Annual Financial Report
22/09/2023 07:00
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RNS Number : 2702N European Opportunities Trust PLC 22 September 2023
European Opportunities Trust plc (the 'Company')
Legal Entity Identifier: 549300XN7RXQWHN18849
Annual results for the year ended 31 May 2023
Financial Highlights
· Net asset value total return of 3.3% and share price total return
of 5.0% for the financial year, compared with a total return of 6.9% from the
MSCI Europe index.
· Net asset value total return per share of 881.8% since launch on
20 November 2000 (equivalent to 10.8% compound per year), outperforming the
total return of the MSCI Europe index of 241.4% over the same period
(equivalent to 5.6% compound per year).
· Annual dividend increased by 40% to 3.5p per share compared to
the prior year.
· Reduction on management fees agreed with effect from 1 June 2023.
· Continued buy back activity supporting a narrowing of the
discount from 12.3% as at 31 May 2022 to 10.9% as at 31 May 2023.
31 May 2023 31 May 2022 % change
Net asset value per share (pence) 876.46 850.64 3.0
Net asset value total return (with dividends added back) 3.3
Middle market share price (pence) 781.00 746.00 4.7
Share price total return (with dividends added back) 5.0
MSCI Europe index, total return in GBP (Benchmark) 6.9
Dividend per share (pence) in respect of financial year 3.5 2.5 40.0
Discount to net asset value at year end (%) (10.9) (12.3)
Ongoing charges ratio (%) 1.02 1.02
( )
Matthew Dobbs, Chair of the Company commented:
"Despite the disappointing performance relative to our Benchmark over recent
periods, the Board is entirely confident in our core investment case. The
Investment Manager embraces a high conviction approach, selecting companies
which they believe are differentiated and have the balance sheet strength,
cash flows and exposure to enable them to flourish in a range of economic
scenarios and provide superior returns to our investors over the medium term.
I would like to express my thanks to all of our shareholders and stakeholders
for their continuing support."
Sell side call
There will be a presentation for sell side analysts at 11.00 a.m. today, 22
September 2023. Please contact Buchanan for details on
EOT@buchanancomms.co.uk.
For further information, please contact:
Devon Equity Management Limited - AIFM enquiries@devonem.com
Richard Pavry / Charles Bilger +44 (0)20 3985 0445
Singer Capital Markets - Corporate broker
Robert Peel (Corporate Finance) +44 (0)20 7496 3000
Alan Geeves / James Waterlow / Sam Greatrex (Sales)
Buchanan - Communications
Henry Wilson +44 (0)7788 528143
Helen Tarbet +44 (0)7872 604453
George Beale +44 (0)7450 295099
Chair's Statement
I am pleased to present the Company's twenty third Annual Report and Accounts
since launch, covering the twelve months ended 31 May 2023 and my first year
as your Chair.
During the period under review the total return on the net asset value per
share of the Company was 3.3% (with dividends added back). This compares with
the total return of 6.9% from our Benchmark, the MSCI Europe index in GBP, and
the total return on the middle market price of the Company's shares of 5.0%
during the same period.
Since the year end the net asset value per share has increased by 2.0% to 894p
(as at 31 August 2023), outperforming the Benchmark index which increased by
1.6% over that period. The market price of the Company's shares on 31 August
was 800p, an increase of 2.4% since the financial year end.
Over the ten years to 31 August 2023 the total return on the net asset value
per share was 130.5%, which compares with the total return on our Benchmark of
109.7%. The total return on the share price was 102.6%, reflecting, in part,
the widening of the Company's discount in recent years.
The widening of the discount has partly reflected broader trends across the
Investment trust sector but must also reflect the Company's underperformance
of its Benchmark in recent years. Our Investment Manager's views on the
contributors and detractors to recent performance are set out in the review
below. While performance in recent years has been challenging, the Board
recognises that the Investment Manager's approach to investing the Company's
portfolio is clearly differentiated both from the Benchmark composition and
from the approaches of many competing, actively managed, funds. This high
conviction approach is likely to result in shorter-term variance from the
Benchmark, both in positive and negative directions. However, the Board
continues to believe that the Company represents a distinctive alternative
choice for investors which we believe is well positioned to deliver
outperformance again in the future.
Annual dividend
The Company's stated objective is to achieve shareholder returns primarily
through capital growth and the Board does not impose a specific income
objective on the Investment Manager in the management of our portfolio.
In order to qualify as an investment trust, the Company is not permitted to
retain more than 15% of eligible investment income arising during any
accounting period. Accordingly, the Board's policy is to propose a modest
annual dividend and one at least sufficient to enable the Company to maintain
its investment trust status.
Reflecting the substantial rise in net revenue for the year, augmented by a
small drawdown on the Company's ample capital reserve, the Board is
recommending a resolution to declare a final dividend of 3.5p per share (a 40%
increase on the 2022 dividend of 2.5p) which will be proposed at the Annual
General Meeting, payable on 27 November 2023 to shareholders on the Register
of Members on 3 November 2023 (the Record Date). The ex-dividend date is 2
November 2023. The cost of this dividend exceeds the minimum that the Company
is obliged to distribute under applicable law. A dividend reinvestment plan
(DRIP) is available to shareholders who would prefer to re-invest their
dividends in the shares of the Company.
The declaration of the dividend as a final dividend will provide shareholders
with an opportunity to express their approval on the matter, in line with
corporate governance guidelines. In the unlikely event that shareholders vote
against the resolution to pay a final dividend at the Annual General Meeting,
the Directors would pay an equivalent interim dividend, as otherwise the
Company would be likely to lose investment trust status, with damaging tax
consequences for many of its shareholders.
Our Investment Manager
In July 2022, our Investment Manager took on responsibility for the regulatory
role of Alternative Investment Fund Manager (AIFM) to the Company in place of
Fundrock Partners Limited. This transition followed a detailed review of the
Investment Manager's internal controls, compliance and risk environment by
both the Board and our depositary, JP Morgan. The Investment Manager continues
to build on the robust operational platform established in 2019 and, in terms
of the investment team working for your Company, our portfolio manager,
Alexander Darwall, is now supported and challenged by four other investment
professionals in pursuit of the Company's strategy.
Revised management Fee
The Board reviews the Company's management fee structure with the Manager each
year to ensure that the terms of the fee are competitive and reasonable for
shareholders. As part of this review, I am pleased to inform shareholders that
the Board agreed a reduced management fee with the Investment Manager which
was effective from 1 June 2023. Devon is now entitled to 0.80% per annum on
net assets up to £1 billion; 0.70% per annum on any net assets over £1
billion up to £1.25 billion; and 0.60% per annum on net assets above £1.25
billion. Previously Devon was entitled to 0.90% per annum on net assets up to
£1 billion and 0.80% in respect of any net assets above £1 billion.
Our approach to gearing
The Board believes that borrowing will enhance returns to investors over the
long term. The Board monitors the level of gearing carefully and has defined a
risk control framework for this purpose which is reviewed at each Board
meeting. It should be stressed that all gearing is subject to the Investment
Manager's confidence in identifying attractive investment opportunities, and
to them remaining attractive. Acting within parameters determined by the Board
the Investment Manager tends to increase gearing at times of perceived low
valuations, while reducing it as markets recover. The net gearing level on the
Company's investments was 8.9% at the year end.
Subsequent to the financial year end the Company renewed its multi-currency
revolving credit facility with The Bank of Nova Scotia, London Branch with a
maximum drawable amount of £85 million available until September 2024 (2023:
£100 million) and credit approval for an additional 'accordion' amount
available upon application for a further £50 million (2023: £50 million).
There was £75 million drawn down as at 31 May 2023, reduced to £55 million
drawn down as at the reporting date.
Discount management
The Board has an active discount management policy, the primary purpose of
which is to reduce discount volatility. It seeks to maintain the discount in
single digits in normal market conditions. Buying shares at a discount also
results in an enhancement to the NAV per share.
Average discounts of investment trusts invested in European equities narrowed
during the year under review, with the discount on the Company's shares being
10.9% at the year end (31 May 2022: 12.3%).
The Board believes that the most effective means of minimising any discount at
which the ordinary shares may trade is for the Company to deliver strong,
consistent, long-term performance from the investment portfolio (in both
absolute and relative terms). However, wider market conditions and other
considerations inevitably affect the rating of the ordinary shares from time
to time.
In determining whether a share purchase would enhance shareholder value, the
Board will take into account market conditions, the Company's performance, any
known third-party investors or sellers, the impact on liquidity and total
expense ratios and of course the level of discount to net asset value at which
the shares are trading. Any purchases will only be made at prices below the
prevailing net asset value and where the Board believes that such purchases
will enhance shareholder value.
A total of 4,126,242 shares were repurchased into treasury during the period
under review (with an aggregate value of £30.7 million) and a further
1,1,670,207 shares (with an aggregate value of £13.2 million) have been
repurchased since the financial year end (as at 18 September 2023). This
compares with 4,052,000 shares bought into treasury in the previous financial
year. The repurchase of shares at a discount to NAV added a total of £4.9
million to the Company's NAV during the period under review and has added a
further £1.7 million since the year end.
The Board is of the view that the Company should retain the power to buy back
shares during the current financial year and is therefore seeking to renew the
annual authority to repurchase up to 14.99% of the shares in issue at the
forthcoming AGM.
The Company also has authority to issue new shares and to reissue any shares
held in treasury for cash on a non-pre-emptive basis. Shares are
issued/reissued only at a premium to NAV, thereby enhancing NAV for existing
shareholders. The Directors are, once again, seeking 10% share issuance
authority at the AGM. As with the buyback authority, this authority will
expire at the conclusion of the AGM to be held in 2024, unless renewed
earlier. No shares were issued or reissued during the period under review.
Environmental, social & governance
Consideration of ESG factors by investors continues to be a rapidly developing
field which is to be welcomed. As we have mentioned in previous communications
it is still a relatively new area for investors and it can be an incredibly
complex landscape with its own language and metrics and sometimes conflicting
narratives. Your Board continues to engage with the Investment Manager about
its approach and the part ESG factors play in research, portfolio construction
and voting. The Company does not exclude sectors on sustainability grounds,
however consideration of ESG risks is an inherent part of the investment
process.
Board composition
As previously announced, Virginia Holmes intends to retire from the Board at
the forthcoming Annual General Meeting. Ms Holmes has served on your Board
since 2017 and as your Senior Independent Director since 2022. On behalf of
the Board and our shareholders I would like to thank her for her invaluable
contribution to the Company throughout her years of service. She takes with
her our very best wishes for the future.
I am delighted that Lord Lamont has agreed to take over as Senior Independent
Director with effect from the date of our AGM.
On 10 August 2023, the Board announced the appointment of Ms Manisha Shukla as
a non-executive Director of the Company. Ms Shukla is a practicing solicitor
with particular expertise in the financial services industry and we welcome
her to the Board.
We continue to review Board composition and Directors' succession on a regular
basis to ensure that we have a Board with a mix of tenures and one which
provides diversity of perspective together with the range of appropriate
skills and experience for your Company.
In accordance with the UK Corporate Governance Code, with the exception of Ms
Holmes, all Directors who have held office throughout the financial year are
offering themselves for re-election (or, in the case of Manisha Shukla,
election) at the forthcoming Annual General Meeting. Between them, the
Directors have a wide range of appropriate skills and experience to form a
balanced Board for the Company.
