European equity markets matched the advances of other global markets. The MSCI World Index, sterling adjusted, improved by 12.0% during the period under review. The S&P500 returned 10.7%. However, this belies the bigger story in the US which was the performance of the NASDAQ. Bolstered by the strong performance of leading technology stocks, the NASDAQ returned 19.0% in the six month period in sterling terms. Technology stocks are viewed as 'winners' in the post COVID-19 world: electronic communications and entertainment replacing physical contact. The surge in technology stocks was a major factor also in Asia where the MSCI AC Asia ex-Japan was up 23.0% in sterling. Europe has less exposure to technology stocks than the US or Asia. European governments and the European Commission decided that it would make 'green' technologies the centre piece of recovery. This was crystallised in 'The European Green Deal'. 'Striving to be the first climate-neutral continent', as the European Commission says, involves huge amounts of public money being poured into the new technologies needed for the energy transition. We have not invested in those stocks which are, initially at least, beneficiaries of new energy ideas like hydrogen. Europe's high-cost energy polices risk putting Europe's companies and consumers at a disadvantage in global competitiveness. As a result, we expect a reversal or moderation of policies in due course. Though the price of WTI crude in sterling rose by 17.8% in the period under review, it remains low by historic standards. Oil and other fossil fuels will remain staples of the energy mix for decades to come.

Wirecard accounted for 5.8% of the Company's 15.4% underperformance; Grenke accounted for a further 2.0%. The demise of Wirecard has been covered extensively in our reports and in the press. The precise details of the fraud are not yet known. Grenke, which is a German-based leasing and factoring company, was a poor performer both because of the wider recession and because of specific allegations of fraud against the company. Though we took the precaution of selling the shares as news of the allegations broke, we are confident that the company is sound. Grifols was another bad performer, contributing 1.0% to the underperformance. There are two reasons for the weak share price: the difficulties of collecting blood plasma,the key 'feedstock' for their products, due to COVID-19 restrictions; and the potential new threat from alternative antibody suppression therapies, which are being developed to treat autoimmune diseases. These therapies work by blocking the binding of antibodies and are being developed with the aim of substituting Grifols' blood plasma fractionated products. Notwithstanding these concerns, we have increased our investment in Grifols. Historically, demand for Grifols products have grown at more than twice the rate of GDP growth. We expect demand to recover to this rate in due course as new indications for their products are established.

Our two biggest investments, Novo Nordisk and Experian, both underperformed in the period under review. We retain a high degree of confidence in both companies. Novo Nordisk shares detracted from returns because it was thought the election of Biden as US President would lead to more controls on the price at which the company sells its products in the US. Further, the company's main competitor, the US company Eli Lilly, is improving its GLP-1 therapeutic products to rival Novo Nordisk's leadership. On both counts we are sanguine. The two companies dominate the global market for the treatment of diabetes, obesity and other comorbidities. The world is certainly big enough for both to flourish. Experian, one of the world's leading credit bureaus and specialist analytics providers for credit scoring, continues to report good results. However, the shares have been weak because the election of Biden as US President raises the possibility that his Administration will set up a new government backed credit bureau in an attempt to improve financial inclusion. There is also a perceived threat of tighter consumer credit controls in the US. Notwithstanding these possibilities, we are convinced that Experian is singularly well placed to develop its credit data and analytics businesses across many markets including the US. We have retained the holding. Another underperforming stock was Deutsche Boerse, the German-based exchange organisation and market infrastructure provider. Low interest rates have deprived the group of one of its important sources of revenues; and, with the backdrop of investor optimism, there has been a lack of volatility in capital markets. Such volatility is typically good for Deutsche Boerse's business. We are confident that in due course interest rates will rise and uncertainties in capital markets will again generate more business for the company. We retained the holding.

