Annual Financial Report
20/09/2024 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20240920:nRST9535Ea&default-theme=true
RNS Number : 9535E European Opportunities Trust PLC 20 September 2024
European Opportunities Trust plc (the 'Company')
Legal Entity Identifier: 549300XN7RXQWHN18849
Annual results for the year ended 31 May 2024
Highlights
· Net asset value total return of 15.5% and share price total return of 16.5%
for the financial year, compared with a total return of 17.3%, for the
Company's Benchmark, the MSCI Europe index.
· During the year, a tender offer for 25% of the Company's shares took place as
well as buybacks equating to a further 9.4% of the opening share capital,
supporting the Board's discount management policy.
· Annual dividend of 2.0p per share.
· Reduced management fees took effect from 1 June 2023.
31 May 2024 31 May 2023 % change
Net asset value per share (pence) 1,008.48 876.46 15.1
Net asset value total return 15.5
Middle market share price (pence) 906.00 781.00 16.0
Share price total return 16.5
MSCI Europe index, total return in GBP (Benchmark) 17.3
Dividend per share (pence) in respect of financial year 2.0 3.5
Discount to net asset value at year end (%) (10.2) (10.9)
Ongoing charges ratio (%) 0.97 1.02
( )
Chair's Statement
I am pleased to present the Company's twenty-fourth Annual Report and Accounts
since launch, covering the twelve months ended 31 May 2024.
During the period under review, the total return on the net asset value per
share of the Company was 15.5% (with dividends reinvested). This compares with
the total return (again reflecting dividends reinvested) of 17.3% from our
Benchmark, the MSCI Europe index in GBP, and the total return on the price of
the Company's shares of 16.5% during the same period.
Since the year end, the net asset value per share has remained flat at
1,008.8p (as at 31 August), underperforming the Benchmark index which
increased by 0.7% over that period. The market price of the Company's shares
on 31 August was 900p, a reduction of 0.7% since the financial year end.
Whilst the Company's NAV total return has outperformed our Benchmark over the
ten years to 31 May 2024, its three and five year NAV total returns have been
below the Benchmark. The Board is painfully aware of the disappointment this
entails for shareholders. Through intense engagement with the Investment
Manager, the Board is persuaded that the consistency of commitment to a
differentiated, high conviction approach will be vindicated in the longer
term. Since launch, the Company has generated an annualised net asset value
total return of 11.1% and an annualised share price total return of 10.4% as
at 31 May 2024.
Annual dividend
The Company's stated investment objective is to achieve shareholder returns
primarily through capital growth. Accordingly the Board does not impose a
specific income objective on the Investment Manager in the management of the
portfolio. Consequently the revenue per share, and therefore the dividends
paid, have fluctuated from year to year.
Due primarily to transaction activity in the portfolio involving the disposal
of a number of high income generating securities and the reduction in the size
of the Company, there has been a particularly sharp decline in the revenue
return per share to 0.3p per share in the year under review (3.3p in 2023).
It has generally (but not exclusively) been the Board's policy to pay a
dividend covered by the revenue return per share of the year to which it
pertains. However in view of the scale of the decline in the year to 31 May
2024, the importance of income to many shareholders and the ample revenue
reserves, the Board has decided to recommend a final dividend of 2.0p (3.5p in
2023).
This illustrates one of the flexibilities of investment trusts which, in
contrast with open-ended funds such as OEICs, can hold back some of the income
in good years, thereby building up revenue reserves that can be used to
supplement dividends during periods of lower revenue returns.
The dividend will be proposed at the Annual General Meeting and be payable on
25 November 2024 to shareholders on the Register of Members on 8 November 2024
(the Record Date). The ex-dividend date is 7 November 2024.
Discount management and 2026 tender offer
The discount on the Company's shares was 10.2% at the year end (2023: 10.9%)
and the average discount for the year was also 10.2% (2023: 14.4%). The year
end discount was wider than the 7.8% average on that date for the investment
companies' universe as a whole (excluding VCTs) and wider than the average of
the Company's peers in the AIC Europe sector of 6.7%.
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.
In January 2024, the Board implemented a tender offer at close to NAV for 25%
of the shares in issue which was fully subscribed. The Board has also
announced proposals for a further performance-related tender offer for up to
25% of the shares in issue in the event that the Company's net asset value
total return does not equal or exceed the Benchmark total return over the
three-year period ending on 31 May 2026. The Company will also put a
continuation vote to shareholders at the 2026 AGM in accordance with its
three-yearly continuation vote cycle.
In the meantime, the Board believes that the most effective means of
minimising any discount at which the 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 factors
inevitably impact the rating of the shares from time to time.
In determining whether a share purchase would enhance shareholder value, the
Board takes into account market conditions, the Company's performance, any
known third-party investors or sellers, the impact on liquidity and total
expense ratios, as well as 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 33,365,814 shares were repurchased during the period under review
(with an aggregate value of £302.2 million, inclusive of £222.7 million
purchased pursuant to the tender offer implemented in January 2024). This
compares with 4,126,242 shares bought into treasury in the previous financial
year. A further 630,919 shares (with an aggregate value of £5.6 million) have
been repurchased since the financial year end (as at 9 September 2024).
The Board believes 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.
Gearing
The net gearing level on the Company's investments was 8.4% (2023: 8.9%) at
the year end.
The Board believes that borrowing can enhance returns to investors over the
long-term. The Board monitors the level of the Company's gearing carefully on
an ongoing basis and 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.
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 2025 (2024:
£85 million) and credit approval for an additional 'accordion' amount
available upon application for a further £50 million (2024: £50 million).
There was £60 million drawn down as at 31 May 2024, unchanged as of the date
of this report.
Board re-election at the AGM
As previously announced, Lord Lamont intends to retire from the Board at the
forthcoming Annual General Meeting. Lord Lamont has served on your Board since
2015, as chair of the Remuneration Committee and as your Senior Independent
Director since 2023. On behalf of the Board and you, our shareholders, I would
like to thank him for his exceptional contribution to the Company throughout
his nine years of service. He takes with him our very best wishes for the
future.