I would like to thank my fellow Directors for their diligence and dedication
on your behalf over the last year.
Continuation vote
Under our Articles of Association, the Company is required to put forward to
shareholders a resolution every three years to approve the Company continuing
in being as an investment trust. Accordingly, an ordinary resolution to that
effect will be proposed at this year's Annual General Meeting.
During the ten months since my appointment as your Chair I have engaged
directly and through both Devon and our brokers with a range of shareholders
representing the majority of the Company's ordinary share register. These
engagements have included both the Company's largest shareholders as well as
some smaller holders. I have been encouraged by the support from shareholders
during these discussions, noting that that the Company's underperformance over
the past five years should be set in the context of the longer-term
outperformance achieved for the Company's portfolio since the Company's launch
in November 2000 and acknowledging the importance of the consistent
application of the Company's discount management policy described above. The
Board considers the continuation of the Company to be in the best interests of
shareholders and recommends that shareholders vote in favour of the
continuation resolution at the Annual General Meeting.
Annual General Meeting
The Company's Annual General Meeting will be held on 15 November 2023. Notice
of the Annual General Meeting, containing full details of the business to be
conducted at the meeting, is set out in the Annual Report and Accounts.
I would like to take the opportunity to remind shareholders that you have the
right to vote on important matters that affect the Company. It is an important
aspect of an investment trust that shareholders can and are encouraged to make
their voices heard by voting on key business matters.
We continue to be pleased to see moves in the investment platform industry to
democratise shareholder access for nominee holders with information being made
more readily available by platforms to shareholders when companies have votes
open and giving the ability for shareholders to participate in those votes.
This past year in December, one of the largest platforms, Hargreaves Lansdown,
joined Interactive Investor in offering an online voting service for its
clients. Should you be a shareholder through a platform which offers the
opportunity to vote then we encourage you to take advantage of those
arrangements for casting your votes and thus having your say in the running of
your Company.
In addition to the formal business, Alexander Darwall will provide a
presentation to shareholders on the performance of the Company over the past
year as well as an outlook for the future. The Board would welcome your
attendance at the AGM as it provides shareholders with an opportunity to put
questions to both the Board and of the Investment Manager.
Outlook
Despite the disappointing performance over recent years the Board is confident
in our core investment case. We believe that our Investment Manager has the
potential to provide superior returns over the medium term and we encourage
all Shareholders to support the continuation of the Company for a further
three years at the forthcoming AGM.
I would like to express my thanks to all of our shareholders and stakeholders
for their continuing support.
Matthew Dobbs
Chair
21 September 2023
Investment Manager's Review
Despite slowing economic growth, stubbornly high inflation and higher interest
rates, European equities advanced in the period under review.
Higher interest rates normally have the effect of depressing equity valuations
and corporate earnings; and slower economic growth should also suppress
earnings growth. Equity valuations were nevertheless sustained during the
period despite the impact of higher rates. Corporate earnings, on the other
hand, have come under pressure. After the surge in earnings in 2021 and 2022,
consensus aggregate earnings for 2023 and 2024 are expected to be weak, with
barely any growth in 2023 and only about 5% expected in 2024.
The main explanation for the rise in European equity markets lies in the
lingering effects of the massive, expansionary 'quantitative easing' (QE)
central bank policies which were started in 2009 in response to the Global
Financial Crisis. Although policy makers have now moved from QE to
'quantitative tightening' (QT), the effects of the European Central Bank's
(ECB's) Asset Purchase Programme (APP) and the Bank of England's bond buying
programme will take time to reverse. Even though interest rates have now risen
markedly, there is still a great deal of 'cheap' money in the economy. Whilst
the stock of cheap money created by QE continues to sustain equity valuations,
government initiatives such as furlough schemes during COVID created
significant excess household savings, sustaining surprisingly high levels of
consumer spending. This has been a crucial factor behind the resilience of the
European economies and underlying corporate earnings. As household savings are
used up, and as QT grinds on to reverse the expansionary effects of QE, in due
course the present benign economic conditions will give way to a much tougher
economic climate.
Another element explaining the good performance of European equities during
the period is the easing of concerns over energy costs. Europe's energy
dependency is well known. The Green transition is not significantly changing
this dependency, at least not in the foreseeable future. Approximately 60% of
Europe's energy needs are imported. The rupturing of supplies and, finally,
prohibiting the import of gas from Russia has made Europe much more dependent
on imports of liquefied natural gas (LNG). Indeed, LNG imports have surged,
with the US the principal source. In addition, Europe's energy use by
households and industry dropped by an estimated 15% last winter. The
decarbonisation of the European economy has been accomplished through a loss
of industrial competitiveness, with industry (and associated emissions) being
moved offshore.
Europe's economy continues to underperform other regions. The IMF's most
recent forecasts in April 2023 bear this out. The IMF expects the European
Union to grow at 0.8% in 2023 and by 1.6% in 2024. The respective figures for
world growth are 2.8% and 3%. Inflation has proved to be a more intractable
problem in Europe than elsewhere. Accordingly, European central banks, notably
the ECB changed course when in June 2022 the Governing Council of the ECB
decided to discontinue net asset purchases under the APP as of 1 July 2022 and
thereby signalled its intention to raise interest rates. At the time of
writing, the ECB's main refinancing rate is 4% and the 3-month Euribor
interest rate is 3.57%, compared with 0% and -0.34% respectively at the end of
May 2022. This rapid rise in interest rates doubtless has the effect of
slowing economic growth, although, for the reasons described above, the full
impact is yet to be felt.
Positioning
We continue to invest in what we describe as 'special' companies, companies
that, in our opinion, can flourish in a range of economic scenarios and which
are well protected from competitive pressures. We believe that our portfolio
is well positioned to navigate macro challenges. Our companies tend to be much
more global in their activities than most European listed stocks, thereby
achieving exposure to faster growing economic regions; our companies tend to
have stronger balance sheets with less debt and higher cash flows than most
European listed stocks and thereby less vulnerable to higher interest rates;
our companies are relatively low users of energy and are therefore less
concerned by higher energy costs. Moreover, our companies are generally
relatively less exposed to consumer spending. Selling products and services
with measurable added value to other corporates and governments is, we think,
a more resilient business model as the economy slows down.
Even though we observe a retreat from globalisation, most obviously with the
deterioration in China's relations with the West, we continue to maintain the
'global' character of our portfolio and believe that it is a crucial strategic
advantage. The nature of our investee companies' exposure to China is,
generally speaking, such that we do not consider 'value at risk' to be a major
concern. In some cases, for instance semiconductors, there is a need to build
more capacity in the US and Europe to counter the dependency on production in
China and Taiwan. This duplication is, from a strictly economic view,
disappointing. However, for individual companies it can be a boon.
The Company's high level geographical and sectoral exposures are a product of
our stock picking approach to investment rather than an active asset
allocation decision in their own right.
We believe the Company's portfolio is well diversified, despite the relatively
small number of holdings. The portfolio has been managed in a consistent
manner since the launch of the Company in November 2000.
The biggest changes in the Company's sectoral exposures over 7 years have been
the reduction to Consumer Discretionary and Financials. The reduction in Basic
Materials and Telecommunications is explained by the acquisition of the
Company's former holding in Syngenta by ChemChina and the sale of Inmarsat,
respectively. The key underweights have consistently been to mainstream
Financials, Real Estate and Utilities. The Company's relatively large exposure
to Healthcare is diversified by the activity, market cap and portfolio
weighting of our underlying holdings.
Performance
The total return on the net asset value of the Company's ordinary shares was
3.3% during the twelve months to 31 May 2023. This compares with a total
return of 6.9% from our Benchmark, the MSCI Europe index in GBP.
We under performed our Benchmark during the period under review. We had
relatively low exposure to some of the better performing sectors in the
Benchmark during the period, such as defence financials and luxury goods.
Stock picking is the key to our strategy. We believe that our portfolio has
been hampered in recent years by the widespread investor apathy towards
European equities which has, we believe, caused an unmerited derating of some
of our companies.
European funds are out of favour, as evidenced by the significant outflows
from open-ended European equity funds this year. To a certain extent it is
understandable that asset allocators have withdrawn funds from European
equities: Europe is most heavily impacted by the energy crisis and does not
appear to have effective policies to reverse its long record of economic
underperformance. Recent manifestations of this malaise such as civil unrest
in France harden the perception that Europe is a difficult area in which to
invest. A reduced allocation to European equities disproportionately affects
the mid and smaller stocks in which we are overweight. Investor indifference
is only slightly mitigated by private equity interest in the region. Over the
last year we have had private equity bids for three of our companies, Network
International, OHB and SUSE. In all cases we consider the bids were too low
but the signal lack of interest from public market investors meant that we had
no choice but to accept. Even with occasional bids from private equity, we
believe that many of our companies are currently materially under-valued.
Results from our companies were good, underscoring our optimism in the
portfolio. We expect further positive developments as the year progresses. The
top performing companies in the period under review, as shown in the full
portfolio set out below have also been key contributors over the past three
years.
Contributors
The biggest single contributor to our performance in the period under review
was Novo Nordisk, the Danish pharmaceutical company, and our biggest
investment. The company's results have confirmed that demand for their new
diabetes and anti-obesity drugs is soaring. The anti-obesity part of their
business is extraordinary: an almost completely new opportunity. Whereas
existing therapies have failed to make much of a mark, Novo Nordisk's GLP-1
drugs have proved to be extraordinarily efficacious in causing weight loss. It
is a huge, growing global market with only one serious competitor presently.
The scale of the opportunity is hard to envisage, though one way is by taking
the World Health Organisation's definition of obesity, that being a Body Mass
Index (BMI) of more than 30. By this definition, in 2016 there were over 650
million obese adults globally, a number surely higher now and certainly higher
if children were included. Like all blockbuster opportunities, competition is
working hard to enter the space. Likewise, the stunning success of the drugs
has (rightly) brought commensurate scrutiny of the safety issues. On both
counts we are optimistic.
As for competition, the market is obviously big enough for multiple players.
Novo Nordisk can point to certain advantages (first mover, strong global
reputation, and favourable cardiovascular effects of their drugs) which are
likely to ensure a strong position in the market. As for safety concerns, the
company's GLP-1 drugs have been in the market, and taken by millions of
people, since 2014. There is therefore plenty of real-world evidence which, to
date, does not concern us unduly. Nevertheless, we recognise that these
factors - competition and safety concerns - are holding the shares back in the
short term. The results of more clinical trials are expected which should
further boost the company's prospects. Notwithstanding our great confidence in
the company, for the reasons explained in 'Portfolio Activity', we reduced our
weighting.
The next biggest contributor to our performance was Edenred, the French
provider of specific-purpose payment solutions for companies, employees and
merchants. Edenred is the inventor of 'Ticket Restaurant', and now processes
and promotes payment solutions for food (such as meal benefits), incentives
(such as gift cards, employee engagement platforms), mobility (such as
multi-energy, maintenance, toll, parking and commuter solutions) and corporate
payments (such as virtual cards). It operates schemes for governments and
corporates which want to give benefits to employees for specific purposes.