There were positive contributors. Chief amongst these was Intermediate Capital Group, (ICG), the UK-listed global alternative asset manager in private debt, credit and equity. The holding contributed 1.6% to performance. It is both ironic and instructive that our biggest contributor operates in the private markets. It highlights the attractions of private finance unencumbered by some of the challenges of the public markets. In part the strong share price performance was a rebound after the undue weakness earlier in the year. Confidence in the company was boosted as it recorded good results and reported that conditions for fund raising, investing and sales of investments, had remained favourable during the COVID-19 crisis. There are concerns that the British government (unlike other European governments) is considering increasing tax rates for those working in private equity. We do not think this eventuality would damage ICG's business as those concerned would probably leave the UK. Three of the best contributors to performance, Infineon Technologies (+1.2%), Soitec (+0.9%) and ASML (+0.5%), all operate in the semiconductor industry. Infineon designs, manufactures, and markets semiconductors including power semiconductors, microcontrollers, security controllers, radio frequency products, and sensors. These find applications in the automotive, industrial, communications, and consumer and security electronics sectors. Soitec manufactures specialty SOI wafers used in the production of semiconductors. The company uses its proprietary Smart Cut process to modify silicon to allow for more speed and less consumption of power. Soitec's products are sold to the energy, electronic, and solar energy industries. It has a quasi-monopoly position in a growing niche of the semiconductor market. The Dutch company, ASML, is one of the world's largest makers of semiconductor manufacturing equipment, specialising in photolithography systems used to imprint circuitry patterns onto silicon wafers. ASML's products include EUV (extreme ultraviolet) lithography systems, DUV (deep ultraviolet) lithography systems, and metrology and inspection systems. All three companies have benefitted from the buoyancy of the semiconductor markets. The drivers include the communications requirements of more remote working, 5G and the 'Internet of Things'. Another good contributor was Arrow Global (+1.1%), the UK-listed debt collection business, whose shares recovered strongly after earlier weakness. The addressable market for debt collection is expanding; and the company is transforming its business model by increasing its fund management business whereby it increasingly acts as agent rather than principal. Both these factors, we believe, underpin a compelling investment case. Genus, the UK-listed company, also enhanced the portfolio's returns. It provides cattle and pig breeding services. Using its own domestic production and contracts with breeding companies worldwide, it supplies dairy and beef semen used for artificial insemination. It also is a world leader in pig genetics. As African Swine Fever has devasted the pig populations in China, Genus has benefitted by supplying its porcine genetics to help rebuild pig herds. Ubisoft, the French video game company, contributed 0.35% to performance. It has prospered by providing 'socially distanced' entertainment. The greater, longer term, attraction of the business is that with technology advances, the quality of the games is improving, thereby stimulating demand. Further, Ubisoft's partnership with Tencent, the Chinese technology company, opens prospects of success in China. Finally, we highlight the contribution from our investment in Gaztransport et Technigaz ("GTT"), the French engineering company that designs cargo containment systems for liquefied natural gas carriers and land storage of liquefied natural gas carriers. We identified this company as a beneficiary of the switch in Asia from using coal as the principal fuel for power generation to natural gas. As a cheap, relatively 'clean' source of energy, natural gas remains a compelling choice. Indeed, the trend to natural gas in Asia still holds. However, the outlook for natural gas in Europe and North America is less clear. We are monitoring developments to see what, if any, implications there are for GTT's Asian orientated business.

In response to the impact of COVID-19 and the associated policy reactions, we adjusted the portfolio in the first half of 2020. We sold our holdings in travel-related companies whose businesses models depend on high-capacity utilisation. These, we believe, are likely to be lasting casualties of COVID-19 restrictions. They are also companies which are directly or indirectly affected to a great extent by governments' interventions. For example, some airlines have had government support and some have not. These interventions are consistent with the International Monetary Fund's (IMF) advice. Whilst recommending big increases in public expenditure (a reversal of the IMF's historic prudence), the IMF advocates European governments to provide "solvency support" to businesses, urging the European Central Bank to consider "direct support" to companies if bank lending is insufficient. Further, the IMF has advised governments to prioritise support for companies that, in the view of governments, are most viable, "while facilitating the exit of unviable companies". Such a policy introduces a great deal of political risk.