I am delighted that Jeroen Huysinga has agreed to take over as Senior
Independent Director and that Manisha Shukla will take over as Chair of the
Remuneration Committee with effect from the date of our AGM.
We continue to review Board composition and Directors' succession regularly 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, all Directors who have
held office during the financial year (with the exception of Lord Lamont) are
offering themselves for re-election (or, in the case of Neeta Patel who joined
the Board since the last AGM, first election) at the forthcoming Annual
General Meeting.
I would like to thank my fellow Directors for their diligence and dedication
on your behalf over the last year.
Shareholder engagement
The Board believes that shareholder engagement is extremely important and
recognises the importance of maintaining an open dialogue with shareholders.
Over the course of the year, we have continued to engage with a range of our
shareholders representing in aggregate the majority of the share register. The
Board values the feedback it has received and insights it has gained through
the engagement process and we thank the shareholders for their valuable
contributions. We remain committed to continued engagement with all
shareholders.
Update Statement on 2023 Annual General Meeting
At the Company's 2023 Annual General Meeting all resolutions were passed with
the requisite majorities. However, the Company received more than 20% of votes
cast against several resolutions. In accordance with AIC Code of Corporate
Governance, the Board offered meetings with shareholders who voted against the
identified resolutions. The relevant shareholders responded that they did not
require a meeting at that time. The Board will continue to maintain an open
dialogue with shareholders ahead of the forthcoming Annual General Meeting and
welcomes feedback from any shareholders on the Company's progress.
2024 Annual General Meeting
The Company's Annual General Meeting will be held at 11:00 am on 13 November
2024. 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 attend and vote on 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.
Your attention is also drawn to the Directors' Report in the Annual Report and
Accounts where the resolutions classified as special business are explained.
The Directors consider that all resolutions to be put to shareholders are in
their and the Company's best interests as a whole, and recommend that
shareholders vote in their favour.
In addition to the formal business, Alexander Darwall and members of the
investment team at Devon will provide a presentation to shareholders on the
performance of the Company over the past year as well as an outlook for the
future.
Should shareholders have questions for the Board or the Investment Manager, or
any queries as to how to vote, they are welcome, as always, to submit them by
email to enquiries@devonem.com (mailto:enquiries@devonem.com) or call 020 3985
0445.
Outlook
Your Board and I would like to express our thanks to all of our shareholders
for their continuing support and as ever, welcome any engagement with our
shareholders. Through the superior characteristics and earnings growth
prospects of the underlying portfolio, we are confident that the Company is
well positioned to offer an attractive investment proposition. We are not,
however, complacent and we acknowledge that the five and three year relative
returns have been below par. We shall continue to keep the Company's
performance, and our Investment Manager, under close review on your behalf.
Matthew Dobbs
Chair
19 September 2024
Investment Manager's Review
The total return on the net asset value of the Company's shares was 15.5%
during the twelve months to 31 May 2024. This compares with a total return of
17.3% from our Benchmark, the MSCI Europe index in GBP.
Index performance
Despite political turmoil in Europe and disappointing growth rates, European
equities advanced in the period under review. Moderating inflation in the EU,
where the annual inflation was 2.6% in April 2024 compared with 8.1% a year
earlier, has prompted cuts in interest rates. Between 2022 and 2024, European
interest rates rose rapidly; the ECB's refinancing rate went from 0% in 2022,
peaking at 4.5% in 2023. With the cooling in the rate of inflation, the ECB
lowered its refinancing rate in June this year, but it remains, at 4.25%,
higher than at any time since 2008. Nevertheless, anticipation of a period of
rate reductions provided support for European equities.
The brightest element behind the strong equity market performance was the
impact of Artificial Intelligence (AI). Whilst principally an American
phenomenon, European technology stocks, too, were lifted by the opportunities
this will bring. The benefits of AI were recognised in other sectors, where
proprietary Intellectual Property (IP) can be leveraged with AI.
Notwithstanding the productivity gains from these technological advances,
corporate earnings growth in Europe (MSCI Eurozone) is modest. Earnings in
2023 declined slightly, whereas consensus aggregate earnings for 2024
anticipate about 3-5% growth. As in the US, much of the growth is coming from
Technology and Communication Services. For the markets more broadly, rising
real wages are squeezing corporate margins.
Performance
Whilst the Company's total NAV return was 15.5%, we were disappointed not to
outperform the Benchmark during the period under review. As ever, stock
picking is the key to our performance. This was hampered by the negative
sentiment around small and mid-sized stocks, a part of the market to which our
portfolio has a greater than average exposure. We believe that many small and
mid-sized companies are significantly undervalued. In some cases, these have
attracted private equity interest, underpinning valuations. We still regard
this as insufficient and are disappointed to see our holdings, notably
Darktrace, taken out of the public market at unsatisfactory prices. We had
anticipated years of progress at Darktrace and are disappointed to forego that
eventuality.
The Company's relative performance was impacted by an underweight exposure to
the banking sector. Banks performed strongly during the period as higher
rates, strong fee momentum, moderating cost inflation headwinds, lower
regulatory costs and benign credit costs all fed through to
better-than-expected earnings reports. This has fed into dividend
distributions and a modest re-rating (off a low base).
Whilst we recognise the cyclical tailwind during the period under review from
rising rates and continuing low levels of non-performing loans, our structural
view of the European banking sector remains unchanged. Specifically, we
generally avoid business models dependent on high levels of leverage to
generate returns above their cost of capital. Through multiple cycles European
banks have proven consistently unable to generate returns above their cost of
capital on a sustainable basis, which precludes our involvement in the sector.
The significant asymmetric risk to the downside in periods of challenging
macro (which can result in equity issuance or even effective/actual
bankruptcy) reinforces our aversion to the sector.
Positioning
We continue to invest, as we always have, in 'special' 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. Europe's low structural growth is a
major challenge. Europe's real GDP has only grown at 1.5% pa in the past
decade, below the US at 2.3% pa, and below the wider world at 2.7% pa. This is
mitigated in our portfolio by the greater extra-European revenue exposure of
the portfolio. The STOXX Europe index derives approximately 41% of its
revenues from Europe, 24% from North America and 21% from Asia-Pacific. The
respective 'look-through' share of revenues for your Company are 39% and 35%
for Europe and North America respectively; emerging markets account for 20% of
sales on the same basis.
