Fidelity European: Annual Financial Report
21/03/2023 07:00
FIDELITY EUROPEAN TRUST PLC
Final Results for the year ended 31 December 2022
Financial Highlights:
* The Board of Fidelity European Trust PLC (the “Company”) recommends a
final dividend of 4.62 pence which together with the interim dividend payment
of 3.08 pence per share (totalling 7.70 pence) represents an increase of 12.7%
over the total dividend of 6.83 pence paid in the prior year.
* Over the reporting year, the net asset value (“NAV”) of the Company
returned -3.6% but outperformed the Benchmark Index which fell by -7.0%. The
share price return was -3.8%.
* The Company was the top performer in its peer group at the end of the
reporting year.
* The Company continues to focus on attractively valued companies with strong
balance sheets and consistent dividend growth.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN’S STATEMENT
The year under review was one of the most extraordinary in recent memory,
rivalling the one in which COVID-19 first erupted. It is barely a year since
Russia invaded Ukraine, devastating an entire country and sending shockwaves
around the globe. Everything from grain to oil prices, energy and commodity
costs and spending on defence, were impacted. The UK had three prime ministers
in the space of a few months, while Continental Europe saw a new ruling
coalition in Italy and a tightly contested election in France. Meanwhile,
central banks raised interest rates significantly and moved from quantitative
easing to quantitative tightening. The European Central Bank was somewhat
later than others to embark on this important change of policy.
With so much going on, one would be forgiven for overlooking the impact that
COVID-19 has had on consumers and businesses. Having said that, China
announced a surprising end to its zero-COVID policy in December 2022,
potentially opening up one of the world’s major economies again and
benefiting demand for European companies’ products. With elevated levels of
volatility and a difficult market environment, the Board and I are pleased to
see the Portfolio Managers sticking to their tried and tested philosophy of
bottom-up stock picking, namely finding attractively valued dividend growers
with strong business franchises and balance sheets.
Performance
The Company’s performance, although negative over the period, was better
than the Benchmark Index, the FTSE World Europe (ex-UK), with a net asset
value “NAV” total return of -3.6% and a share price total return of -3.8%.
In comparison, the Benchmark Index total return was -7.0%. The discount
widened slightly from 5.1% at the start of the year to end the year at 5.4%.
Both the NAV and share price total performance returns over three, five and
ten years remain well ahead of the Benchmark Index, as can be seen from the
chart on the Financial Highlights page in the Annual Report. These are
pleasing results for the Company.
Outlook
Inflation appears to have peaked in Europe at 10.6% in October 2022. The last
quarter of 2022 saw equity markets bounce given unusually mild weather in
Europe which helped bring down gas prices from elevated levels, and of course,
positive news from China where property market stimulus and a relaxation of
zero-COVID policies helped to buoy markets. In Europe, results for the third
quarter also held up better than expected, in part supported by a weak euro.
The risks of a global recession at some stage in 2023 loom large, however, and
so there is a tone of caution about the operating environment for the year
ahead. Companies with prudently managed balance sheets look well-positioned to
weather any potential economic problems, and it is exactly these types of
resilient companies in which the Company’s Portfolio Managers look to
invest.
The portfolio remains balanced in terms of sector positioning and the
Portfolio Managers’ focus is on finding attractively valued companies with
good prospects for cash generation and dividend growth over the longer term.
Positioning is driven by opportunities at the individual stock level rather
than by macro developments, as the Portfolio Managers believe that calling the
general direction of the market is a difficult, if not an impossible task. The
investment strategy of the Company remains unchanged.
Environmental, Social and Governance (ESG) Investment
ESG factors remain central to the work of both the Board and the Portfolio
Managers. Businesses are under pressure to ensure that their activities are
environmentally sustainable and demonstrate social responsibility and good
corporate governance. Although there is progress in the form of commitments
and initiatives across a wide range of areas from deforestation to clean
energy transition, much more needs to be done. Continuing deterioration in the
climate and other ESG concerns present their own investment risk to your
portfolio. Fidelity International has a sustainable investing approach,
including engagement and voting principles and guidelines. It continues to
evolve its approach to ESG, for example, in its proprietary forward-looking
ESG ratings. The proprietary sustainability ratings system leverages Fidelity
International’s internal research and interactions with issuers, and the
ratings are designed to generate a forward-looking and holistic assessment of
ESG risks and opportunities based on sector specific performance indicators.
Analysts quantify the direction of change of companies’ ESG performance and
rate the companies using a scale of A to E. The ratings of the companies
within the portfolio are well ahead of the broader market and continue to
improve.
The Portfolio Managers outline how they use Fidelity International’s
approach to ESG in their report and what this means for the Company’s
investment portfolio. The Fidelity group of companies (including the Manager)
has embedded ESG factors in its investment decision making process. Further
details are in the Annual Report.