Revenues are expected to grow at nearly 20% in the near term, driven by new
government initiatives, digitalisation and a dynamic Brazilian market.
Management, in our opinion, is exceptionally good; we have great confidence in
their strategy.
Infineon, the German-listed, designer, manufacturer and marketer of power
semiconductors, was another significant contributor to performance. Demand for
power semiconductors has remained robust. Infineon's semiconductor systems and
solutions help to feed regenerative energy into power grids, reduce energy
consumption by computers and make cars more energy efficient. Power efficiency
and savings are clearly of increasing importance and Infineon is well placed
to benefit.
One of our long-standing investments, RELX, was another good performer.
Opinion is split as to whether the company will be a winner or loser from
Generative AI. The good price performance suggests that most investors think
RELX is a winner from Generative AI. This is also our view. There are two
areas of the company's business, Risk and Legal, where we think it will
benefit. AI is not completely new: RELX has for many years developed
algorithms which might now be described as AI. The necessary ingredients for
success are control of data and domain knowledge. RELX has both of these and
thereby is well protected from new entrants. In fact, we expect the company's
use of AI to be one factor which will increase the growth rates of its Risk
and Legal businesses.
In absolute terms Network International was the best performing stock in the
portfolio following a takeover offer from a private equity consortium.
Nevertheless, this was a disappointing outcome. The price at which the
takeover was agreed, in our opinion, significantly under-valued Network
International. Yet the directors were right to recommend the offer as public
market investors had not shown much interest in the company. This episode is
illustrative of public market investor apathy. Private equity has certain
advantages, not least that their investors are, necessarily, more patient. It
is regrettable that good companies such as Network International fail to
attract the requisite investor support to keep it in the public markets.
The performance of Oxford Instruments in some respects bears out this point.
In March 2022, Oxford Instruments was the subject of a conditional takeover
offer. Fortunately, Oxford Instruments remained independent and has, since the
takeover approach, produced a string of excellent results. Public market
shareholders are now benefitting from the company's commercial success, a
success built on its leading technologies. We expect the company to continue
its impressive record, delivering ever-more efficient research and
manufacturing tools including microscopy, scientific cameras and imaging which
they supply to a wide range of life sciences and physical sciences
enterprises.
Although it made only a small contribution to the portfolio's performance, as
the second largest holding, Experian, the leading credit bureau, deserves
comment. Credit origination in the US, one of the key drivers of Experian's
business, remained solid. Experian has developed a consumer-facing business in
North America which represents a successful diversification. Its business in
Brazil, its second biggest market, is thriving in the wake of changes in the
banking landscape in Brazil. The company has virtually no presence in China
(no value at risk) but sees scope to develop its other assets in Asia. India,
where Experian has been present with a credit bureau for many years, and which
represents a significant medium term growth opportunity.
Another positive contributor to performance was Dassault Systèmes, the
French-listed technology company. The company provides design and engineering
software for manufacturers and product life cycle management software to
pharmaceutical and healthcare companies. This long-standing investment
continues to impress with its constant innovation and strong strategic steps.
Its strategic vision and good execution mean that, in our opinion, Dassault
Systèmes is likely to build on its excellent track record.
Deutsche Boerse also contributed to performance. Higher interest rates in the
US and Europe boosted net interest income on cash balances. Turmoil in
financial markets is good for the company, both directly with more index
futures trading and indirectly as higher interest rates boosts their income
from customer deposits. Returns from commodity derivatives was also boosted by
high margin fees.
Finally, we note the strong showing of Grenke, the German small-ticket leasing
company. The subject of unfounded allegations of illegality in 2020, the
company has cleared its name and is now reporting good results. Higher
interest rates are, surprisingly perhaps, relatively good news for its leasing
business. Customers are quick to recognise higher borrowing costs from bank
lending. The same is not true of leasing. Accordingly, Grenke is reporting
better volumes and profits even as interest rates rise. We expect the company
to continue to progress.
Detractors
The worst performing stock in the period under review was Grifols. Grifols, a
Spanish company, is a world leader in the manufacture and marketing of blood
plasma derivatives. Poor management lies at the root of the problem. The
company has over-extended itself, taking on too much debt. Moreover, the
management has not executed well, allowing its core US operations to drift.
However, following a period of management turmoil, we are satisfied with the
appointment of a new CEO. The announcement of a significant restructuring plan
and other commitments to reduce debt has hardened our confidence. The company
faces a potential existential threat to the business in the form of new
competition from new anti-FcRn inhibitors which threaten to displace Grifols'
IgG fractionated products. In our view, demand for fractionated blood plasma
will remain strong notwithstanding the impact of FcRn inhibitors, and in due
course collections will return to normal as harsher economic conditions
incentivise blood plasma donors to return. The early signs of a turnaround in
the company's fortunes are encouraging.
Shares in SOITEC, the French technology company, performed badly. SOITEC has
unique technology. It designs and manufactures semiconductor materials. They
produce substrates for miniaturising chips, improving their performance and
reducing their energy usage. Management ructions explain the weak share price.
This situation appears to have stabilised now and as investor attention has
refocussed on their new innovative initiatives, confidence has started to
return. We are optimistic that SOITEC will enjoy another boost to its growth
rate as its technology is adopted in silicon carbide devices, itself a play on
the growing electric vehicle market.
Bayer shares also retreated in the period under review. Bayer is a global
enterprise with core competencies in life sciences, healthcare and technology
for agriculture. Even the appointment of a new CEO could not shake the torpor
that afflicts Bayer's shares. This German conglomerate has been plagued by
lawsuits in the US over the alleged carcinogenic effects of Roundup, its
systemic, glyphosate-based herbicide originally produced by Monsanto. To date,
the company has set aside approximately $13 billion to settle with most
plaintiffs. There is a risk of further costs. The Crop Science business of
Bayer is world class. We expect its value will be properly recognised by
investors in due course.
Mowi is the world's leading salmon farmer. The business has performed well,
with demand for salmon continuing to improve, underlining our view that this
is a good, resilient business. However, the Norwegian government introduced a
new 'resources' tax to take most of the profits that Mowi generates from its
Norwegian based business. This quasi nationalisation was unacceptable to us;
it distorts normal capital allocation and represents a significant penalty for
Mowi's success in building a strong business. Accordingly, we sold our shares.
The French company, Gaztransport & Technigaz (GTT) also slightly detracted
from our performance. It provides engineering and design technologies for
liquefied natural gas (LNG) carriers and engineering and design technologies
for LNG propulsion systems for ships. Although the EU Parliament decided to
approve the inclusion of gas and nuclear in the EU Taxonomy, lower gas prices
has blunted investors' enthusiasm for GTT. The greater use of natural gas is
clearly vital to GTT's success. One of the main attractions of natural gas is
that it is a ''transition'' fuel, a fuel that can substitute oil and coal with
lower carbon dioxide emissions. However, pressure is building to move directly
to renewable sources of energy, bypassing the use of natural gas. The
International Maritime Organisation, for instance, has recently adopted a net
zero commitment for international shipping by 2050. In the absence of credible
alternative fuels, we think this is an unrealistic ambition and continue to
believe that LNG will form an important part of shipping's fuel mix. We are
confident in GTT's prospects.
Shares in Genus, the world leader in porcine and bovine genetics, fell
sharply. The core business, the development and supply of bovine and porcine
genetics, remains very solid. It is a world leader. However, the Chinese
market, an important market for Genus, has slumped as African Swine Fever has
ravaged the Chinese pig herd. In due course we expect the Chinese market to
recover and with that we would expect to see a recovery in the Genus share
price. The company is at an advanced stage with studies which we expect will
lead to it applying for regulatory approval of its gene editing technology for
creating animals resistant to the Porcine Reproductive and Respiratory
Syndrome virus (PRRSv). This is potentially a huge, transformational
opportunity for Genus. We remain confident about the core business and see
tremendous potential value in the company's gene editing technology.
Neste, the Finnish-listed company, had a small negative impact on our returns.
Its principal business is the production and sale of renewable biodiesel
including Sustainable Aviation Fuel (SAF). Results have been excellent.
However, investors have concerns both about demand and supply for their
products.
As regards demand, the new Swedish government's decision to cut the amount of
biofuel that must be added to diesel and petrol has highlighted the
vulnerability of a business which is largely dependent on government
regulation. We do not expect a softening in mandates in Europe, which are
forecast to drive demand. And whilst it is true that most demand depends on
mandates in Europe and the US, the voluntary market is also important and
growing. SAF is the most significant part of the voluntary market in which
airlines have chosen to go beyond EU or government mandates committing to
using increasing proportions of SAF with jet fuel. We are confident that
demand for Neste's renewable products is growing strongly.
As regards supply, admittedly there are plenty of competitors with plans to
build capacity. However, we think that Neste has a critical advantage in
securing feedstock partly because Neste's proprietary processing technology
allows it to use lower quality waste materials, giving it an advantage over
its competitors and partly because it has built an impressive global
collection platform. Without such an advantage, we think that competitors will
struggle to secure sufficient resources thereby limiting its capacity to
compete. We remain confident that the company's prospects are soundly based.
BioMérieux, the French listed in vitro diagnostics company, has emerged from
Covid a bigger, more profitable business. Yet the shares have been derated.
This we attribute to investor apathy rather than to a deterioration in the
company's prospects. Indeed, with the launch of its new point-of-care
syndromic testing kits, we believe that BioMérieux has opened a big new
opportunity. The company's prospects are better than ever.
Since its listing in April 2021 Darktrace has produced a series of excellent
results. The company warned that their growth rate has slowed to just under
30%, a figure that unsettled some investors. The bigger concern for Darktrace
was the allegation of criminal misconduct, specifically in its accounting
practices. The company announced in July that a forensic audit had found no
evidence of wrongdoing. We have engaged extensively with management and the
directors. Consequently, we are currently relatively optimistic for this
holding.
Finally, Intermediate Capital Group (ICG) also detracted from our relative
returns. ICG is a UK-listed private equity company investing in private credit
and debt. Although its results have continued to impress, many investors are
concerned that ICG will be adversely affected by rising interest rates. To
some extent this is true, however there are other considerations which makes
us, on balance, more optimistic. The first is that ICG has more exposure to
private debt than it has to private equity. This implies that it possesses
substantial safeguards, given the availability of funds to settle debts prior
to benefiting shareholders. In this respect, the tighter debt situation is a
positive for the company.
Activity
We raised approximately £153 million from sales during the year under review,
representing about 17.8% of the portfolio. We reinvested approximately £118
million of the proceeds, representing 13.6% of the portfolio, using part of
the balance to reduce bank borrowings. We remain confident in our investments
but have been reducing net gearing over the last few months, largely in
response to higher interest rates.
The biggest sale during the year was that of our entire holding in the
Swiss-listed Barry Callebaut, the world's leading manufacturer of high-quality
chocolate and cocoa products. As a consumer facing business we were concerned
that higher chocolate prices would impact demand for Barry Callebaut's
products. Indeed, since selling the position the company's results have shown
that this is what happened.
We also sold our shares in Mowi for the reasons explained earlier in this
report: a new punitive tax on the company's Norwegian operations convinced us
that this will stunt the development of salmon farming in Norway.
We sold Pets At Home as we have concerns about how it will fare in a UK
consumer recession.