Consumer spending has been remarkably robust since the outbreak of COVID, on
the back of huge public spending support. A squeeze on consumer spending looks
inevitable at some point. Accordingly, the portfolio is tilted away from
consumer facing stocks and is instead more heavily weighted towards companies
which provide goods and services to other companies and governments (often
described as B2B). Therefore, we expect the earnings of our investee companies
to be less cyclical, more robust and to grow even as consumer spending
declines. Perhaps the most obvious example of a sector that is uncorrelated to
consumer spending is the Defence sector. We initiated new positions in Thales
and BAE Systems, to capture the seemingly inevitable increase in Defence
spending.
Our companies typically have more IP and value added across the portfolio. The
corollary of this is that Return on Invested Capital (ROIC) tends to be higher
than average. Another characteristic of the Company's portfolio is its high
active share. The active share at the period end was 91.4% (2023: 92.5%),
being defined as the sum of the absolute value of the differences of the
weight of each holding versus the weight of each holding in the Benchmark,
divided by two. Our investee companies also tend to have relatively low debt
levels, which is partly due to their low capital intensity and high cashflow
generation, and partly a function of the predominantly 'organic' growth
strategies.
The development of the energy market is another important consideration in our
positioning. Oil prices, in sterling, rose 10% in the period under review.
More significantly, Europe's commitment to the 'Green Economy', not matched
elsewhere in the world, is a threat to Europe's industrial competitiveness and
has led to 'offshoring', that is to say, moving businesses outside Europe to
reset costs lower. This is the opposite of the US experience where their
vibrant energy sector has led to the 're-shoring' of industry. Europe is
vulnerable to energy costs; the green transition is not likely to reverse its
long record of economic underperformance. For these reasons Europe is a
difficult area in which to invest. A meagre allocation to European equities
disproportionately affects mid and smaller stocks, stocks which form the bulk
of our portfolio. Investor indifference is mitigated to a certain extent by
Private Equity interest.
Contributors
Yet again, the biggest single contributor to our performance relative to our
Benchmark in the period under review was Novo Nordisk, the Danish
pharmaceutical company. The company reported strong profit increases over the
last twelve months. Its GLP-1 drugs, for diabetes and weight management, have
gained significant traction in many markets, most importantly, the United
States. A body mass index (BMI) over 30 is considered obese by the World
Health Organisation. The anti-obesity part of their business is extraordinary:
an almost completely new opportunity, one, moreover, that is relevant to the
estimated one billion people worldwide with a BMI of over 30. Moreover,
clinical trial results were very encouraging with concomitant labelling
improvements. Semaglutide, the GLP-1 active ingredient in Ozempic and Wegovy
(respectively the diabetes and weight loss drugs), has been found to have
additional beneficial indications. The most important, though not the only
one, is cardiovascular (CV) disease. Weight loss is not only good in itself;
it also reduces the risk of other diseases such as diabetes and CV disease.
Clinical trials show that semaglutide's therapeutic effects go beyond the
benefits that come simply from weight loss. The pharmacoeconomic (measuring
costs and outcomes) case for GLP-1 drugs is building; arguably, the case for
Semaglutide specifically, with its CV indication, is even better.
Being our biggest investment, the strong performance of the shares (up 66% in
the twelve months under review) made a big contribution to the portfolio. Novo
Nordisk's weighting was 13% of total assets at the beginning of the reporting
period; at the end it was 14.2% of total assets. We sold c. £71.4 million of
shares during the period under review to keep the weighting down.
Nevertheless, this is clearly a very significant position. Our confidence in
Novo Nordisk is not simply the excitement about its new blockbuster drugs and
the massive latent demand worldwide for anti-obesity drugs. What makes it a
great investment, with a weighting to match, is the visibility of its
prospects. There is only one other serious competitor at present. It will take
years for others to pass through clinical trials and launch new competing
products. In the interim, Novo Nordisk is constantly developing more advanced
products itself. It has an impressive manufacturing scale, and distribution
reach, and enjoys a distinguished heritage in China which is a significant
advantage as it addresses that market. Transparency of Novo Nordisk's pipeline
and those of its competitors, coupled with the need for regulatory
authorisation, means that it is relatively easy to monitor threats to the
company's leading position. The nature of this business is such that we are
likely to get plenty of warning of any material threats.
Another significant contributor to our performance relative to our Benchmark
was RELX, one of our long-standing, major investments. The company is clearly
a winner from Generative AI, one factor behind the higher growth rates
reported in two areas of the company's business, Risk and Legal. RELX has for
many years developed algorithms which might now be described as AI. RELX has
the necessary ingredients for success, data sets and domain knowledge, which
should help maintain good growth rates. The Exhibitions business has also
rebounded very strongly after COVID-related lockdowns.
Shares in Darktrace soared following an offer for the company from a private
equity firm. We invested in Darktrace when it came to the market in April
2021. Although the exit price (at more than twice the price of the Initial
Public Offering) marked a successful investment for us, it is disappointing
that the adverse and often unreasonable commentary that blighted its time in
the public markets effectively forced Darktrace into private ownership. We had
anticipated many years of growth with Darktrace, which operates in a niche
area of cybersecurity.
The global alternative asset manager, Intermediate Capital Group (ICG), which
provides investment finance across the capital structure, was another good
performer. Just as public markets are squeezed by capital outflows, so the
private markets are relatively buoyant. ICG is a beneficiary of this and with
its emphasis on private credit markets is less vulnerable to a downturn than
pure private equity.
Experian was also a contributor to our performance. As a leading credit bureau
in the biggest market, the US, Experian has been vindicated with its
differentiated strategy. By developing a consumer-facing credit platform, the
company successfully navigated the slowdown in the traditional market for
credit bureaus, serving the banks. It also has a strong business in Brazil
which is growing rapidly, and where the outlook is good.