OTHER MATTERS
Dividends
The Board does not influence the Portfolio Managers by imposing any income
objective in any particular year, and the investment focus on companies
capable of growing their dividends remains. The Board acknowledges that both
capital and income growth are components of performance, as reflected in the
investment objective of the Company. It therefore has a policy whereby it
seeks to pay a progressive dividend in normal circumstances and to pay
dividends twice yearly in order to smooth dividend payments for the reporting
year. Unlike open-ended funds, investment trusts can hold back some of the
income they receive in good years, thereby building up revenue reserves, which
can then be used to supplement dividends during difficult times. The Board has
over the past few years augmented revenue reserves by retaining a small
proportion of earnings to be used in difficult times, as in the case of the
final dividend paid in May 2021.
The Company’s revenue return for the year to 31 December 2022 was 9.00 pence
per ordinary share (2021: 7.50 pence), and an interim dividend of 3.08 pence
per ordinary share was paid on 28 October 2022 (2021: 2.65 pence). The Board
recommends a final dividend of 4.62 pence per ordinary share for the year
ended 31 December 2022 (2021: 4.18 pence) for approval by shareholders at the
Annual General Meeting (“AGM”) on 10 May 2023. The interim and final
dividends (total of 7.70 pence) represent an increase of 0.87 pence (12.7%)
over the 6.83 pence paid for the year ended 31 December 2021.
The final dividend will be payable on 16 May 2023 to shareholders on the
register at close of business on 31 March 2023 (ex-dividend date 30 March
2023). Shareholders may choose to reinvest their dividends for additional
shares in the Company.
Discount Management and Treasury Shares
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 ordinary share.
In order to assist in managing the discount, the Board has shareholder
approval to hold ordinary shares repurchased by the Company in Treasury,
rather than cancelling them. Shares in Treasury are then available to be
re-issued at NAV per ordinary share or at a premium to NAV per ordinary share,
facilitating the management of and enhancing liquidity in the Company’s
shares. The Board is seeking shareholder approval to renew this authority at
the AGM on 10 May 2023.
Between August and October 2022, as the Company’s discount widened, it
repurchased 2,285,526 ordinary shares into Treasury. Since then the discount
has remained in single digits and no further shares have been repurchased.
Gearing
The Company continues to gear through the use of derivative instruments,
primarily contracts for difference (“CFDs”), and the Portfolio Manager has
flexibility to gear within the parameters set by the Board. As at 31 December
2022, the Company’s gross gearing was 11.7% (2021: 11.1%). Net gearing was
the same at 11.7% (2021: 11.1%) due to the absence of any short derivative
positions in the portfolio. In the reporting year, gearing made a negative
contribution to performance, as can be seen from the attribution analysis
table in the Annual Report.
The Board monitors the level of gearing and the use of derivative instruments
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 Portfolio Managers’ confidence in identifying attractive
investment opportunities, and to their remaining attractive.
Board of Directors
After serving on the Board for nine years, Marion Sears stepped down from the
Board on 10 May 2022 as a non-executive Director and Senior Independent
Director. Her successor as a non-executive Director, Milyae Park, was
appointed on 1 January 2022. Milyae was subsequently elected by shareholders
at the AGM held on 10 May 2022. Paul Yates succeeded Marion as Senior
Independent Director on 10 May 2022.
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 for Directors of FTSE 350 Companies, all Directors will be
subject to annual re-election at the AGM on 10 May 2023. The Directors’
biographies can be found in the Annual Report and between them they have a
wide range of appropriate skills and experience to form a balanced Board for
the Company.
Continuation Vote
In accordance with the Company’s Articles of Association, the Company is
subject to a continuation vote every two years. The next such vote is at this
year’s AGM on 10 May 2023.
The Company’s performance record has been strong since it launched on 5
November 1991, with a NAV total return of 4,899.3% and a share price total
return of 4,784.6% compared to a Benchmark Index total return of 1,280.5%. The
NAV and share price returns over one, three and five years remain well ahead
of the Benchmark Index as can be seen from the “Standardised Performance
Total Return” chart on the Financial Highlights page in the Annual Report.
In addition, the prospects of the Company over a five year investment horizon
can be found in the Viability Statement below. Therefore, your Board
recommends that Shareholders vote in favour of the continuation of the
Company.
Annual General Meeting
The Company’s AGM is at 12 noon on Wednesday, 10 May 2023, and the Board and
I hope to see as many shareholders as possible. Details of the AGM are below.