For the period under review, though portfolio turnover (defined as sales as a percentage of average assets over the period, annualised) at 32% was a relatively high figure, this was not due to COVID-19 developments. Our sales of three significant holdings, Wirecard, Bayer and Grenke, were unrelated to COVID-19 issues. We sold all shares in Wirecard the day that convincing evidence of fraud was presented. We sold the holding in Bayer when the company's plans to resolve the lawsuits against its product, Roundup (a glyphosate-based herbicide), foundered in the American courts. The other major sale was of shares in Grenke. Investors in Grenke were quick to see similarities with Wirecard when allegations of fraud were made against the company and its principal shareholder. Indeed, as soon as the allegations were made, as a precaution we immediately sold our holding. However, we subsequently reinvested in Grenke, with a smaller position size; we think that the company and its officers will be vindicated in due course and we are encouraged by the company's commitment to improve corporate governance.

Most of the proceeds of these sales were deployed in increasing positions in existing holdings. We bought more shares in Ubisoft. We also bought more Genus. There were three new investments the largest of which was Soitec. We also established positions in Worldline and Mowi. Worldline is a French-based payments services company, offline and online, driven by the digitisation of payments. Mowi is the world's largest producer of Atlantic salmon. The feed conversion efficiency of salmon is one element that makes it a relatively low-cost product. Demand for salmon is increasing in North America, Europe, and Asia. Mowi is the biggest and most integrated producer and as such is best placed to capitalise on the positive demand trends

Outlook

Fundamental investment tenets are being challenged by a new order, 're-purposing capitalism', that started before COVID-19. The new order's impact is hardened by COVID-19 related policies. The increasing emphasis on Environmental, Social and Governance (ESG) issues, the EU's Green Deal and similar programmes, and a significant expansion in the role and reach of central governments are part of this new order. Private equity is attracting capital more easily than public equity. In short, free market capitalism appears to be out of fashion with the investment community and the political class. As governments and other stakeholders increasingly influence the allocation of resources, inefficiencies and higher costs are inevitable. This is inflationary. Whereas private capital values (stock markets or privately held assets) adjust quickly when the fundamentals are disproved, with so much political capital invested in the 'green' recovery, European governments will be slow to recognise a misallocation of resources. The massive increase in debts makes markets more vulnerable to setbacks. Furthermore, where so much public money is deployed protectionist urges will become greater. Our investment principles are unchanging. In recognising the primacy of the consumer, we are wary of stocks which depend overly on government subsidies and policies, and which are vulnerable to protectionist measures: we try to avoid political risk. We focus on companies whose products and services deliver demonstrable value to customers. Our companies, all European-listed, are typically global in their reach; tapping into growth opportunities around the world is ever more important not least because it is clear China and other Asian economies are stronger than Europe's. We invest in companies with proven and profitable products and services. There are, as always, great opportunities for world-leading European-listed companies. We seek to identify companies that will be winners from technology advances and where their business models are appropriate for the digital and global challenges. We remain confident that our investment process is well set to identify these winning companies.

Alexander Darwall

25 February 2021

Investment Portfolio as at 30 November 2020

Statement of Directors' Responsibilities in Relation to the Financial Statements

Going Concern

The Half Yearly Financial Report has been prepared on a going concern basis. The Directors consider that this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the Company's investment objective, risk management policies and capital management policies, the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments and the ability of the Company to meet all of its liabilities and ongoing expenses.

The Directors continue to adopt the going concern basis of accounting in preparing the financial statements while recognising that the Articles of the Company require a continuation vote at every third AGM.

Principal Risks and Uncertainties

Between now and the end of the financial year (and beyond) the Company will continue to be exposed to the effect of variations in the price of its investments. A fall in the value of its portfolio will have an adverse effect on Shareholders' funds. It is not the aim of the Board to eliminate entirely the risk of capital loss, rather it is its aim to seek capital growth. The Company may have significant exposure to portfolio companies from certain sectors from time to time. Greater concentration of investments in any one sector may result in greater volatility in the value of the Company's investments and may materially and adversely affect the performance of the Company. Other key risks faced by the Company relate to foreign currency movements, interest rates, liquidity risk, gearing risk, the discount to Net Asset Value, regulatory risk, loss of key personnel, operational and financial risks.

The outbreak of the COVID-19 pandemic poses additional risks to the Company beyond the risks described above. They include liquidity risks to markets, risks associated with the maintenance of the current dividend policy and business continuity risks for the Investment Manager. Each of these risks is being assessed on a day to day basis by the Investment Manager.