Camurus, a new investment, was also a strong performer. Swedish-listed,
Camurus uses its proprietary, extended- release technology to develop
long-acting pharmaceutical drugs (typically using existing approved, active
pharmaceutical compounds), addressing the needs of patients living with severe
and chronic diseases. Their medicines are developed in-house or in
partnerships with international pharmaceutical companies. These long-acting
medicines aim to improve chronic disease management both in terms of efficacy
and treatment administration, but also in terms of reducing the treatment
burden. The company's first product is a once-weekly or monthly medication for
the treatment of moderate to severe opioid use disorder (OUD) and is
particularly effective in the prevention of withdrawal symptoms caused by
stopping the use of opioids for pain management therapy. The medicine has been
launched in the US, Australia, the UK and Finland. Initial reports of the
markets' acceptance are very encouraging. The opportunity is huge owing to the
large addressable market
Prysmian reported a string of good results. Its leading position in the
manufacturing of electrical energy cables means that it is a beneficiary of
the energy transition. The share of electricity in final energy demand is
likely to increase, which might be described as electrification of energy, and
for this grid stability and resilience is prerequisite. The initial driver for
this transition was the increase in renewable energy. The rapid increase in
demand for data centres, itself partly driven by the surge in AI, has
intensified the urgent need to upgrade electricity networks and to overhaul
and modernise the electric grid, especially in the US.
Deutsche Boerse was another contributor. Its various transactions platforms
continue to perform well: 'higher for longer' interest rates in Europe have
boosted profits; its power trading platform is proving to be very successful
and volatility in financial markets is a boon to their activities.
The continuing demand for Liquified Natural Gas (LNG) has underpinned the
success of Gaztransport et Technigaz ('GTT'). There is no doubt that LNG will
continue to be an important, indeed growing, part of the energy mix. New
sources of natural gas are being developed in the world. The transport of that
gas with LNG carriers is almost certain to increase. As a leading technology
provider of solutions for transporting LNG, and other liquified fuels, GTT is
clearly a beneficiary of this trend.
Detractors
Edenred had a significant negative impact on our relative returns. Although a
good long-term performer, the share price stalled on concerns about regulatory
changes in its main markets, France and Brazil. However, we do not think that
these concerns amount to a serious threat to Edenred's position as the leader
in specific purpose benefits. We maintained the holding.
Genus also detracted from our performance relative to our Benchmark during the
period under review. Results were impacted by the weak performance in the
Chinese market and by delays in the application process for approval for
gene-edited pigs. We are confident that they will obtain approval, which will
transform their fortunes. Accordingly, we retained the position.
Dassault Systèmes has an excellent long-term record. However, the shares
performed poorly in the period under review. The short-term growth rate has
moderated, impacted by the slowdown in clinical trials post COVID, which in
turn has dampened growth in their life sciences business. Nevertheless, we
remain very positive about Dassault Systèmes' strong position and prospects
for growth. Automotive-related demand is robust and likely to improve as cost
efficiency becomes ever more important with the development of Electric
Vehicles (EV). Aerospace and defence demand is another growing opportunity.
Moreover, Generative AI is already driving growth. We retained the shares.
Grifols was another significant detractor, as allegations around accounting
and governance damaged the company. The company has addressed these concerns,
obtained a clean bill of health from the Spanish regulator, published
unqualified accounts, appointed a new external CEO and reduced debt. There is
considerable scope to improve operating performance, underpinning our
confidence in this holding.
Worldline shares have performed badly. Nevertheless, we saw value in the
shares and increased the holding.
We sold the holding in Neste following a series of disappointments. We lost
confidence in management and its ability to navigate the challenges of the
demand, supply imbalance in the biofuels and renewable diesel markets.
We also sold all our shares in Bayer, a chronic underperformer that also
detracted from performance in the period. We were unimpressed by the new
management and do not believe that they are tackling the company's challenges
successfully.
S.O.I.T.E.C also detracted from our returns relative to our Benchmark. The
business has proved to be more cyclical than we expected with high smartphone
inventories dampening demand for their products. Furthermore, it has not
succeeded in getting widespread adoption of its unique silicon carbide
splitting technology. Whilst acknowledging that progress is slower than we had
hoped, we still believe that the company's technology will gain extensive
acceptance and retained the shares.
Finally, we note the negative impact of Genmab shares on the portfolio. Whilst
its standing as a leader in the production of antibody therapeutics is not in
doubt, its ability to monetise its technology leadership is a concern.
Nevertheless, we decided to keep the position, believing that in due course
the company will be properly rewarded for its impressive technology.
Portfolio activity
During the period under review, we raised approximately £325.5 million net
cash. We sold about £605.7 million of stocks and reinvested around £280.3
million, representing a turnover ratio of 71% of the Company's average net
assets during the year (2023:28%). Takeover activity within the portfolio, the
funding of share buy backs and the tender offer in January 2024, for which we
had to raise approximately £222.7 million, accounted for most of this
activity. We reduced the number of holdings from 31 to 27. There were four new
investments and eight complete sales during the period under review.
The biggest sales in the period under review were of three troubled holdings,
Merck KGaA, Neste and Bayer. Merck's pharmaceutical business announced
disappointing clinical trial results. We sold because we saw better
opportunities in other stocks. The sale of Neste followed a series of
disappointments with the management's performance. Poor execution and poor
communication undermined our confidence in the company. There is also some
evidence that European governments are backing away from earlier biofuels
commitments, representing a setback for Neste. We decided to sell all our
shares in Bayer as we are not convinced that the new CEO's plans will work.
The cultural challenges, not to mention litigation overhangs, need to be
addressed and overcome at Bayer.
We also made outright sales of Borregaard, Elkem, Wolters Kluwer, OHB
Technology and SUSE. The last two companies were sold following offers from
private equity firms. We sold Borregaard because profit growth failed to match
our expectations; we sold Elkem as reported profits disappointed and Wolters
Kluwer on valuation grounds.
We took new positions in, Camurus, CTS Eventim, Thales and BAE Systems, the
biggest new position being Swedish-listed Camurus.
We initiated a position in CTS Eventim, which is Europe's leading promotor of
live entertainment, and the number one provider of ticketing services in
Europe. It also operates some of Europe's most renowned venues, a few of which
it owns. Demand for live entertainment is growing. CTS Eventim's continues to
develop its ticketing services, gaining market share and expanding
geographically.