We reduced weightings in Novo Nordisk, Infineon, Dassault Systèmes, Wolters
Kluwer, RELX, GTT, Worldline, BioMérieux. The bigger sales of Novo Nordisk,
Infineon, Dassault Systèmes and RELX were prompted by strong performance,
reducing already significant weightings. The other sales were made on
valuation grounds and when we considered there was better value to be found in
other stocks. The over-arching consideration was to reduce the Company's
borrowings.
In the course of the year we took new positions in Ryanair, Genmab, Bachem,
Air Liquide, SUSE, Elkem, BFF, and Prysmian. Of these, Ryanair was the biggest
new position. This is a company which we have held for long periods in the
past. Although we have some concerns about investing in a business that is
vulnerable to a consumer recession, the extent of the cost and network
advantages that Ryanair has built in recent years is extraordinary. Ryanair
has, because they planned for a strong recovery during the Covid pandemic,
gained market share in the European short haul market. Its network of flight
routes has expanded as competitors have retreated. Its cost advantage is such
that we believe it can weather a recession well not least because it should
gain more market share as passengers seek better value flights.
We also established a position in Genmab, a Danish biotech company, focussed
primarily on oncology through the production of monoclonal and bispecific
antibodies. It has leadership in the most complex aspects of antibodies
production and an impressive pipeline. We see opportunities for the company to
develop in other therapeutic areas. Their potential addressable market is huge
although it will take time for this to develop.
Air Liquide was another important new purchase. It is a global leader in
industrial and healthcare gases, producing and selling gases such as hydrogen,
liquid nitrogen, oxygen and carbon dioxide. Industrial gases are vital to most
industrial activities. The transition to 'green' industrial gases, notably
hydrogen, represents a significant potential opportunity for Air Liquide. We
like their low risk, higher reward strategy as regards the green transition.
It is their customers, rather than Air Liquide itself, which take the initial,
substantial capital risks where 'green' transition is concerned.
We initiated a position in Prysmian, an Italian company headquartered in
Milan. Prysmian operates in the business of underground and submarine cable
systems for power transmission and distribution, special cables for
applications in various industrial sectors and medium and low voltage cables
for infrastructure and construction needs. The Group also operates in the
telecommunications sector by manufacturing cables and accessories for voice,
video and data transmission, with a full range of optical fibre, optical and
copper cables, and connectivity systems. North America accounts for over a
third of group sales and is the region which will probably make the greatest
contribution to profits growth in the medium term. There is a tremendous need
to overhaul and modernise the electric grid in the US. Increasing electricity
generation, driven by the substitution of fossil fuels for renewable energy
sources, more data centres and 're-shoring', necessitates this upgrade. The
same is true in Europe, which accounts for over 40% of group sales, though the
grid is not as old as in the US.
Smaller new purchases included that of shares in Bachem, the Swiss listed
company, which develops and produces peptide active pharmaceutical ingredients
(API). Bachem has long-term expertise in chemistry manufacturing and controls
development in industrial peptide manufacturing. The company is expanding into
the adjacent activity of oligonucleotide manufacturing.
Bachem stands to benefit from the growth in the market for peptide-based
therapies, most notably the GLP-1 class of drugs for diabetes and obesity,
although the pipeline of broader peptide-based therapies is exceptionally
strong. The success of existing and new peptide-based therapies can be
expected to drive a continued inflow in R&D investment into peptide- based
therapies, underpinning our confidence in the continued growth of the market,
from which, as the clear market leader, Bachem stands to gain. The company's
expansion into the adjacency of oligonucleotide manufacturing further
contributes to the company's growth prospects.
SUSE is a German-based multinational open-source software company that
develops and sells Linux computer operating systems to business customers.
Subscribers receive support and access to custom packages which improve the
operating system. As computing power and use rises, we expect the demand for
operating system instances to increase in parallel. This is what Linux from
SUSE, the world's second biggest provider of paid Linux, provides. Recent
execution has disappointed. We believe that the newly appointed CEO can
improve execution and boost the growth rate. We sold this holding after the
period end following a recommended offer by a private equity company.
We also took a very small position in Elkem, the Norwegian-listed producer of
silicones and silicon products, operating worldwide. We believe that the
company enjoys a sustainably favourable cost position which will ensure that
it remains a leader as demand grows.
A new position was established in BFF Banking Group, the largest independent
specialty finance company in Italy and a leading player in Europe. It
specialises in the management and non-recourse factoring of trade receivables
due from the Public Administrations, securities services, banking and
corporate payments. Experts at collecting payments from public authorities,
BFF provides this factoring service to many suppliers to the same public
authorities. Its roots are in collections for their pharmaceutical customers.
The group operates in Italy, Croatia, Czech Republic, France, Greece, Poland,
Portugal, Slovakia and Spain.
Largest net purchases and sales during the period
Largest net purchases £'m Largest net sales £'m
Ryanair 15.6 Novo Nordisk 30.7
Genmab 14.7 RELX 22.8
Air Liquide 13.4 Barry Callebaut 17.6
Prysmian 12.2 Mowi 15.9
Edenred 5.1 Infineon Technologies 9.6
Gearing
Net gearing at 31 May 2023 was 8.9%. In setting the level of borrowings, we
are mindful of the levels of debt in our underlying companies, as well as the
macro situation and upside potential of our investments. It is not our
intention in the foreseeable future to increase borrowings. Since the year end
our net borrowings have reduced further to 5.6% as at 31 August 2023.
Outlook
Investor sentiment regarding Europe is not good. Europe has been a
structurally lower growth region than North America and Asia. This pattern is
unlikely to change soon. Indeed, Europe remains vulnerable to further energy
shocks. The EU's target, as set out in its 'Fit for 55' is the reduction of EU
emissions by at least 55% by 2030. The corollary is that renewable energy
should reach 45% share of the total energy mix by 2030. Reaching these goals
has an economic cost. Accordingly, we select companies that have a global
reach, tapping into faster growing regions, and companies where energy costs
are a lower component of the overall cost base.
The European economy has proved to be surprisingly resilient, buoyed by robust
consumer spending. Driven by the joint impacts of monetary and fiscal
stimulus, the post-pandemic period has been one characterised by abundant
liquidity and a resilient consumer. However, as the ECB's asset purchases
continue to unwind and consumers deplete their pool of excess savings, we see
a different dynamic unfolding, a less resilient economy and more subdued
consumer spending.
Our companies, typically, have lots of intellectual property (IP) and innovate
extensively, meeting customers' needs. New technologies will continue to drive
innovation and create new business opportunities. Most prominent of these
emergent technologies is Artificial Intelligence (AI). In our view, the
biggest beneficiaries of this development will be those companies that have
proprietary, monetisable data, and those that provide infrastructure to
accommodate significant computing applications, fitting exactly the profile of
our investee companies. These same IP intensive, innovative businesses have
pricing power and discipline, a crucial factor in softer economic conditions.
We remain confident in our strategy and in the positioning of our portfolio.
Our lower exposure to consumer spending and input cost dependency positions us
well. Moreover, the strong balance sheet and profitability profiles of our
companies positions them well not only to survive in more challenging
conditions, but to thrive as competitors lack the cash flows to invest through
the cycle and as new M&A opportunities emerge.
Our style has remained consistent throughout the 23 years since the Company's
launch in November 2000. We invest in companies with exceptional,
idiosyncratic growth prospects, that succeed through the cycle, owing to the
value proposition their products represent to customers. Notwithstanding our
concerns about widespread investor apathy, we continue to identify and invest
in special companies which enjoy structural growth. This is the basis of our
confidence in the medium-term prospects for the Company's portfolio.
Alexander Darwall
CIO, Devon Equity Management Limited
21 September 2023
Investment Portfolio as at 31 May 2023
Relative Contribution to Portfolio return/%
Market Portfolio weight/% Benchmark weight/% Price 12 months/%
Company Sector Country Value £'000
Novo Nordisk Healthcare Denmark 121,606 13.0 2.7 48.8 4.4
Experian Industrials UK 88,437 9.4 0.3 8.5 1.0
Dassault Systèmes IT France 77,777 8.3 0.3 6.7 0.7
RELX Industrials Netherlands 75,351 8.0 0.6 13.1 1.2
Edenred IT France 57,842 6.2 0.2 35.2 1.6
Deutsche Boerse Financials Germany 57,480 6.1 0.3 6.8 0.4
BioMérieux Healthcare France 52,255 5.6 0.0 (2.3) 0.1
Bayer Healthcare Germany 44,376 4.7 0.6 (17.4) (0.8)
Genus Healthcare UK 42,579 4.6 - (7.5) (0.2)
Infineon Technologies IT Germany 32,672 3.5 0.5 22.1 0.8
Intermediate Capital Group Financials UK 31,694 3.4 - (6.0) (0.2)
SOITEC IT France 31,566 3.4 - (22.4) (1.0)
Grifols Healthcare Spain 25,523 2.7 0.0 (44.0) (2.2)
Merck Healthcare Germany 22,433 2.4 0.2 (5.1) (0.0)
Gaztransport & Technigaz Energy France 20,487 2.2 - (20.1) (0.6)
Oxford Instruments IT UK 19,337 2.0 - 25.7 0.5
Neste Energy Finland 19,013 2.0 0.2 (31.2) (0.9)
Darktrace IT UK 15,522 1.7 - (23.4) (0.4)
Ryanair Holdings Industrials Ireland 15,419 1.6 - (1.9) (0.0)
Air Liquide Materials France 13,474 1.4 0.9 1.6 (0.1)
Genmab Healthcare Denmark 12,858 1.4 0.3 (15.1) (0.3)
Prysmian Industrials Italy 11,929 1.3 0.1 (2.3) (0.1)
Grenke Financials Germany 9,615 1.0 - 6.8 0.1
Network International Holdings IT UK 9,255 1.0 - 68.6 0.4
Bachem Holding Healthcare Switzerland 4,219 0.5 0.0 (21.6) (0.1)
Grifols Preference Healthcare Spain 4,105 0.5 - (35.7) (0.2)
Hikma Pharmaceuticals Healthcare UK 3,583 0.4 0.0 6.8 0.0
Elkem Materials Norway 2,898 0.3 - (20.6) (0.1)
Borregaard Materials Norway 2,815 0.3 - (12.6) (0.2)
OHB Industrials Germany 2,707 0.3 - (7.3) (0.0)
Wolters Kluwer Industrials Netherlands 2,290 0.2 0.3 19.0 0.2
SUSE IT Luxembourg 1,795 0.2 - (31.3) (0.1)
Worldline IT France 1,754 0.2 0.1 (3.3) 0.1
BFF Bank Financials Italy 1,652 0.2 - 9.3 0.0
Total 936,318 100.0
* Price performance and relative contribution to portfolio returns have been
calculated on a total return and transactions basis over the period from close
on 31 May 2022 to 31 May 2023. These calculations include the impact of
foreign currency rates and are based on Bloomberg securities and FX pricing
sources and Bloomberg's estimation of the portfolio's total market value.
Relative contribution to portfolio return is measured against the MSCI Europe
total return index in GBP. Source: Devon, Bloomberg.
Strategic Report
The Strategic Report has been prepared in accordance with the Companies Act
2006 (Strategic Report and Directors' Report) Regulations 2013. The Strategic
Report seeks to provide shareholders with the relevant information to enable
them to assess the performance of the Directors and the Company during the
financial year under review as per the requirements for Directors in the
Companies Act 2006.