Vivian Bazalgette
Chairman
20 March 2023
ANNUAL GENERAL MEETING – WEDNESDAY, 10 MAY 2023 AT 12 NOON
The AGM of the Company will be held at 12 noon on Wednesday, 10 May 2023 at 4
Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or
Mansion House) and virtually via the online Lumi AGM meeting platform. Full
details of the meeting are given in the Notice of Meeting in the Annual
Report.
For those shareholders who would prefer not to attend in person, we will
live-stream the formal business and presentations of the meeting online.
Sam Morse, the Portfolio Manager, will be making a presentation to
shareholders highlighting the achievements and challenges of the year past and
the prospects for the year to come. He, the Co-Portfolio Manager and the Board
will be very happy to answer any questions that shareholders may have. Copies
of his presentation can be requested by email at investmenttrusts@fil.com or
in writing to the Company Secretary at FIL Investments International, Beech
Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to
vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice
of Meeting in the Annual Report for details on how to vote virtually.
Investors viewing the AGM online will be able to submit live written questions
to the Board and the Portfolio Managers and we will answer as many of these as
possible at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the
Company’s website at www.fidelity.co.uk/europe. On the day of the AGM, in
order to join electronically and ask questions via the Lumi platform,
shareholders will need to connect to the website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity Personal Investing,
Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to
request attendance at the AGM in accordance with the policies of your chosen
platform. They may request that you submit electronic votes in advance of the
meeting. If you are unable to obtain a unique IVC and PIN from your nominee or
platform, we will also welcome online participation as a guest. Once you have
accessed https://web.lumiagm.com from your web browser on a tablet or
computer, you will need to enter the Lumi Meeting ID which is 186-425-859. You
should then select the ‘Guest Access’ option before entering your name and
who you are representing, if applicable. This will allow you to view the
meeting and ask questions, but you will not be able to vote.
Portfolio Managers’ Review
Question
You have both had another year of navigating challenging investment conditions
under your belts. What lessons have you learned?
Answer
Sam:
1. Expect the unexpected. We do not spend a lot of time trying to
predict what comes next (did you predict the global pandemic or the invasion
of Ukraine?) but we do spend a lot of time trying to identify well-funded
companies that we think will be able to deliver consistent dividend growth
irrespective of what comes next.
2. Stay fully invested. The first portfolio manager of your company,
Anthony Bolton, always reminds us that it is important not to become more
bearish as the market falls. The stock market looks forward and often recovers
its poise when investors least expect it.
3. Stay balanced. Diversification is a free gift – it provides
protection from unexpected outcomes and reduces the number of sleepless nights
in times of high volatility (which has been the norm in 2022 and recent
years.)
Marcel: I fully agree with all that Sam has mentioned. I would add that
sometimes when it comes to trading during periods of crisis “less is
more”. This runs counter to the conventional wisdom that you need to trade
more during these periods in order to protect your portfolio. We were not
smart enough to predict the pandemic and invasion of Ukraine and all the
second and third order impacts. However, when we looked at the Company’s
holdings individually, as well as in aggregate, we felt confident that the
Company was well setup to handle what the market would potentially throw at
us. This indeed proved to be the case and vindicated our approach to avoid
“doing something” just for the sake of it.
Question
What stocks have performed particularly well during this period and why?
Answer
Sam: As the old saying goes: ‘You wait forever for a London bus and then
three come along one after the other.’ The Company had not had a takeover
offer for one of its holdings for some time, but in 2022, we received three
offers which, on a combined basis, accounted for much of the NAV
outperformance of the Company, relative to its Benchmark Index. The most
significant boost to performance came from Swedish Match for which Philip
Morris International (think Marlboro man) originally offered SEK106 per share
in May and ended up giving us SEK116 per share six months later. Although we
did not think it was overly generous, we decided to accept the SEK116 offer.
Swedish Match has been a dividend growing stalwart in the Company for many
years and has enjoyed a lot of recent success in the USA. We expect this to
continue with its nicotine pouch brand Zyn. Atlantia, the Italian
infrastructure company, was taken over by the Benetton family who already had
a controlling stake in the company, in league with the private equity giant
Blackstone. Finally, at the end of the year, Novozymes, a major player in
industrial enzymes, announced an all-Danish ‘merger’ with another holding
in the Company, Christian Hansen, a major player in food enzymes and cultures.
Top 5 Stock Contributors (on a relative basis) %
Swedish Match +1.6
TotalEnergies +1.1
Novo Nordisk +0.7
Deutsche Börse Group +0.7
Bankinter +0.7
=========
Top 5 Stock Detractors (on a relative basis) %
Partners Group -0.8
EQT -0.6
Legrand -0.6
Novartis -0.6
Dassault Systèmes -0.5
=========
Question
What impact has heightened geopolitical risk had on the Company?