We made two small new purchases in Thales and BAE Systems. Both companies will
benefit from increasing European defence spending. They also stand to benefit
from more defence spending in other parts of the world, notably Asia.
Moreover, both companies cover the fullest range of defence which, nowadays,
is not simply Land, Sea and Air, but also extends to cyber and space.
Competence across all these areas is thought to improve the value proposition
of each offering. Thales, the French multinational company that designs,
develops and manufactures systems, devices and equipment for the aerospace,
defence and security sectors is a leader in cyber security and data
protection. Increasing demand for their products and services is evident. BAE
Systems, the UK-listed defence and aerospace company, is gaining business in
the US and also looks well-placed to grow in Asia where there is clearly
increasing long-term demand for defence solutions.
We also increased commitments in a number of existing holdings. We bought more
shares in Genus following setbacks in the process of obtaining FDA approval
for its gene-edited pigs. We expect them to get approval and expect this to
transform the company's fortunes. We also bought more shares in BFF Bank after
a sharp fall in the share price, a fall caused by a regulatory enquiry by the
Bank of Italy. We expect the bank to recover fully in due course. The decision
to buy more shares in Oxford Instruments followed the appointment of a new CEO
who has refreshed the strategy. The clarity, credibility and accountability of
this strategy is encouraging. We also bought more shares in Bachem, which
should benefit from the surging demand for peptide manufacturing, and Prysmian
which is flourishing on the back of increasing power demand.
Gearing
Our net borrowings as at 31 May 2024 were £55.4 million (2023: £76.5
million), representing net gearing of 8.4% (2023: 8.9%). The gross gearing
drawn down under the Company's loan facility was £60 million as at 31 August
2024, representing net gearing of 7.8% after offsetting cash held on deposit.
Outlook
The direction of interest rates is always an important factor for equity
markets, determined in part at least by the rate of inflation. AI is a new
productivity tool helping this trend. The US, where the most innovative
AI-related technologies are developed is the biggest beneficiary, but all
regions, including Europe, will profit from AI. However, it is unlikely to
reverse the pattern of the last twenty years, or more: Europe has been a
structurally lower growth region than North America and Asia. The economic
cost of decarbonisation in Europe, which is being pursued with a zeal
unmatched elsewhere in the world is also a major constraint. With European
politics in turmoil, investor sentiment regarding Europe is not good. The tide
is going out with money funds flowing out of European equities.
However we are confident that our investment style can overcome this difficult
backdrop. Our investee companies typically have strong balance sheets and
global exposure, protecting downside risk. Our focus on IP rich, high
value-added, innovative companies means that the portfolio is well placed to
deliver upside for our shareholders. The earnings record of the fund shows
that earnings per share (EPS) of our investee companies have grown faster than
the average of the Benchmark over the last five years and our forecasts for
the next three years suggest this will continue. We will provide further
updates on performance in the coming year, which we look forward to with
confidence.
Alexander Darwall
Devon Equity Management Limited
19 September 2024
Investment Portfolio as at 31 May 2024
Relative Contribution to Portfolio return/%
Market Portfolio weight/% Benchmark weight/% Price 12 months/%
Company Value
£'000
Novo Nordisk 100,780 14.2 3.9 65.9 5.4
RELX 54,652 7.7 0.7 38.5 2.8
Dassault Systèmes 52,111 7.3 0.2 (10.3) (1.0)
Experian 46,891 6.6 0.4 28.4 2.2
Deutsche Boerse 42,863 6.0 0.3 14.6 1.0
Intermediate Capital Group 39,270 5.5 - 73.4 2.9
Genus 33,799 4.8 - (27.6) (1.8)
Infineon Technologies 32,898 4.6 0.5 6.1 0.4
Darktrace 31,767 4.5 - 108.7 2.6
Edenred 31,553 4.5 0.1 (27.8) (1.9)
Prysmian 26,081 3.7 0.2 73.9 1.4
Camurus 23,941 3.2 - 85.7 1.1
BioMérieux 22,749 3.1 - 3.6 0.5
Grifols 21,761 3.4 - (14.7) (0.6)
Gaztransport Et Technigaz 19,920 2.8 - 46.0 1.2
S.O.I.T.E.C. 19,786 2.8 - (16.2) (0.3)
Ryanair Holdings 19,585 2.8 - 21.9 0.4
Oxford Instruments 18,659 2.6 - (9.2) (0.2)
Thales 9,944 1.4 0.2 17.1 0.1
Genmab 8,871 1.2 0.2 (29.6) (0.4)
Worldline 8,782 1.2 - (68.0) (0.7)
BFF Bank 7,403 1.0 - 12.6 0.1
BAE Systems 6,957 1.0 0.5 35.0 0.1
Air Liquide 6,923 1.0 0.9 15.8 0.1
Bachem 6,906 1.0 - (16.2) 0.0
Grenke 6,660 0.9 - (21.6) (0.2)
CTS Eventim 5,450 0.8 - 31.3 0.1
Grifols (preference shares) 2,936 0.4 - 31.3 0.1
Total 709,898 100.0
* Price performance and relative contribution to portfolio returns have been
calculated on a total return basis by reference to each portfolio transaction.
Over the period from close on 31 May 2023 to 31 May 2024. 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.
The five largest contributors to performance relative to the Benchmark are
highlighted in bold and the five largest detractors are highlighted in
italics.
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.
Reviews of the Company's activities are included in the Chair's Statement and
the Investment Manager's Review above. There has been no significant change in
the activities of the Company during the year to 31 May 2024 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;
· an understanding that structural changes are likely to benefit rather than
negatively impact that company's prospects; and
· the ESG criteria (described below).
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 cash flow 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).
Environmental, Social and Governance considerations
The Board considers Environmental, Social and Governance ('ESG') and
sustainability risks to be an important element to be integrated into the
Company's investment decisions. It has instructed Devon to take ESG risk
considerations into account in both the discretionary management of the
Company's investment portfolio and in its ongoing engagement with investee
companies.