Business and Status
During the year, the Company carried on business as an investment trust with
its principal activity being portfolio investment. The Company has been
approved by HM Revenue & Customs as an investment trust subject to the
Company continuing to meet the eligibility conditions of sections 1158 and
1159 of the Corporation Tax Act 2010 and the ongoing requirements for approved
companies as detailed in Chapter 3 of Part 2 of the Investment Trust (Approved
Company) (Tax) Regulations 2011. In the opinion of the Directors, the Company
has conducted its affairs in the appropriate manner to retain its status as an
investment trust.
The Company is an investment company within the meaning of section 833 of the
Companies Act 2006. It is not a close company within the meaning of the
provisions of the Corporation Tax Act 2010 and it has no employees. The
Company is domiciled in the United Kingdom, was incorporated in England &
Wales on 16 August 2000 and started trading on 20 November 2000, The Company
is an Alternative Investment Fund (AIF) for the purposes of the UK Alternative
Investment Fund Managers Regulations.
There has been no significant change in the activities of the Company during
the year to 31 May 2023 and the Directors anticipate that the Company will
continue to operate in the same manner during the current financial year.
Investment policy
The Company will, at all times, invest and manage its assets, with the
objective of spreading risk and in accordance with the following Investment
Restrictions:
· no single holding shall constitute more than 10% of the Company's
total assets (calculated at the time of investment). The Board will pay
particular attention to holdings which grow to represent more than 10% of
total assets;
· the Company will not invest in unlisted securities;
· the Company will not invest in derivative instruments, whether
for efficient portfolio management, gearing or investment purposes;
· the Company will not invest in other listed closed-ended
investment funds;
· the Company shall not take legal or management control over any
investments in its portfolio; and
· not more than 50% of the Company's investments may be in
securities which are not qualifying securities or government securities for
the purposes of the UK ISA Regulations.
The Board is responsible for promoting the long-term success of the Company
for the benefit of all stakeholders and in particular its shareholders.
Although the majority of the day-to-day activities of the Fund are delegated
to the Investment Manager and third-party service providers, the
responsibilities of the Board are set out in the schedule of matters reserved
for the Board and the relevant terms of reference of its Committees, all of
which are reviewed regularly by the Board.
To ensure that the Board is able to discharge this duty, both the Investment
Manager and third-party service providers are required to provide the Board
with regular updates. In addition the Directors, or the Board as a whole, have
the authority to seek advice from professional advisers including the
Company's service providers and independent external advisers as well as
attend any relevant training seminars.
Any material change in the investment policy of the Company described above
may only be made with the approval of shareholders by an ordinary resolution.
Investment Approach
The Investment Manager adopts a stock picking approach in the belief that a
thorough analysis and understanding of a company is the best way to identify
long-term superior growth prospects. This understanding begins with
identifying those companies where the ownership structure and incumbent
management are conducive to the realisation of the aim of achieving superior
long-term earnings growth.
The Investment Manager seeks to identify companies which enjoy certain key
business characteristics including some or all of the following:
· a strong management record and team, and the confidence that the
Investment Manager has in that management's ability to explain and account for
its actions;
· proprietary technology and other factors which indicate a
sustainable competitive advantage;
· a reasonable expectation that demand for their products or
services will enjoy long-term growth; and
· an understanding that structural changes are likely to benefit
rather than negatively impact that company's prospects; and
· the ESG criteria (described above).
In analysing potential investments, the Investment Manager employs differing
valuation techniques depending on their relevance to the business
characteristics of a particular company. However, the underlying feature will
be the sustainability and growth of free cashflow in the long-term.
Portfolio risk
Portfolio risk is mitigated by investment in a diversified spread of
investments. The Investment Manager is not constrained by Benchmark
weightings, sector, geographical location within Europe or market
capitalisation or size of investee companies.
Benchmark index
The Company's Benchmark is the total return on the MSCI Europe index in GBP.
Borrowing limits
The Board considers that long-term capital growth can be enhanced by the use
of gearing through bank borrowings. The Board considers that the Company's
level of gearing should be maintained at appropriate levels, with sufficient
flexibility to enable the Company to adapt at short notice to changes in
market conditions.
The Board oversees the level of gearing in the Company and reviews the
position with the Investment Manager on a regular basis. In normal
circumstances the Board does not expect the level of gearing to exceed 20% of
the Company's total assets (calculated at the time of borrowing).
Future developments
It is the Board's ambition to grow the asset base of the Company through a
combination of organic growth and new issuance of shares (where there is an
opportunity to do so at a premium to NAV). The Investment Manager is
encouraged to use the particular advantages of the Company's investment trust
structure to enhance potential returns to shareholders, including the use of
gearing and the freedom to hold high conviction positions through periods of
market fluctuations.
Planned life of the Company
The Articles of Association of the Company provide that at every third Annual
General Meeting an ordinary resolution shall be proposed that the Company
shall continue in existence as an investment trust. If any such resolution is
not passed at any of those meetings, the Directors shall, within 90 days of
the date of the resolution, put forward to shareholders proposals (which may
include proposals to wind up or reconstruct the Company) whereby shareholders
are entitled to receive cash in respect of their shares equal as near as
practicable to that to which they would be entitled on a liquidation of the
Company at that time (and whether or not shareholders are offered other
options under the proposals).
The next scheduled continuation vote will be at the 2023 Annual General
Meeting. Shareholders should note that the valuation policies used to produce
these Accounts on a going concern basis might not be appropriate if the
Company were to be liquidated.
Dividend policy
The Company's objective is to achieve shareholder returns through capital
growth rather than income. However, in order to qualify for approval as an
investment trust, the Company is not permitted to retain more than 15% of
eligible investment income arising during any accounting period. Accordingly,
the Board's policy is to propose a modest annual dividend and one at least
sufficient to enable the Company to maintain its investment trust status.
Management
The Company has no employees and most of its day-to-day responsibilities are
delegated to the Investment Manager.
J.P. Morgan Europe Limited acts as the Company's depositary and the Company
has entered into an outsourcing arrangement with J.P. Morgan Chase Bank N.A.
for the provision of accounting and administration services.
Although Devon Equity Management Limited is named as the Company Secretary at
Companies House, J.P. Morgan Europe Limited provides all company secretarial
services to the Company as part of its formal mandate to provide broader fund
administration services to the Company.
Risk management & internal controls
The Board has established an ongoing process for identifying, evaluating and
managing significant risks faced by the Company. This is described in more
detail below.
Viability statement
In accordance with the Code of Corporate Governance issued by the Association
of Investment Companies ('AIC') in February 2019 (the 'AIC Code'), the Board
has assessed the longer-term prospects for the Company beyond the twelve
months required by the going concern basis of accounting. The period assessed
is for five years to 31 May 2028.
The Directors' view of the Company's viability has not changed since last
year. The Company, as an investment trust, is a collective investment vehicle
rather than a commercial business venture and is designed and managed for
long-term investment. The Company's investment objective is to achieve
long-term capital growth and the Board regards the Company's shares as a
long-term investment. 'Long-term' for this purpose is considered by the
Directors to be at least five years, a timeframe in which the accuracy of
estimates and assumptions is deemed to be reasonable. The Company's viability
has thus been assessed over that period. Five years is considered a reasonable
time frame for a forecast, however, the life of the Company is not intended to
be limited to that or any other period.
There are no current plans to amend the investment strategy, which has
delivered good investment performance with NAV total returns ahead of the
Benchmark since launch and over the past ten years. The Directors believe that
the Company should continue to perform despite more recent underperformance of
the Benchmark over one, three and five years. The investment strategy and its
associated risks are kept under constant review by the Board.
In assessing the viability of the Company under various scenarios, the
Directors undertook a robust assessment of the principal risks and
uncertainties to which it is exposed (including the issues arising from the
COVID-19 pandemic, Russia's invasion of Ukraine and climate change). The risks
of failure to meet the Company's investment objective, and contributory market
and investment risks, were considered to be of particular importance. The
Directors also took into account: the investment capabilities of Devon; the
liquidity of the portfolio, with nearly all investments being listed and
readily realisable; the Company's borrowings (the Company maintains a
relatively low level of gearing and has at all times been comfortably
compliant with its loan to value and other covenant obligations to its lender,
The Bank of Nova Scotia, London Branch); the ability of the Company to meet
its liabilities as they fall due; the Company's annual operating costs and
that, as a closed ended investment trust, the Company is not affected by the
liquidity issues of open-ended companies caused by large or unexpected
redemptions.
In taking account of these factors and pursuant to the Board's review of the
detailed internal controls and risk management processes, the Directors have
undertaken a reverse stress test seeking to identify the financial
circumstances that might result in the Company becoming unviable. This
concluded that the viability of the Company might start to be challenged if
the value of Total Shareholders' Funds were to fall permanently by
approximately 80% from the level at the year end, a fall that the Board
considers to be near implausible having noted that since the launch of the
Company in November 2000, the largest fall in the Company's Benchmark, the
total return on the MSCI Europe index, over any calendar year has been 34.4%
and the largest fall over any rolling five year period has been 14.5% (each
based on Benchmark calendar month end values).
As part of its assessment, the Board has noted that shareholders are required
to vote on the continuation of the Company at three-year intervals, the next
vote being at the forthcoming Annual General Meeting. The Board has sought and
received feedback from shareholders and is confident that the continuation
vote will be passed.
Based on the above, and assuming there is no adverse change to the regulatory
environment and tax treatment of UK investment trusts to the extent that would
challenge the viability of the UK investment trust industry as a whole, the
Directors have a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over the five
year period of assessment.
The Directors' assessment of the Company's ability to operate in the
foreseeable future is included in the Going Concern Statement in the
Directors' Report in the Annual Report and Accounts.
Key Performance Indicators
At the quarterly Board meetings, the Directors consider a number of
performance indicators to help assess the Company's success in achieving its
objectives. The key performance indicators used to measure the performance of
the Company over time are as follows:
Share price total return 1 year (%) 3 years (%) 5 years 10 years (%)
to 31 May 2023 (%)
The Company 5.0 4.8 4.0 100.9
MSCI Europe Index, total return in GBP (Benchmark) 6.9 36.4 34.6 104.4
AIC Europe peer group(1) 12.9 34.9 49.7 153.2
Net asset value total return 1 year (%) 3 years 5 years (%) 10 years (%)
to 31 May 2023 (%)
The Company 3.3 8.2 15.1 127.8
MSCI Europe Total Return Index in GBP (Benchmark) 6.9 36.4 34.6 104.4
AIC Europe peer group(1) 10.0 32.6 46.4 149.8
(Discount)/premium as at 31 May 2023 (%) 2022 (%) 2021 (%)
The Company (10.9) (12.3) (9.0)
AIC Europe peer group(1) (8.3) (10.3) (5.1)
Ongoing charges for the year ending 31 May 2023 (%) 2022 (%) 2021(%)
The Company 1.02 1.02 0.99
AIC Europe peer group1 0.88 0.85 0.85
1 The AIC Europe peer group data is available at www.theaic.co.uk.
(http://www.theaic.co.uk/)
There were 7 investment trusts in the AIC Europe sector as at 31 May 2023. The
Board monitors the Company's performance in relation to both the investment
trust market as a whole and the companies within the geographical sector which
the Board considers to be its peer group.