Answer
Marcel: Clearly, the primary impact has been that the sense of security which
the market, and indeed society at large, has had for a number of years, has
been shattered as a result of the largest European conflict since 1945. As
such the “peace dividend” that markets have enjoyed over many years is
substantially reduced with the market now also repricing risks of not just
Eastern Europe but also other regions such as Taiwan and Korea. Additionally,
the second order impact of the Ukraine invasion has been materially higher
inflation and interest rate expectations over the coming years. All of the
above has resulted in a sharp de-rating in the market, even if at an aggregate
level, European corporate earnings are still expected to grow in 2023.
Question
How optimistic are you about corporate earnings?
Answer
Marcel: The short answer is less optimistic than sell-side consensus
estimates. Surprisingly to us, consensus still expects earnings growth in 2023
for European listed equities in aggregate, despite the challenging
macroeconomic outlook and likely headwinds over the next 12 months.
Fidelity’s analysts in aggregate are more bearish, expecting earnings to
decline by 5%+ in 2023, with which we would agree. Additionally, there is
likely to be more downside risk to these earnings numbers than upside risk.
Having said this, we believe aggregate earnings in the Company should prove to
be more resilient than the market given we can seek shelter in sectors with
pricing power, balance sheet strength and tailwinds from structural demand and
a strong US dollar. Key sector examples of this would be luxury goods,
software and aerospace and defense.
Thus, Fidelity analysts are less optimistic than the market on earnings growth
for European companies in 2023, but the stocks in the portfolio should prove
more resilient (see chart in the Annual Report).
Question
What are some of the more recent portfolio changes that you have made and how
are you positioned for 2023?
Answer
Sam: For much of 2022, we have been sitting on our hands. Turnover has been
low. Although we have seen some big drops in the share prices of high growth
companies, owned and not owned, we must not forget that, in many cases, they
were dropping from very elevated levels (a corollary of ultra-low interest
rates). Towards the end of the year, however, we did begin to add selectively
to existing holdings which might be categorised as ‘growth cyclicals’ with
a particular focus on those with strong balance sheets, given our expectation
that interest rates would stay high in 2023 and that we might experience a
more recessionary environment too. We used the proceeds from Swedish Match and
Atlantia to add to our holdings in ASML, Partners Group and Kone – all of
which have been derated aggressively during 2022, but all of which enjoy
strong balance sheets and retain, in our opinion, strong long term prospects
for dividend growth. We also have some high growth stocks on our watch list
that are not currently owned by the Company, but have fallen to more
attractive entry levels, having been overly expensive for many years, so we
expect to see more turnover in the Company in early 2023 relative to recent
years. Our focus, in terms of positioning, is the same as always: we will stay
balanced by sector groupings and stay anchored on well-funded companies which
are able to grow their dividends consistently on a three to five year view.
QUESTION
Markets went down last year. Why did you stay geared?
Answer
Sam: In keeping with Fidelity’s long-held conviction that it is a “mug’s
game” to try to time markets, Marcel and I will, with the Board’s
endorsement, maintain a fixed level of gearing within a 10%-15% range. The
agreed level of gearing takes into account our cautious investment approach
and allows considerable headroom in the event of a sharp sell-off in the
market. Gearing is, of course, one of the great advantages of an investment
trust, and although it may amplify volatility in the short term, we expect it
to enhance long term returns. Yes, it is painful when markets fall, as they
did in 2022, and it is often tempting to reduce the gearing when that happens,
but markets do recover and often when least expected. If you miss out on those
early days of recovery, you may fail to gain all the potential benefit of
gearing.
Question
What headwinds do you see facing the portfolio in the next 12 months?
ANSWER
Sam: The health of the consumer is critical especially in more mature
economies where private consumption often represents the majority of GDP. The
inflation shock of 2022 will continue to be a headwind for most consumers in
2023. It is unlikely that wages will rise as fast as the cost of living so
disposable incomes will be squeezed again in real terms. Rising unemployment
could also add fuel to the fire. Many of the companies we own in the
Company’s portfolio, especially those that are consumer-facing, will suffer
a headwind of declining demand and they will have to work hard to off-set the
forces of operational leverage if they are to avoid seeing a geared negative
impact on their bottom line. Pricing power will continue to be an important
antidote in this battle, particularly while inflation remains elevated. As
mentioned at last year’s AGM, we have always focused on pricing power as an
enabler for delivering consistent dividend growth. There are many examples of
pricing power across the Company’s holdings. Some have products with
inelastic demand, such as Hermes handbags, some sell ‘small but critical’
products, such as the food ingredients sold by Symrise, and some enjoy pricing
power thanks to their dominant position in their industry, such as ASML.
Question
Are you planning to make any changes to your investment approach?