Devon's primary objective is to produce superior financial returns for the
Company's shareholders. High standards in sustainability and efficiency make
good business sense and have the potential to protect and enhance investment
returns.
The Board has not established formal sustainability investment goals for the
Company, nor has it mandated Devon to implement automatic exclusion criteria
for certain categories of investee companies. Nevertheless, Devon's investment
decision-making process and ongoing risk monitoring integrate the assessment
of potential and actual sustainability risks and opportunities for all
investee companies.
Devon's investment team constructs a comprehensive business case for each
investee company in the portfolio. As part of its due diligence, the team
analyses the value chain for each investee company, seeking to identify any
involvement in industries deemed to be high risk through production,
distribution, or related practices which could harm the business case for the
investment.
The factors considered vary depending on the type of investee company being
assessed. These may include:
· Corporate governance (including board structure, executive remuneration, tax
compliance, track record of capital allocation, management incentives, labour
relations
· Shareholder's rights (including election of directors, capital amendments);
· Change of regulation (including greenhouse gas (GHG) restrictions, governance
codes);
· Physical threats (including extreme weather, climate change, water shortage);
· Brand and reputation issues (including poor health and safety record, cyber
security breach);
· Supply Chain Management (including increase in fatalities, labour relations);
· Work practices (including observation of health, safety and human rights
provisions and compliance with provisions with the Modern Slavery Act); and/or
· Alignment with the goals of the Paris Agreement (to meet net zero GHG
emissions by 2050).
Devon's approach focuses on targeted dialogue, active governance, and
collaborative efforts to ensure the alignment of investee companies, while
also upholding the fiduciary responsibilities to their clients.
Stewardship and engagement
By engaging with investee companies, Devon seeks to foster constructive
relationships, inform investment decisions, and drive positive change within
the portfolio with the expectation of enhancing shareholder returns.
Specifically, Devon's concentrated, long-term approach to investment
facilitates meaningful engagement on culture, governance, and sustainability
issues with the management of investee companies. This enables them to:
· address concerns through dialogue;
· gain insights into proposed remedial actions; and
· influence behaviour and advocate best practices for long-term success.
Matters that have been raised through engagement include: remuneration
policies, board composition, workforce engagement, shareholder and voting
structures, diversity strategy, health and safety, energy transition, capital
allocation, sustainability strategy, labour and human rights, and climate
change mitigation efforts.
For example, during the financial year under review, Devon engaged
successfully with Bachem. Following two material events, we felt the company's
communication with the market could be improved. Devon engaged with the
company on this issue, emphasising that timely and widespread dissemination of
material information was critical to ensure both confidence in the management
team and protect minority shareholder interests. The management team were
receptive to Devon's representations, and Devon has recognised an improvement
in their communication with the market.
Another example, during the financial year in review, was Devon's engagement
with the management of Oxford Instruments. Devon had two principal concerns.
One was the CEO's lack of formal science expertise, a consideration for the
leadership of a science driven company. The second concern was the complexity
of the way in which the group presented its operations. The senior management
of Oxford Instruments was happy to address Devon's concerns. Devon was
reassured and fully satisfied with their response on both points. On the
first, the company explained that they have a science advisory committee to
support the CEO and other senior management. In response to the second point,
management announced a new, simplified divisional structure which has hugely
improved the quality of communicating the group's business. Moreover, the
recent capital market's day, the first in many years, was an excellent
opportunity to see one of the big new facilities, see demonstrations of some
of the company's tools, and meet more senior management. Devon welcomes the
improved transparency and engagement.
Voting at investee company meetings
In addition to direct engagement, the Board has given discretionary voting
powers to Devon and, wherever practicable, Devon will exercise all voting
rights associated with the shares held in the Company's portfolio. A report of
all votes cast on the Company's behalf during the financial year under review
may be viewed on Devon's website at www.devonem.com. (http://www.devonem.com/)
Policies and transparency
Devon has established an ongoing process for identifying, evaluating and
managing significant risks faced by the Company. This is described in more
detail below.
· 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 risks and opportunities and integrating them into their
decision-making and engagement with investee companies.
· 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 applicable FCA regulations and governs Devon's remuneration practices for
its staff. It aligns with sustainability considerations and aims to support
Devon's overall objectives.
· Voting and Engagement Policy: In accordance with the Shareholder Rights
Directive (SRD) II requirements, 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 Devon's commitment to transparency.
· SFDR & SDR Disclosures: Devon complies with the reporting obligations set
forth by the Sustainable Finance Disclosure Regulation (SFDR), the UK's
Sustainability Disclosure Requirements (SDR) and the FCA's 'anti greenwashing'
and 'naming and marketing' rules. It provides disclosures related to
sustainability and environmental considerations as required by these
regulations.
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 www.europeanopportunities.com
(http://www.europeanopportunities.com/) .
Planned life of the Company
The Articles of Association of the Company provide that at every third Annual
General Meeting, an ordinary resolution be proposed that the Company shall
continue as an investment trust. The next scheduled continuation vote will be
at the 2026 Annual General Meeting. If such resolution is not passed, 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 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).
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 an annual dividend which is 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.
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 the
five years to 31 May 2029.
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.
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
Russia's invasion of Ukraine, the war in Gaza and climate change), together
with mitigating factors. 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 described on in the
Annual Report and Accounts, 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 the Company's net assets 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 2026 Annual General Meeting.
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 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. There were
7 investment trusts in the AIC Europe sector as at 31 May 2024. 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 2024
The Company 16.5 21.9 13.4 109.3
MSCI Europe index, total return in GBP (Benchmark) 17.3 28.4 57.0 114.2
AIC Europe peer group1 18.9 25.0 73.6 169.3
Net asset value total return 1 year (%) 3 years (%) 5 years (%) 10 years (%)
to 31 May 2024
The Company 15.5 23.4 25.0 137.0
MSCI Europe index, total return in GBP (Benchmark) 17.3 28.4 57.0 114.2
AIC Europe peer group1 16.9 24.4 69.6 163.8
(Discount)
As at 31 May 2024 (%) 2023 (%) 2022 (%)
The Company (10.2) (10.9) (12.3)
AIC Europe peer group1 (6.7) (8.3) (10.3)
Ongoing charges ratio
For the year ended 31 May
2024 (%) 2023 (%) 2022 (%)
The Company 0.97 1.02 1.02
AIC Europe peer group1 0.81 0.88 0.85
1 The AIC Europe peer group data is available at www.theaic.co.uk.
(http://www.theaic.co.uk/)
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 shares is 105% of the average of the middle
market quotations for the shares for the five business days immediately
preceding the date of repurchase. The minimum price is the nominal value of
the shares. 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 shares repurchased, pursuant to the above buy back
authority, may be held in treasury. These 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
shares that it purchases pursuant to the share buyback authority granted by
shareholders.