Discount to net asset value
The Company's Discount Management Policy is set out in the Chair's Statement
above.
Under the Listing Rules, the maximum price that may currently be paid by the
Company on the repurchase of any ordinary shares is 105% of the average of the
middle market quotations for the ordinary shares for the five business days
immediately preceding the date of repurchase. The minimum price is the nominal
value of the ordinary shares.
The Board is proposing that its authority to repurchase up to approximately
14.99% of its issued share capital should be renewed at the Annual General
Meeting. The new authority to repurchase will last until the conclusion of the
Annual General Meeting of the Company in 2023 (unless renewed earlier). Any
repurchase made will be at the discretion of the Board considering prevailing
market conditions and within guidelines set from time to time by the Board,
the Companies Act, the Listing Rules and the Disclosure, Guidance and
Transparency Rules of the FCA.
Treasury Shares
In accordance with the Companies (Acquisition of Own Shares) (Treasury Shares)
Regulations 2003, any ordinary shares repurchased, pursuant to the above buy
back authority, may be held in treasury. These ordinary shares may
subsequently be cancelled or sold for cash. This gives the Company the ability
to reissue shares quickly and cost effectively and provide the Company with
additional flexibility in the management of its capital. The Company may hold
in treasury any of its ordinary shares that it purchases pursuant to the share
buyback authority granted by shareholders. During the financial year the
Company repurchased 4,126,242 ordinary shares to be held in treasury at an
average discount of 14.22% (2022: 4,052,000).
Ordinary shares held in treasury may only be reissued by the Company at prices
representing a premium to the net asset value per ordinary share as at the
date of re-issue.
Principal risks and uncertainties
In accordance with the AIC Code, the Board is responsible for establishing
procedures to manage risk, oversee the internal control framework, and
determine the nature and extent of principal risks the Company is willing to
take in order to achieve its long-term strategic objectives. The Board has
overall responsibility for the Company's systems of internal controls and for
reviewing their effectiveness. The Board, with the support of the Audit &
Risk Committee and the Investment Manager, has carried out a robust assessment
of the principal and emerging risks which may impact the Company. The
principal risk factors that may affect the Company and its business can be
divided into the following areas:
Risk and Impact How the risk is managed Current assessment of risk
Investment Strategy Risk To mitigate these risks the Board reviews the Company's investment objective Increasing:
and policies and the Investment Manager's investment approach in the context
Pursuing an investment strategy to fulfil the Company's objective which the of past performance (relative to Benchmark), shareholder feedback and broader The Company's shares have traded at a wider average discount during the year
market perceives to be unattractive or inappropriate, or the ineffective market and economic conditions. The Board sets mandate restrictions as than the Board would wish. The Board has engaged with Shareholders in
implementation of an attractive or appropriate strategy, may lead to reduced necessary. anticipation of the Continuation vote at the forthcoming AGM.
returns for shareholders and, as a result, a decreased demand for the
Company's shares. This may lead to the Company's shares trading at a widening
discount to their net asset value.
The Board reviews the long-term succession plans prepared by the Investment
Manager and takes into consideration the availability of suitably experienced
personnel to manage the Company's portfolio in the short-term in the event of
an emergency.
The Board has established a discount management policy and regularly considers
its ongoing appropriateness in light of market conditions. In addition to
seeking annual shareholder approval to its share buy-back authority, the Board
also puts a continuation vote to every third AGM of the Company (the next
scheduled to take place at the forthcoming AGM.
Investment Risks Stable:
The Company's assets consist of listed securities and its principal financial To mitigate this risk the Board considers various portfolio metrics including This risk is seen to be high, but stable since 2022 reflecting the continuing
risks are therefore market related and include market risk (comprising individual stock performance, the composition and diversification of the Russian invasion of Ukraine and inflation levels
currency risk, interest rate risk and other price risk), liquidity risk and portfolio by industry sector, purchases and sales of investments, the holding
credit risk. period of each investment and the top and bottom contributors to performance.
The Manager provides rationale for stock selection decisions. The Board also
considers the macro- economic and geopolitical risks and uncertainties that
the Company is exposed to.
The Company does not take active positions in currencies, nor does it invest
in fixed income securities.
The Investment Manager mitigates liquidity risk by investing in a diversified
portfolio of highly liquid, exchange- traded equities and by adhering to the
Board's concentration limits on individual holdings. The Board has set a
policy that the Company will not invest in unlisted securities.
The Investment Manager does not invest in countries which are subject to
sanctions or exposed to significant political risk.
Operational Risks Stable:
Key risks and uncertainties include a cybercrime event or an IT systems The Board relies on the cyber security and IT risk management tools All control procedures are working effectively. There have been no material
failure which compromises the Company's data or the Investment Manager's implemented by the Investment Manager and the Custodian to prevent operational issues that have impacted the Company during the year.
ability to manage the Company's portfolio; inadequacy of disaster recovery cyber-attacks. The Investment Manager uses a well established third-party IT
planning to ensure continuity of the Investment Manager's operations; or the system (Bloomberg) for all trading activity on behalf of the Company.
inadequacy of the oversight and controls undertaken by the Custodian, the AIFM
or the Investment Manager in relation to the Company.
The Board is reliant on the Investment Manager and its key third-party service
providers to ensure that appropriate measures are in place in order that
critical operations can be maintained at all times. The Investment Manager is
aligned with the Operational Resilience requirements set out by the FCA and
regularly tests its business continuity capabilities.
The Board considers the internal controls of the Investment Manager and all
key third-party service providers on at least an annual basis. System-enforced
controls are in place in each case which alert staff in oversight and
compliance roles of any breaches. Similarly, 'Four eye' checks are mandated
for all manual controls to ensure there is sufficient oversight over actions
taken.
Legal and Regulatory Risks The Board relies on the services of the Investment Manager, its broker and Stable:
J.P. Morgan to report changes in and to ensure compliance with all applicable
Key risks and uncertainties include: the risk of non-compliance with existing laws and regulations including the Companies Act 2006, the Listing Rules and All control procedures are working effectively. There have been no material
regulatory or legal requirements, including resultant negative PR the Alternative Investment Fund Managers Regulations. legal or regulatory changes that have impacted the Company during the year.
implications; adverse implications of regulatory change; or changes to the
Company's policies and reporting obligations in relation to sustainability and
ESG risks.
The Audit & Risk Committee reviews the performance of the external
auditors and the effectiveness of the independent audit process on an annual
basis. The experience of the auditors in financial accounting and auditing
standards is reviewed to ensure that changes in audit standards are
anticipated, understood and complied with.
The Board is reliant on the Investment Manager to ensure that appropriate
measures are in place to ensure that its approach to ESG investing is
appropriately defined and adhered to. The Investment Manager has developed and
implemented its stated ESG policy.
Legal and regulatory changes are monitored at each Board meeting and
compliance with the AIC Code is fully considered annually
Emerging Risks
Emerging risks that could impact the Company in the future are considered at
each Board meeting, along with any potential mitigating actions. Artificial
Intelligence, inflation, the impact of the ongoing war in Ukraine and climate
each pose emerging risks to the Company beyond the principal risks described
above. While these risks currently exist, their extent and long-term impact
are yet to emerge but they are regularly assessed by the Investment Manager.
The Board is kept informed through its advisers and the Investment Manager
regarding any political, economic, legal or regulatory change that is
anticipated may significantly affect the Company.
Effectiveness of internal controls
In accordance with the AIC Code, the Board has carried out a review of the
effectiveness of the system of internal control as it has operated over the
year and up to the date of approval of the Annual Report and Accounts. Further
information on the principal risks the Company faces in its portfolio
management activities is disclosed in Note 18 of the Accounts (which are
available for download from www.devonem.com).
Directors
Biographical details of the Directors and the Board's policy on diversity can
be found in the Annual Report and Accounts. The Board currently comprises
three male Directors and three female Directors.
Modern Slavery statement
The Modern Slavery Act 2015 requires certain companies to prepare a slavery
and human trafficking statement. The Company does not fall within the scope of
the Modern Slavery Act and therefore no slavery and human trafficking
statement is included in the Annual Report.
The Board nevertheless requires regular confirmation from each of its
third-party suppliers, at least once a year, of their compliance with the UK
Modern Slavery Act. The Board also requires each supplier to have sufficient
measures in place to align with the requirements outlined in the Bribery Act
2010 and the Criminal Finances Act 2017. Specifically, the Company has
obtained assurances from each of its primary suppliers that they adhere
strictly to a zero-tolerance policy regarding the provision of services that
would contravene The Modern Slavery Act, the Bribery Act or the Criminal
Finances Act.
Publication of Devon's formal policy statements
Devon has implemented several policy statements that guide their management of
the Company's investment portfolio. These policies are reviewed at least
annually and include:
· ESG Policy: This policy outlines Devon's approach to
Environmental, Social and Governance factors in their investment process. It
highlights the commitment to considering ESG issues and integrating them into
their decision-making;
· Sustainability Risk Policy: This policy addresses the
identification, assessment and management of sustainability risks within
Devon's investment activities. It ensures that sustainability risks are duly
taken into account and monitored to safeguard long-term performance;
· Remuneration Policy: This policy is designed to comply with the
requirements of SFDR Level 1 and governs the remuneration practices within
Devon. It aligns with sustainability considerations and aims to support
Devon's overall objectives;
· Engagement Policy: This policy outlines Devon's approach to
engaging with investee companies and exercising their voting rights as
shareholders. It also includes the annual disclosure of votes cast,
demonstrating commitment to transparency;
· SFDR: Devon complies with the reporting obligations set out in
the EU Sustainable Finance Disclosure Regulations (SFDR), which require
disclosures related to sustainability and environmental considerations.
In publishing these policies, Devon seeks to demonstrate its commitment to
transparency, responsible investment practices and compliance with regulatory
requirements. These policy statements, along with associated disclosures, can
be downloaded from Devon's website at www.devonem.com.
(http://www.devonem.com/)
Section 172 statement
Under section 172 of the Companies Act 2006, the Directors have a duty to act
in the way they consider, in good faith, would be most likely to promote the
long-term success of the Company for the benefit of its members as a whole,
and in doing so have regard (amongst other matters) to:
• the likely consequences of any decision in the long term;
• the need to foster the Company's business relationships with our
stakeholders which includes our shareholders, service providers such as the
Investment Manager, AIFM and other relevant parties as listed below;
• the need to act independently by exercising reasonable skill and
judgement;
• the impact of the Company's operations on the community and the
environment;
• the requirement to avoid a conflict of interests;
• the desirability of the Company maintaining a reputation for high
standards of business conduct;
• the need to act fairly between members of the Company; and
• the need to declare any interests in proposed transactions.
As an investment trust, the Company has no employees, customers or physical
assets; our stakeholders include our shareholders and our service providers,
including our Investment Manager, our former AIFM, Depositary, Custodian,
Lender, Registrar, Auditors, Broker and Administrator, each as identified in
the Annual Report and Accounts.
The Board considers that the interests of the Company's key stakeholders are
aligned, in terms of wishing to see the Company deliver sustainable long-term
capital growth, in line with the Company's stated objective and strategy, and
meet the highest standards of legal, regulatory, and commercial conduct, with
the differences between stakeholders being merely a matter of emphasis on
those elements.