Answer
Sam: No. Companies that deliver consistent dividend growth consistently
outperform those that do not. Backward-looking analysis demonstrates that this
is true. The challenge, of course, is to be able to identify which companies
will grow their dividends consistently going forward – and in this respect,
the past is not necessarily always a reliable guide. We focus on certain key
criteria to help us identify which companies will grow their dividends on a
three to five year horizon. We look for positive fundamentals, such as proven
business models that enjoy attractive cash flow returns on cash invested, a
strong balance sheet (we certainly want to avoid companies where financial
leverage could jeopardise their ability to grow dividends) and strong cash
generation (a good track record in cash generation usually goes hand in hand
with a good track record in dividend growth). Finally, we try to make sure we
do not pay too much for the dividend growth we expect – this is not dividend
growth at any price but dividend growth at an attractive or, at least, a
reasonable price. Our investment strategy will not change but we are always
trying to improve our execution of that strategy!
Question
How have you taken advantage of developments in Fidelity’s approach to ESG
this year?
Answer
Marcel: Fidelity’s recent evolution of its proprietary ESG ratings framework
(see the Annual Report) has resulted in our ESG analysis going much deeper
than before and with additional focus on the comparability of stocks across
various sectors and geographies. While the Company is not an ESG fund, we do
clearly use ESG factors as an input. Put simply we view “sustainability”
and the “sustainability of dividends” as very closely related concepts.
Given our longer than average holding periods, we do not want to be taking any
undue ESG risks: these risks might come to light while we own the stocks! As
such we have welcomed the increased depth of ESG analysis as it allows us more
accurately to evaluate the ESG risks or relative lack thereof on the
Company’s holdings. An example of this would be aerospace and defense, which
is a sector that is sometimes shunned by investors given the defense exposure
most companies have. Events over the last year, however, have shown how a more
nuanced approach is required than simply excluding defense exposed stocks
outright and as such the deeper dive on ESG for MTU Aero Engines was
invaluable. It uncovered MTU as one of the best global ESG aerospace and
defense stories (without many of the typical red flags the industry faces),
which was part of what gave us the confidence to increase our holding in the
company.
Below, we share a voting case study on TotalEnergies.
SAM MORSE
Portfolio Manager
20 March 2023
Marcel Stötzel
Co-Portfolio Manager
20 March 2023
TOTALENERGIES: VOTING CASE STUDY
BACKGROUND
French oil major TotalEnergies is a high conviction holding in Fidelity
European Trust PLC’s portfolio. At Fidelity, we take our ownership of
companies seriously and actively vote on shareholder resolutions, a process
which is driven by our sustainable investing team, who act in consultation
with the portfolio managers and investment analysts. Fidelity engaged with the
company before an advisory shareholder vote on its sustainability and climate
transition plan at its 2022 AGM, using the insights gleaned to conclude that
TotalEnergies’ progress merited support on balance. This decision
corresponds with our view that TotalEnergies is making positive strides with
its transition plan, further bolstering our conviction in the stock.
A HIGH CONVICTION HOLDING
TotalEnergies is a core holding in the Fidelity European Trust PLC portfolio
and we have long liked the company for its low-cost upstream portfolio, large
integrated chemicals footprint, good asset mix and strong capital allocation
policies. Importantly for us, the company has a strong balance sheet and solid
shareholder distributions, with a 6% dividend yield and a dividend per share
that is growing at 3-5% a year. Further strengthening our conviction in the
stock is the fact that the company is ahead of its peers when it comes to
transforming its business for a low carbon future.
DUE DILIGENCE INFORMS OUR VOTING DECISION
In May 2022, TotalEnergies held an advisory shareholder vote on its
sustainability and climate transition plan as part of its 2022 AGM.
Shareholder voting is a process that is driven by our sustainable investing
(“SI”) team, in consultation with the fundamental analyst covering the
stock and the portfolio managers who own it. As is typical, for the
TotalEnergies shareholder vote, we were consulted by the SI team in advance,
who outlined to us their intentions and the reasons why they intended to vote
in favour of the plan.
Our SI team and the investment analyst told us that they believed
TotalEnergies had a well-articulated climate transition plan, including a
description of how it expects its portfolio mix to look in 2050 to reach net
zero. Renewable electricity is to account for 50% of production, new
decarbonised molecules from biomass or from renewable electricity will account
for 25%, and hydrocarbons will account for the remaining 25%, with residual
emissions fully captured, recycled or offset. TotalEnergies has also been able
to set more ambitious scope 3 targets than the sector, largely through a pivot
to LNG and electricity. Our SI team and fundamental analyst pointed out that
TotalEnergies is the only oil major whose long term targets/pathway are
currently deemed net zero aligned by the Transition Pathway Initiative.