Shares held in treasury may only be reissued by the Company at prices
representing a premium to the net asset value per 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 The Board reviews the Company's investment objective and policies and the Stable: The Company's shares have traded at a narrower average discount during
Investment Manager's investment approach in the context of past performance the year than in 2023, albeit slightly above the Board's target of single
Key risks and uncertainties include: (a) poor investment performance over an (relative to Benchmark), shareholder feedback and broader market and economic digits in normal market conditions (10.2% in 2024, 14.4% in 2023).
extended period relative to Benchmark; (b) the sudden departure of Alexander conditions. The Board sets mandate restrictions as necessary.
Darwall and/or a key staff member at Devon; (c) the development of a
significant discount to net asset value in the Company's shares; (d) the risk
of non-compliance with the UK Consumer Duty regulations, including failure to
The Board has implemented a number of discount management initiatives, as
properly align the Company to the needs, objectives, characteristics and The Board reviews the long-term succession plans prepared by the Investment described in the Chair's Statement.
vulnerabilities of its identified target market; and (e) the risk of the Manager and takes into consideration the availability of suitably experienced
Company's shareholders voting to discontinue the Company. personnel to manage the Company's portfolio in the short-term in the event of
an emergency.
During the year under review the NAV total return was 15.5%, slightly behind
the Company's Benchmark total return of 17.3%.
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 2026 AGM). The Board has also committed to a
25% tender offer in the event that NAV total return does not exceed the total
return of the Benchmark over the three years to 31 May 2026.
Market risks To mitigate this risk the Board considers various portfolio metrics including Stable: The risk is seen to be high, but stable since 2023. The Company's
individual stock performance, the composition and diversification of the investment portfolio has shown resilience despite the challenging macro
The Company's assets consist of listed securities and its principal financial portfolio by industry sector, purchases and sales of investments, the holding environment. Devon continues to adopt a diversified approach to portfolio
risks are therefore market related. Key risks and uncertainties include: (a) period of each investment and the contributors and detractors to performance. construction within the concentration limits determined by the Board.
the impact of macroeconomic and geopolitical conditions on the Company's Devon provides rationale for stock selection decisions. The Board also
investments; (b) volatility in the market prices of the Company's investments; considers the macro-economic and geopolitical risks and uncertainties that the
and (c) the risk of fraudulent activity at the portfolio company level Company is exposed to.
impacting the valuation of their issued securities and causing the risk of a
loss of confidence in the Company.
The Company does not take active positions in currencies, nor does it invest
in fixed income securities.
Devon 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.
Devon does not invest in countries which are subject to sanctions or exposed
to significant political risk.
Operational Risks The Board relies on the cyber security and IT risk management tools Stable:
implemented by the Investment Manager and the Custodian to prevent cyber-
Key risks and uncertainties include: (a) a cybercrime event or an IT systems attacks. The Investment Manager uses a well established third-party IT system The Board has reviewed the performance of the Company's service providers
failure which compromises the Company's data or the Investment Manager's (Bloomberg) for all trading activity on behalf of the Company. during the year and has approved their continuing appointment. There have been
ability to manage the Company's portfolio; (b) inadequacy of disaster recovery
no material operational issues that have impacted the Company during the year.
planning to ensure continuity of the Investment Manager's operations; or (c)
the inadequacy of the oversight and controls undertaken by the Custodian or
Devon 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 that there is sufficient oversight over
actions taken.
Legal and Regulatory Risks The Board relies on the services of the Investment Manager, its broker, its Stable:
legal advisers and J.P. Morgan Europe Limited to report changes in and to
ensure compliance with all applicable laws and regulations including the All control procedures are working effectively. There have been no material
Companies Act 2006, the Listing Rules and the Alternative Investment Fund legal or regulatory changes that have impacted the Company during the year.
Key risks and uncertainties include: (a) the risk of non-compliance with Managers Regulations.
existing regulatory or legal requirements, including resultant negative PR
implications; (b) adverse implications of regulatory change; or (c) 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.
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, the ongoing global conflicts (and the resulting economic
uncertainty), the outcome of political elections in Europe and the United
States and climate change 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. They are assessed by the
Investment Manager and the Board on a continuing basis and embedded into
Devon's investment process. The Company has no exposure to investee companies
in Russia or Ukraine.
The Investment Manager seeks to ensure that individual stocks in the Company's
portfolio meet an acceptable risk/reward profile by reference to both
principal and emerging risks.
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 reporting date of this Annual Report and Accounts.
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.
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 its stakeholders
which includes its shareholders, service providers such as the Investment
Manager 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; its stakeholders include its shareholders and its service providers,
including the Investment Manager, 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 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', 'Board activities' 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
Devon's investment team.
As AIFM, Devon 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 described 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.europeanopportunities.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 which 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 AIC 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. Actions taken in response to such votes received during the year ended
31 May 2024 are set out in the Chair's Statement.
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.
Board activities
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
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. The Board has set the parameters within which
the Investment Manager operates and these are set out under the terms of the
investment management agreement 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:
· Succession planning: The Board, acting on recommendations from the Nomination
Committee and an independent search agent, appointed a new independent
non-executive Director, Neeta Patel with effect from 1 January 2024.
· Leadership: Lord Lamont was appointed Senior Independent Director in November
2023. Jeroen Huysinga will take over as Senior Independent Director and
Manisha Shukla will take over as chair of the Remuneration Committee with
effect from Lord Lamont's retirement at the forthcoming Annual General
Meeting.