The Board believes that the optimum basis for meeting its duty to promote the
success of the Company is by appointing and managing third-parties with the
requisite performance records, resources, infrastructure, experience and
control environments to deliver the services required to achieve the
investment objective and successfully operate the Company. By developing
strong and constructive working relationships with these parties, the Board
seeks to ensure high standards of business conduct are adhered to at all times
and service levels are enhanced whenever possible. This combined with the
careful management of costs is for the benefit of all shareholders who are
also key stakeholders.
Whilst the Company's operations are limited, as third party service providers
conduct all substantive operations, the Board is aware of the need to consider
the impact of the Company's investment strategy and policy on wider society
and the environment. The Board considers that its oversight of environmental,
social and governance (ESG) matters is an important part of its responsibility
to all stakeholders and that proper consideration of ESG factors sits
naturally with the Company's longstanding aim of providing a sustainable basis
for adding value for shareholders. Further details on the Investment Managers'
approach to stewardship and examples of engagement are provided above. The
remaining sections of this Strategic Report titled 'Relations with the
Investment Manager,' 'Engagement with shareholders' and 'Principal decisions
taken during the year under review' form part of this Section 172 Statement.
Relations with the Investment Manager
Alexander Darwall, CIO of Devon, continues to be responsible for the portfolio
management of the Company on behalf of Devon, supported by Luca Emo
Capodilista, Charlie Southern, James Bird and Angus Denison-Smith within his
investment team.
Devon was appointed as the Company's AIFM with effect from 1 July 2022. As
AIFM, Devon now has responsibility for additional risk oversight in accordance
with the requirements of applicable law. The Board regularly meets with Devon
and pays particular attention to the control procedures and processes in place
at Devon, to ensure that its duties for the Company continue to be handled
with the appropriate level of resource and professionalism.
The portfolio activities undertaken by the Investment Manager and the impact
of decisions taken are set out in the Investment Manager's Review above.
Further information on the annual evaluation of the Investment Manager, to
ensure that its continued appointment remains in the best interests of
shareholders, is set out in the Annual Report and Accounts.
Engagement with shareholders
The Directors place great importance on engagement with shareholders. The
Company reports to shareholders twice a year by way of the Half-Yearly
Financial Report and the Annual Report and Accounts. In addition, net asset
values are published daily and newsletters are published monthly on the
Company's website, www.europeanopportunitiestrust.com.
(http://www.europeanopportunitiestrust.com/) Key decisions are announced to
the London Stock Exchange through the Regulatory News Service.
The Company holds an Annual General Meeting. In normal circumstances all
shareholders are invited to attend, and this provides an open forum for them
to discuss issues and matters of concern with the Board and representatives of
the Investment Manager and the Company's advisors.
In accordance with the UK Code, in the event that votes of 20% or more are
cast against a resolution at a General Meeting the Company will announce the
actions it intends to take to consult with Shareholders to understand the
reasons behind the result. A further update will be published within six
months. No such votes were received during the year ended 31 May 2023.
The Board seeks to ensure that shareholder views are taken into consideration
as part of any decisions taken by the Board. The Chair actively seeks to
engage directly with shareholders and has attended a number of meetings with
investors during the year. Committee chairs also seek direct engagement with
shareholders on specific matters relating to their area of responsibility. The
Investment Manager and the Company's brokers also engage with the Company's
shareholders and the outcome of these discussions are reported to the Board.
Shareholders are invited to communicate with the Board through the Chair, any
Committee Chair or the Company Secretary, as appropriate. Alternatively,
issues can be discussed with the Company's Senior Independent Director, who
can be contacted at the Company's registered office address.
The Board ensures that the Directors are able to discharge their duties by,
amongst other things, providing them with relevant information and training on
their duties. At all times, the Directors can access as a Board, or
individually, advice from its professional advisers including their lawyers
and Auditors.
Whilst certain responsibilities are delegated, the Board has established terms
of reference for its Committees which are reviewed regularly by the Board. The
Board has set the parameters within which the Investment Manager operates and
these are set out under the terms of agreements with Devon and within the
minutes of corresponding Board meetings.
Principal decisions taken during the year under review
The Directors take into account section 172 considerations in all material
decisions of the Company.
Examples of how the Company's stakeholders were considered in relation to the
principal decisions taken by the Board during the year under review (and post
year end) include:
· Management fee: During the reporting year the Board engaged with
Devon to negotiate a reduction in management fee. Devon is now entitled to
receive 0.80% per annum on net assets up to £1 billion; 0.70% per annum on
any net assets over £1 billion up to £1.25 billion; and 0.60% per annum on
net assets above £1.25 billion. This reduction was effective from 1 June
2023. Previously Devon was entitled to 0.90% per annum on net assets up to £1
billion and 0.80% in respect of any net assets above £1 billion.
· Succession planning: The Board, acting on recommendations from
the Nomination Committee and an independent search agent, appointed a new
independent non-executive Director, Manisha Shukla with effect from 1
September 2023. The Board agreed that Matthew Dobbs would succeed Andrew Sutch
as Chair with effect from the close of the 2022 Annual General Meeting.
Virginia Holmes was appointed Senior Independent Director and Jeroen Huysinga
was appointed chair of the Management Engagement Committee in June 2022. Lord
Lamont will take over as Senior Independent Director with effect from Virginia
Holmes' retirement at the forthcoming AGM.
· Gearing: On 8 September 2023 the Board entered into a new £85
million loan facility with The Bank of Nova Scotia, London Branch. In order to
manage the cost of borrowing the new loan facility includes a floating charge
in favour of The Bank of Nova Scotia in relation to amounts drawn down. The
previous facility was made on an unsecured basis. The loan facility will
enable the Investment Manager to implement the Company's stated gearing
policy, as further described in the section entitled 'Borrowing limits' of the
Annual Report and Accounts. It is hoped that through the careful use of
gearing, the Investment Manager can enhance shareholder returns.
· Discount management: During the year under review the Board has
continued to engage with Shareholders and the Company's broker in relation to
the Company's share price discount to NAV. When prudent, the Company has
bought back shares from the market in order to narrow the discount.
The structure of the Board and its Committees and the decisions it makes are
underpinned by the duties of the Directors under the Companies Act, 2006 and
the provisions of the AIC Code.
Employees, Human Rights and Community Issues
The Board recognises the requirement to provide information about employees,
human rights and community issues. As the Company has no employees, all its
Directors are non-executive and all its functions are outsourced, there are no
disclosures to be made in respect of employees, human rights and community
issues.
Gender Representation
At the date of this Annual Report, the Board comprised six Directors, three
male and three female.
Future developments of the Company
The outlook for the Company for the next 12 months is set out in the Chair's
Statement and the Managers' Report.
For and on behalf of the Board
Matthew Dobbs
Chair
21 September 2023
Income Statement for the year ended 31 May 2023
Year ended Year ended
31 May 2023 31 May 2022
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gain on investments - 20,058 20,058 - 25,056 25,056
Currency exchange gain/(loss) - 360 360 - (270) (270)
Income from investments 2 16,244 - 16,244 14,370 - 14,370
Other income 2 33 - 33 - - -
Total income 16,277 20,418 36,695 14,370 24,786 39,156
Investment management fee (7,733) - (7,733) (8,404) - (8,404)
Other expenses 3 (951) - (951) (1,035) - (1,035)
Total expenses (8,684) - (8,684) (9,439) - (9,439)
Net return before finance costs and taxation
7,593 20,418 28,011 4,931 24,786 29,717
Finance costs 4 (2,863) - (2,863) (961) - (961)
Return on ordinary activities before taxation
4,730 20,418 25,148 3,970 24,786 28,756
Taxation (1,345) - (1,345) (1,233) - (1,233)
Net return after taxation* 3,385 20,418 23,803 2,737 24,786 27,523
Earnings per ordinary share (basic and diluted) 5
3.34p 20.15p 23.49p 2.62p 23.69p 26.31p
* There is no other comprehensive income and therefore the 'Net return after
taxation' is the total comprehensive income for the financial year.
The total column of this statement is the income statement of the Company,
prepared in accordance with UK adopted International Accounting Standards.
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 year.
Statement of Financial Position as at 31 May 2023
2023 2022
£'000 £'000
Fixed Assets
Investments 936,318 951,753
Current assets
Debtors 3,445 3,4532
Cash and cash equivalents 6,951 5,973
10,396 9,505
Total assets 946,714 961,258
Current liabilities
Creditors - amounts falling due within 1 year (83,776) (88,641)
Total assets less current liabilities 862,938 872,617
Capital and reserves
Called up share capital 1,129 1,129
Share premium 204,133 204,133
Special reserve 33,687 33,687
Capital redemption reserve 45 45
Reserves 623,944 633,623
862,938 872,617
Net asset value per ordinary share 876.46p 850.64p
Statement of changes in equity for the year ended 31 May 2023
For the year ended Share capital Share premium Special reserve Capital redemption reserve Reserves Total
31 May 2023 £'000
£'000 £'000 £'000
Notes £'000 £'000
Balance as at 1 June 2022 1,129 204,133 33,687 45 633,623 872,617
Net return after taxation - - - - 23,803 23,803
Repurchase of ordinary shares into treasury
- - - - (30,946) (30,946)
Dividends declared and paid* 6 - - - - (2,536) (2,536)
Balance at 31 May 2023 1,129 204,133 33,687 45 623,944 862,938
For the year ended Share capital Share premium Special reserve Capital redemption reserve Reserves Total
31 May 2022 £'000
£'000 £'000 £'000
Notes £'000 £'000
Balance as at 1 June 2021 1,129 204,133 33,687 45 639,995 878,989
Net return after taxation - - - - 27,523 27,523
Repurchase of ordinary shares into treasury
- - - - (31,786) (31,786)
Dividends declared and paid* 6 - - - - (2,109) (2,109)
Balance at 31 May 2022 1,129 204,133 33,687 45 633,623 872,617
* Dividends paid during the financial year were paid out of revenue reserves.
Cash flow statement for the year ended 31 May 2023
2023 2022
£'000 £'000
Cash flows from operating activities
Investment income received (gross) 16,366 15,136
Deposit interest received 33 -
Investment management fee paid (7,756) (8,323)
Other cash expenses (900) (984)
Net cash inflow from operating activities before taxation and
interest 7,743 5,829
Interest paid (2,302) (834)
Overseas tax incurred (1,372) (1,594)
Net cash inflow from operating activities 4,069 3,401
Cash flows from investing activities
Purchases of investments (117,350) (204,307)
Sales of investments 153,085 215,054
Net cash inflow from investing activities 35,735 10,747
Cash flows from financing activities
Repurchase of ordinary shares into treasury (26,650) (35,688)
Equity dividends paid (2,536) (2,109)
Repayment of loan (20,000) -
Drawdown of loan 10,000 20,000
Net cash outflow from financing activities (39,186) (17,797)
Increase/(decrease) in cash 618 (3,649)
Cash and cash equivalents at start of year 5,973 9,892
Realised (loss)/gain on foreign currency 360 (270)
Cash and cash equivalents at end of year 6,951 5,973
Notes to the Accounts
1. Accounting Policies
The Accounts comprise the financial results of the Company for the year to 31
May 2023. The functional and reporting currency of the Company is pounds
sterling because that is the currency of the prime economic environment in
which the Company operates. The Accounts were authorised for issue in
accordance with a resolution of the Directors on 21 September 2023. All values
are rounded to the nearest thousand pounds (£'000) except where indicated.