Directors' Responsibility Statement

We, the directors of European Opportunities Trust PLC, confirm to the best of our knowledge that:

(a) The condensed set of financial statements have been prepared in accordance with the Accounting Standards Board's statement 'Half Yearly Financial Reports' and give a true and fair view of the assets, liabilities, financial position and profit of the Company for the period ended 30 November 2020;

(b) The Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R; and

(c) The Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R on related party transactions.

The Half-Yearly Financial Report has not been audited or reviewed by the Company's auditors.

By Order of the Board

Andrew Sutch

Chairman

25 February 2021

Income Statement

* There is no other comprehensive income and therefore the 'Net return/(loss) after taxation' is the total comprehensive income/(loss) for the financial period.

The total column of this statement is the income statement of the Company, prepared in accordance with IFRS.

The supplementary revenue return and capital return columns are both prepared under guidance produced by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations.

No operations were acquired or discontinued during the period.

Balance Sheet

Statement of Changes in Equity

Cash Flow Statement

Notes to the Financial Statements

1. Accounting Policies

The accounts comprise the unaudited financial results of the Company for the period to 30 November 2019. The functional and reporting currency of the Company is pound sterling because that is the currency of the prime economic environment in which the Company operates.

The accounts have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB) and International Accounting Standards Committee (IASC), as adopted by the European Union (EU). Where presentational guidance set out in the Statement of Recommended Practice (SORP) for Investment Trusts issued by the Association of Investment Companies (AIC) in November 2014 (as amended in February 2018 and again in October 2019) is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. The accounts have also been prepared in accordance with the disclosure and Transparency Rules issued by the Financial Conduct Authority (FCA).

The Board continues to adopt the going concern basis in the preparation of the financial statements.

2. (Losses)/gains on investments

3. Return/(loss) per ordinary share

4. Retained earnings

* These reserves form the distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments.

5. Net Asset Value per ordinary share

The NAV per ordinary share is based on the net assets attributable to the ordinary shareholders of £856,019,000 (31 May 2020: £922,917,000) and on 109,866,340 (31 May 2020: 112,864,311) ordinary shares, being the number of ordinary shares in issue at the period end.

6. Comparative information

The financial information contained in this interim report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the six months to 30 November 2020 and 30 November 2019 has not been audited. The information for the year ended 31 May 2020 has been extracted from the latest published audited financial statements. The audited financial statements for the year ended 31 May 2020 have been filed with the Register of Companies. The report of the auditors on those accounts contained no qualification or statement under section 498(2) of the Companies Act 2006.

7. Related parties

With effect from 16 November 2020 the Company appointed FundRock Partners Limited as its Alternative Investment Fund Manager ('AIFM') in place of Fundrock Management Company SA, a company within the same group. Devon Equity Management Limited ('Devon') has been appointed as delegated Investment Manager for the Company by the AIFM since 15 November 2019.

Devon and FundRock are paid aggregate management fees of 0.90% per annum of net assets (i.e. excluding drawn down borrowings under the Company's loan facilities) up to £1 billion and 0.80% per annum on any net assets over this amount (with FundRock's fee deducted from the fee payable to Devon). No performance fee is payable to either Devon or FundRock.

The fee payable to Devon for the period from 1 June 2020 to 30 November 2020 was £3,836,000, with £1,915,000 outstanding at period end. There was an under accrual of management fees of £35,000 that relates to the prior year end.

Devon Equity Management Limited is the Investment Manager with secretarial and fund administration services delegated to J.P. Morgan Europe Limited. In line with good governance practice and fostered by the independence between key suppliers, the Company has put safeguards in place to ensure effective shareholder communication and engagement

8. Availability of Half Yearly Financial Report

The Half Yearly Financial Report will shortly be available for download from the Company's website www.europeanopportunitiestrust.com

A copy of the Half Yearly Financial Report will also be submitted to the FCA's National Storage Mechanism and will soon be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

For further information, please contact:

Devon Equity Management Limited

Company Secretaries to European Opportunities Trust PLC

Richard Pavry

020 3985 0445

enquiries@devonem.com

25 February 2021

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