· Gearing: On 6 September 2024 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, London, Branch, in relation to amounts drawn down.
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.
· Tender offer: Following consultations with shareholders and the Board's
professional advisers, in January 2024, the Board implemented a tender offer
for 25% of the Company's shares in issue at a price close to NAV. The tender
offer was fully subscribed, enabling shareholders to realise a portion of
their holdings at prices in excess of the then prevailing market price.
Further details are contained in the Chair's Statement.
· Conditional tender offer: Again, following consultations with shareholders and
the Board's professional advisers, in October 2023 the Board announced its
intention to offer an additional tender offer for up to 25% of the shares in
issue in the event that the total return on the NAV per share over the three
years to 31 May 2026 does not exceed the total return on the Company's
Benchmark.
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.
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 above. 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.
For and on behalf of the Board
Matthew Dobbs
Chair
19 September 2024
Income Statement
for the year ended 31 May 2024
Year ended Year ended
31 May 2024 31 May 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gain on investments - 99,737 99,737 - 20,058 20,058
Other currency (loss)/gain - (80) (80) - 360 360
Income from investments 11,573 - 11,573 16,244 - 16,244
Other income 84 - 84 33 - 33
Total income 11,657 99,657 111,314 16,277 20,418 36,695
Investment management fee (6,409) - (6,409) (7,733) - (7,733)
Other expenses (1,359) (1,466) (2,825) (951) - (951)
Total expenses (7,768) (1,466) (9,234) (8,684) - (8,684)
Net return before finance costs and taxation
3,889 98,191 102,080 7,593 20,418 28,011
Finance costs (2,735) - (2,735) (2,863) - (2,863)
Return on ordinary activities before taxation
1,154 98,191 99,345 4,730 20,418 25,148
Taxation (897) - (897) (1,345) - (1,345)
Net return after taxation* 257 98,191 98,448 3,385 20,418 23,803
Earnings per ordinary share (basic and diluted)
0.30p 113.08p 113.38p 3.34p 20.15p 23.49p
* 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 2024
2024 2023
£'000 £'000
Fixed Assets
Investments 709,898 936,318
Current assets
Debtors 2,882 3,445
Cash and cash equivalents 5,615 6,951
8,497 10,396
Total assets 718,395 946,714
Current liabilities
Creditors - amounts falling due within 1 year (61,957) (83,776)
Total assets less current liabilities 656,438 862,938
Capital and reserves
Called up share capital 888 1,129
Share premium 204,133 204,133
Special reserve 33,687 33,687
Capital redemption reserve 286 45
Reserves 417,444 623,944
Total shareholders' funds 656,438 862,938
Net asset value per ordinary share 1,008.48p 876.46p
Statement of Changes in Equity
For the year ended 31 May 2024
For the year ended Share capital Share premium Special reserve Capital redemption reserve Reserves Total
31 May 2024 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 1 June 2023 1,129 204,133 33,687 45 623,944 862,938
Net return after taxation - - - - 98,448 98,448
Repurchase of shares into treasury - - - - (79,450) (79,450)
Repurchase of shares for cancellation - -
(241) 241 (222,123) (222,123)
Dividends declared and paid* - - - - (3,375) (3,375)
Balance at 31 May 2024 888 204,133 33,687 286 417,444 656,438
For the year ended Share capital Share premium Special reserve Capital redemption reserve Reserves Total
31 May 2023 £'000 £'000 £'000 £'000 £'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* - - - - (2,536) (2,536)
Balance at 31 May 2023 1,129 204,133 33,687 45 623,944 862,938
* Dividends paid during the financial year were paid out of revenue reserves.
Cash flow statement for the year ended 31 May 2024
2024 2023
£'000 £'000
Cash flows from operating activities
Investment income received (gross) 12,086 16,366
Deposit interest received 84 33
Investment management fee (7,084) (7,756)
paid
Other cash expenses (1,225) (900)
Net cash inflow from operating activities before taxation and
interest 3,861 7,743
Interest paid (3,309) (2,302)
Overseas tax incurred (796) (1,372)
Net cash (outflow)/inflow from operating activities (244) 4,069
Cash flows from investing activities
Purchases of investments (280,274) (117,350)
Sales of investments 605,717 153,085
Net cash inflow from investing activities 325,443 35,735
Cash flows from financing activities
Repurchase of shares into treasury (84,491) (26,650)
Repurchase of shares for cancellation (222,123) -
Tender (1,466) -
cost
Equity dividends paid (3,375) (2,536)
Repayment of (75,000) (20,000)
loan
Drawdown of 60,000 10,000
loan
Net cash outflow from financing activities (326,455) (39,186)
(Decrease)/increase in cash (1,256) 618
Cash and cash equivalents at start of year 6,951 5,973
Realised (loss)/gain on foreign currency (80) 360
Cash and cash equivalents at end of year 5,615 6,951
Availability of Annual Report and Accounts
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 shortly be
available on the Company's website at: www.europeanopportunitiestrust.com and
on the National Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
Monthly newsletter
Please use the following link to be added to the distribution list for the
Company's monthly newsletter and factsheet:
https://www.devonem.com/newsletter-sign-up/
For further information, please contact:
Company Secretaries enquiries@devonem.com (mailto:enquiries@devonem.com)
Richard Pavry / Charles Bilger +44 (0)20 3985 0445
Singer Capital Markets - Corporate broker
Robert Peel / Angus Campbell (Investment Banking) +44 (0)20 7496 3000
Alan Geeves / James Waterlow / Sam Greatrex (Sales)
Buchanan Communications - PR Adviser eot@buchanancomms.co.uk (mailto:eot@buchanancomms.co.uk)
Henry Wilson +44 (0)7788 528143
Helen Tarbet +44 (0)7872 604453
George Beale +44 (0)7450 295099
www.europeanopportunities.com (http://www.europeanopportunities.com)
Neither the Company's website nor the content of any website accessible from
hyperlinks on it (or any other website) is (or is deemed to be) incorporated
into, or forms (or is deemed to form) part of this announcement.
END
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR SFDFWUELSEDU