The Accounts have been prepared in accordance with UK-adopted International
Accounting Standards and the requirements of the Companies Act 2006.
Where presentational guidance set out in the Statement of Recommended Practice
for Investment Trusts issued by the Association of Investment Companies in
April 2021 (the 'AIC SORP') is consistent with the requirements of UK-adopted
International Accounting Standards in conformity with the Companies Act 2006,
the Directors have sought to prepare the financial statements on a basis
compliant with the recommendations of the AIC SORP. The Accounts have also
been prepared in accordance with the Disclosure and Transparency Rules issued
by the Financial Conduct Authority.
The Accounts have been prepared under the historic cost modified by
revaluation of financial assets and financial liabilities held at fair value
through profit and loss. The accounting policies have been consistently
applied throughout the year ended 31 May 2023 and in the prior year other than
where new policies have been adopted.
The Board continues to adopt the going concern basis in the preparation of the
financial statements.
(a) Segmental reporting
The Company is engaged in a single segment business and, therefore, no
segmental reporting is provided.
(b) Income recognition
Ordinary dividends from investments are recognised when the investment is
quoted ex-dividend on or before the date of the Statement of Financial
Position. All overseas dividend income is disclosed net of withholding tax.
Ordinary dividends receivable from equity shares are taken to the revenue
return column of the Income Statement.
Deposit and other interest receivable are accounted for on an accruals basis.
These are classified within operating activities in the Cash Flow Statement.
Special dividends are reviewed on a case by case basis to determine if the
dividend is to be treated as revenue or capital.
(c) Presentation of Income Statement
In order to better reflect the activities of an investment trust company and
in accordance with guidance issued by the Association of Investment Companies
(AIC), supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been presented. In accordance with
the Company's Articles of Association, net capital returns may not be
distributed by way of dividend.
An analysis of reserves broken down into revenue (distributable) items, and
capital items (non-distributable) is given in Note 14 to the Accounts
(available for download form www.devonem.com).
All other operational costs are charged to revenue.
(d) Basis of valuation of investments
Investments are recognised and derecognised on a trade date where a purchase
or sale of an investment is under contract whose terms require delivery of the
investment within the timeframe established by the market concerned.
Investments are included initially at fair value which is taken to be their
cost, excluding expenses incidental to purchase which are written off to
capital at the time of acquisition.
All investments are classified as held at fair value through profit or loss.
All investments are measured at fair value with changes in their fair value
recognised in the Income Statement in the period in which they arise. The fair
value of listed investments is based on their quoted bid price at the
reporting date without any deduction for estimated future selling costs.
Foreign exchange gains and losses on fair value through profit or loss
investments are included within the changes in the fair value of the
investment.
For investments that are not actively traded and/or where active stock
exchange quoted bid prices are not available, fair value is determined by
reference to a variety of valuation techniques.
These techniques may draw, without limitation, on one or more of: the latest
arm's length traded prices for the instrument concerned; financial modelling
based on other observable market data; independent broker research; or the
published accounts relating to the issuer of the investment concerned.
(e) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents are
short-term, highly liquid investments that are readily convertible to known
amounts of cash and that are subject to insignificant risks of changes in
value.
(f) Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the
rates of exchange prevailing on the dates of the transactions. At the
reporting date, monetary assets and liabilities that are denominated in
foreign currencies are retranslated at the rates prevailing on that date.
Non-monetary assets and liabilities carried at fair value that are denominated
in foreign currencies are translated at the rates prevailing at the date when
the fair value was determined. Gains and losses arising on retranslation are
included in the Income Statement with the revenue or capital column depending
on the nature of the underlying item.
(g) Borrowing and finance costs
Interest bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs and subsequently measured at amortised
cost.
Interest on the loan facility is accrued at the rate specified by the lender
on renewal date.
Bank interest is recognised in the Income Statement in the period in which it
is incurred.
All finance costs are directly charged to the revenue column of the Income
Statement.
(h) Expenses
Expenses are accounted for on an accruals basis. Management fees,
administration and other expenses are charged fully to the revenue column of
the Income Statement. Expenses which are incidental to the purchase or sale of
an investment are charged to capital, along with any foreign exchange gains
and losses.
In accordance with the AIC SORP, the Board has allocated all expenses, other
than expenses incidental to purchase or sale of investments and issue costs,
to revenue. The Board will continue periodically to monitor this decision.
(i) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the Income Statement because it
excludes items of income or expense that are taxable or deductible in other
periods and it further excludes items that are never taxable or deductible.
The Company's liability for current tax is calculated using tax rates that
have been enacted or substantively enacted by the date of the Statement of
Financial Position.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the Accounts and the
corresponding tax bases used in the computation of taxable profit, and is
accounted for using the balance sheet liability method. Deferred tax
liabilities are generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that
taxable profit will be available against which deductible temporary
differences can be utilised.
Investment trusts which have approval under Section 1158 of the Corporation
Tax Act 2010 are not liable for taxation of capital gains.
Irrecoverable VAT is included in the expense on which it has been suffered.
Recoverable VAT is calculated using the partial exemption method based on the
proportion of zero-rated supplies to total supplies.
(j) Future accounting developments
At the date of authorisation of the financial statements, the following
amendments to the UK adopted International Accounting Standards (IAS) and
interpretations are considered to be relevant to the Company:
IAS 1 - Classification of Liabilities as Current or Noncurrent - Amendments to
UK adopted International Accounting Standards 1. Effective for annual periods
beginning on or after 1 January 2023. No impact for the Company.
IAS 8 - Definition of Accounting Estimates - Amendments to UK adopted
International Accounting Standards IAS 8. Effective for annual reporting
periods beginning on or after 1 January 2024.
IAS 1 and IFRS Practice Statement - Disclosure of Accounting Policies.
Effective for annual reporting periods beginning on or after 1 January 2024.
IAS 12 - Deferred Tax related to Assets and Liabilities arising from a Single
Transaction. Effective for annual reporting periods beginning on or after 1
January 2024.
The Directors expect that the adoption of the standards listed above will have
either no impact or that any impact will not be material on the financial
statements of the Company in future periods.
(k) Significant accounting judgements, estimates and assumptions
Management have not applied any significant accounting judgements, estimates
and assumptions which would have a significant impact on this set of Accounts
or those of the prior financial year.
2. Income
Year ended 31 May 2023 Year ended 31 May 2022
£'000 £'000
Income from investments
Dividends from United Kingdom companies 4,627 4,459
Dividends from overseas companies 11,617 9,385
Deposit interest 33 -
Scrip dividends - 526
16,277 14,370
3. Other expenses*
Year ended 31 May 2023 Year ended 31 May 2022
£'000 £'000
Directors' remuneration 180 182
Auditors' remuneration 54 49
Administration fees 178 191
Safe custody charges 91 86
Legal and professional fees 22 34
Registrar's fee 55 86
Brokerage fees 70 36
Other professional fees 55 50
Depository's fee 150 164
FCA fees 29 28
Printing & publication of reports to shareholders 20 18
Other administrative expenses 47 111
951 1,035
* each including VAT where applicable. There were no non-audit fees payable in
the years to 31 May 2023 and 31 May 2022. The audit fee in the year ended 31
May 2022 includes an under accrual from the year ended 31 May 2021.
4. Finance costs
Year ended 31 May 2023 Year ended 31 May 2022
£'000 £'000
Interest on short-term loan 2,776 858
Commitment fees 67 40
Bank charges 20 63
2,863 961
All finance costs are charged to revenue.
5. Returns per ordinary share
The return per share figure can be analysed between revenue and capital, as
below:
Year ended 31 May 2023 Year ended 31 May 2022
£'000 £'000
Net revenue return 3,385 2,737
Net capital return 20,418 24,786
Net total return 23,803 27,523
Weighted average number of shares in issue during the year 101,303,712 104,612,102
Revenue return per share 3.34p 2.62p
Capital return per share 20.15p 23.69p
Return per share 23.49p 26.31p
6. Dividends
Amounts recognised as distributions to equity holders in the year:
Year ended 31 May 2023 Year ended 31 May 2022
£'000 £'000
2022 final dividend 2.50p paid on 101,439,098 shares (2021: 2.00p paid on
105,473,840 shares)
2,536 2,109
Set out below is the total dividend payable in respect of the financial year
under review, which is the basis on which the requirements of Section 1158 of
the Corporation Tax Act 2010 are considered:
2023 2022
£'000 £'000
2023 final dividend of 3.5p (2022: 2.5p) 3,387* 2,540**
* Based on the number of shares in issue as at 18 September 2023, the latest
practicable date prior to the publication of the Annual Report and Accounts.
Subject to shareholder approval at the 2023 Annual General Meeting, a final
dividend of 3.5p per share will be paid on 27 November 2023 to those
shareholders on the register of shareholders as at 3 November 2023 (the Record
Date).
** A final dividend of 2.5p per share was paid on 28 November 2022 to those
shareholders on the register of shareholders as at 4 November 2022.
Forward looking statements
This announcement may include 'forward-looking statements'. Forward-looking
statements are subject to risks and uncertainties and, accordingly, the
Company's actual future financial results and operational performance may
differ materially from the results and performance expressed in, or implied
by, the statements.
Annual Report and Accounts
The figures and financial information for the Company's financial years ended
31 May 2023 and 31 May 2022 included in this announcement are extracted from
the Company's Annual Report and Accounts and do not constitute statutory
financial statements. The Company's Annual Report and Accounts includes the
Independent Auditor's Report which is unqualified and does not contain a
statement under either Section 498(2) or Section 498(3) of the Companies Act
2006.
The Annual Report and Accounts will be posted to those shareholders who have
elected to receive hard copies. An electronic version of the Annual Report and
Accounts will also shortly be available on the Company's website at:
www.europeanopportunities.com (http://www.europeanopportunities.com) and on
the National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) . The Accounts will
be filed with the UK Registrar of Companies in due course.
A glossary of terms and alternative performance measures referred to in this
announcement can be found in the Annual Report.
Annual General Meeting
The Annual General Meeting will be held on Wednesday 15 November 2023 at
11.:00am at the offices of Devon Equity Management Limited, 123 Victoria
Street, London SW1E 6DE. The Notice of the Annual General Meeting will be
posted to shareholders with the Annual Report and will be available on the
Company's website.
Website
Details of the Company's share price and net asset value, together with
general information about the Company (including past monthly newsletters,
factsheets and portfolio holdings data) can be found at
www.europeanopportunities.com (http://www.europeanopportunities.com) .
Shareholders may subscribe to receive monthly newsletters by emailing
enquiries@devonem.com (mailto:enquiries@devonem.com) .
Neither the content of the Company's website, nor the content on any website
accessible from hyperlinks on its website for any other website, is
incorporated into, or forms part of, this announcement nor, unless previously
published by means of a regulatory information service, should any such
content be relied upon in reaching a decision as to whether or not to acquire,
continue to hold, or dispose of, shares in the Company.
END
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