TotalEnergies also articulates how its capital allocation aligns to its
climate strategy, and a substantial level of its management’s remuneration
incentives are linked to climate objectives.
Our SI team and analyst also engaged with the company before reaching a final
voting decision. This was partly to address the concern about the board’s
decision to exclude a climate-related shareholder proposal from the agenda.
The board had deemed the resolution to be inadmissible due to encroaching on
the board’s duty to set strategy, a matter of settled law in France.
Although our SI team and analyst were satisfied with the company’s
explanation, they have emphasised that this is an issue they will keep under
review.
A BROADER VANTAGE POINT
TotalEnergies has clearly made progress on decarbonisation, but it is
important to acknowledge that the oil industry as a whole is not yet on a
decarbonisation path that would result in meeting the goals of the Paris
Agreement. The issue is clearly complex: the vast majority of the sector’s
emissions come from clients over which TotalEnergies and others do not have
direct control, so achieving net zero will only be possible with determined
engagement from the industry, clients’ willingness to adapt, and a
supportive broader environment, including government cooperation at an
international level. Change in demand for fossil fuels caused by the war in
Ukraine may also impact the ability to meet near term emissions reduction
targets.
These are constraints that our SI team took into consideration when deciding
how to vote on TotalEnergies’ shareholder motion, and these are, of course,
also issues we take into consideration when assessing how viable and
attractive our Company’s portfolio holdings business models are. The SI team
made it clear to us that their voting decision was based on an assessment of
what companies throughout the industry are doing to contribute to global
decarbonisation now, and how they are positioning themselves for the
requirements of a low carbon economy in the future, drawing comparisons with
competitors and globally accepted decarbonisation frameworks.
Based on their engagement with and the assessment of the company, our SI team
concluded that TotalEnergies’ progress merited support on balance.
STRENGTHENING OUR CONVICTION
Our SI team’s assessment of TotalEnergies’ approach to decarbonisation,
their engagement with the company, and the consideration of broader industry
dynamics, all strengthened our view that TotalEnergies is among the leading
oil majors when it comes to decarbonisation strategy, targets, and reporting.
It is at a more advanced stage than sector peers in terms of decarbonisation
and portfolio diversification, and its climate objectives are the strongest.
All of this bolsters our conviction in the stock, confirming our view that the
company not only has strong fundamental characteristics, but that its
proactive approach to decarbonisation gives us confidence that it is focused
on ensuring its business will remain viable in the years to come.
Strategic Report
RISK FRAMEWORK
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and
managing the principal and emerging risks and uncertainties faced by the
Company, including those that could threaten its business model, future
performance, solvency or liquidity. The Board, with the assistance of the
Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the
“Manager”), has developed a risk matrix which, as part of the risk
management and internal controls process, identifies the key existing and
emerging risks and uncertainties that the Company faces. The Audit Committee
continues to identify any new emerging risks and take any action necessary to
mitigate their potential impact. The risks identified are placed on the
Company’s risk matrix and graded appropriately. This process, together with
the policies and procedures for the mitigation of existing and emerging risks,
is updated and reviewed regularly in the form of comprehensive reports
considered by the Audit Committee. The Board determines the nature and extent
of any risks it is willing to take in order to achieve the Company’s
strategic objectives.
Climate change, which refers to a large scale shift in the planet’s weather
patterns and average temperatures, continues to be a key emerging issue as
well as a principal risk confronting asset managers and their investors. The
Board notes that the Manager has integrated ESG considerations, including
climate change, into the Company’s investment process. Further details are
in the Annual Report. The Board will continue to monitor how this may impact
the Company as a risk on investment valuations and potentially shareholder
returns.
Other emerging risks may continue to evolve from unforeseen geopolitical and
economic events, in addition to those currently being faced globally, such as
the energy supply crisis, the cost of living crisis, rising inflation, food
supply crisis and cyberattacks on critical infrastructure.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks
and uncertainties and to ensure that the Board can continue to meet its UK
corporate governance obligations.
The Board considers the following as the principal risks and uncertainties
faced by the Company.
Principal Risks Description and Risk Mitigation
Economic and Geopolitical Risks The Company and its assets may be impacted by economic and geopolitical risks, in particular concerns over global economic growth, inflation and financial distress. Inflation remains elevated across most economies driven by a combination of increased
demand, as the pandemic restrictions are lifted, global labour shortages in some sectors, supply chain shortages and ramifications of the Russia-Ukraine war. This weighs on European stocks, as does the progressive raising of interest rates by the European
Central Bank and the Bank of England. The economic impact from the war in Ukraine is significant and threatens consumer spending and industrial activity amid soaring energy costs and currency instability. Volatile gas prices on lower supply raises the risk
of a European recession and weighs heavily on industry and production, and although financial markets have now largely priced in this risk, the outlook remains uncertain. A settlement of the conflict in the short term looks unlikely. In the meantime,
significant macro and geopolitical effects will continue to need to be managed. The expected growth in global GDP has already been revised downwards in 2022 since Russia’s invasion. Monetary tightening by the European Central Bank and the Bank of England
heightens risks of default for highly leveraged businesses amid recession concerns. The Federal Reserve’s hike in interest rates further strengthens the US dollar, whilst political turmoil and quantitative tightening in the UK may further exacerbate the UK
sterling foreign exchange rate and yield volatility. Globally, geopolitical uncertainty is significantly impacted by deglobalisation trends driven by the prioritisation of the resiliency of supply chains as well as from political pressure. The
ramifications of onshoring include regulatory protectionism across regions, heightening geopolitical tensions on the continent and overseas. US-China tensions over trade and technology rivalry increase the concerns of China-Taiwan relations escalating to
military conflict and potential defence implications to other countries. More fragmented global order increases the geopolitical importance of trade agreements. The Board reviews economic and geopolitical risks and legislative changes at each Board
meeting. The Portfolio Manager, with support from the Co-Portfolio Manager, provides an investment review at each meeting which includes a review of the economic and political environment and any risks and challenges faced by the Company. The Company has
no direct investments in Russia and Ukraine. Whilst the companies in the portfolio are exposed to these risks, most of these companies are global businesses and therefore, also exposed to global economic trends. The Chairman’s Statement and the Portfolio
Managers’ Review above provide more detail.
Market Risk The principal market related risks are financial market related such as market downturns, interest rate movements, inflation, exchange rate movements and market shocks such as the post pandemic economic recovery and volatility from the war in Ukraine.
Russia and Ukraine are both significant net exporters of oil, natural gas and a variety of soft commodities, and supply limitations are fuelling global inflation and economic instability. This is leading to prolonged cost- of-living crisis risks and
potentially impacting investors’ risk appetite. Inflationary pressures may last longer than central banks or governments may like. COVID continues to be a global pandemic with the potential for severe market and economic impacts with future variants. The
risk of the likely effects of the pandemic on the markets are somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time
horizon. The Portfolio Managers’ investment philosophy of stock-picking and investing in attractively valued dividend growers with strong balance sheets should continue to outperform the Benchmark Index over time. Risks to which the Company is exposed in
the market risk category are included in Note 17 to the Financial Statements below together with summaries of the policies for managing these risks.
Discount Control Risk Due to the nature of investment companies, the price of the Company’s shares and its discount to NAV are factors which are not totally within the Company’s control. The Board has an active discount management policy in place, the primary purpose of which
is to reduce discount volatility and maintain the Company’s discount in single digits in normal market conditions. Some short term influence over the discount may be exercised by the use of share repurchases at acceptable prices and within the parameters
set by the Board. The demand for shares can be influenced through good performance and an active investor relations program. The Company’s share price, NAV and discount volatility are monitored daily by the Manager and the Company’s Broker and considered
by the Board at each of its meetings.
Operational Risk from Cybercrime The operational risk from cybercrime is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The
Manager’s technology team has developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever increasing threat. The risk is frequently re-assessed by Fidelity International’s (“Fidelity”) information security
teams and has resulted in the implementation of new tools and processes, including improvements to existing ones. Fidelity has established a dedicated cybersecurity team which provides regular awareness updates and best practice guidance. Risks are
increased due to the Russia/Ukraine conflict and the trend to more working from home. These primarily relate to phishing, remote access threats, extortion and denial-of-services attacks. The Manager has dedicated detect and respond resources specifically
to monitor the cyber threats associated with the change in workplace cyber activity following Russia’s invasion of Ukraine. There are a number of mitigating actions in place including, control strengthening, geo-blocking, and phishing mitigants, combined
with enhanced resilience and recovery options. The Company’s third party service providers also have similar measures in place.
Investment Performance Risk (including the use of derivatives and gearing) The achievement of the Company’s investment performance objective relative to the market requires the taking of risk such as investment strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the
Benchmark Index and/ or peer group companies. The Board relies on the Portfolio Managers’ skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset
value of the portfolio against the Company’s Benchmark Index and its competitors, and also considers the outlook for the market with the Portfolio Managers at each Board meeting. The emphasis is on long term investment performance as there is a risk for
the Company of volatility of performance in the shorter term. The Company’s assets consist mainly of listed securities. The Portfolio Managers’ success or failure to protect and increase the Company’s assets against this background is core to the Company’s
continued success. Derivative instruments are used to protect and enhance investment returns. There is a risk that the use of derivatives may lead to higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in
place policies and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board. Further details on derivative instruments risk is
included in Note 17 to the Financial Statements below. The Company gears through the use of long CFDs which provide greater flexibility and are currently cheaper than bank loans. The principal risk is that the Portfolio Managers fail to use gearing
effectively, resulting in a failure to outperform in a rising market or to underperform in a falling market. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate.
Environmental, Social and Governance (“ESG”) Risk There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including climate change risk. ESG risks include investor expectations and how the Company is positioned from a marketing perspective and whether it
is compliant with its ESG disclosure requirements. Fidelity has embedded ESG factors in its investment decision- making process. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through
Fidelity’s Proprietary Sustainability Rating which is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities based on sector-specific key performance indicators across 127 individual and unique sub
-sectors. The Portfolio Managers are also active in analysing the effects of ESG when making investment decisions. The Board continues to monitor developments in this area and reviews the positioning of the portfolio considering ESG factors. ESG ratings
and carbon emissions of the companies within the Company’s portfolio compared to the MSCI Europe ex UK Index are provided in the Annual Report. Further detail on ESG considerations in the investment process and sustainable investing is in the Annual
Report.
Key Person and Operational Support Risks The Portfolio Manager’s style is intrinsically linked with the Company’s investment philosophy and strategy and, therefore, the Company has a key person dependency on him. Fidelity has succession plans in place for its portfolio managers which have been
discussed with the Board and provides some assurance in this regard. There is a Co-Portfolio Manager who works alongside the Portfolio Manager and has extensive experience in European markets and companies and shares a common investment approach and
complementary investment experience with the Portfolio Manager. This helps strengthen the investment process by introducing greater challenge and also increases the ability to be able to meet more companies. There is also a risk that the Manager has
inadequate succession plans for other key operational individuals. The loss of the Portfolio Manager or key individuals could lead to potential performance, operational or regulatory issues. The Manager identifies key dependencies which are then addressed
through succession plans, particularly for portfolio managers
Operational Resilience Risk Investment team key activities, including portfolio managers, analysts and trading/support functions, are performing well despite the operational challenges posed when working from home during the pandemic, and more recently, from the rail strikes. With
variants of COVID continuing to evolve, it is evident that although the pandemic is being tackled by vaccines, risks remain, especially on how long the effectiveness of vaccines last. There continues to be increased focus from financial services regulators
around the world on the contingency plans of regulated financial firms. The risks following Russia’s invasion into Ukraine, specifically regarding the potential loss of power and or broadband services, are increasingly stable as work transfer recovery
options are established for business-critical activities. The Manager carries on reviewing its business continuity plans and operational resilience strategies on an ongoing basis. The Manager continues to take all reasonable steps in meeting its regulatory
obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. There have not been any significant changes to Fidelity’s control environment as a result
of the pandemic and the rail strikes and the Manager has provided the Board with assurance that the Company has appropriate business continuity plans and the provision of services has continued to be supplied without interruption. Specific risks posed by
the pandemic continue to ease with increasing levels of staff returning to routine office-based working, albeit under hybrid working arrangements which allow greater flexibility on remote working as part of the new operating model. The Company’s other
third party service providers, principally the Registrar, Custodian and Depositary, have also confirmed the implementation of similar measures to ensure no business disruption and that they continue to manage their operational resilience risk and have
appropriate business continuity plans in place. The Registrar, Custodian and Depositary are all subject to a risk-based program of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an
annual basis and any concerns raised are investigated. Risks associated with these services are generally rated as low, although the financial consequences could be serious, including reputational damage to the Company.
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with tax and regulatory
requirements.
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss
of investment trust status, resulting in the Company being subject to tax on
capital gains.
There is a risk that outstanding withholding tax reclaims may not be
recoverable from some jurisdictions and may need to be written-off. The
Manager’s tax team works closely with the Custodian to keep these under
review and the Board is kept updated on the recoverability of the withholding
tax reclaims at each Audit Committee meeting.
The Board monitors tax and regulatory changes at each Board meeting and
through active engagement with regulators and trade bodies by the Manager.
Continuation Vote
A continuation vote takes place every two years. There is a risk that
shareholders do not vote in favour of the continuation of the Company during
periods when performance of the Company’s NAV and share price is poor. At
the AGM held on 11 May 2021, 99.99% of shareholders voted in favour of the
continuation of the Company. The next continuation vote will take place at
this year’s AGM on 10 May 2023 and the Directors expect the vote to be
passed.
Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the “Going Concern” basis. The Company
is an investment trust with the objective of achieving long term growth in
both capital and income. The Board considers long term to be at least five
years, and accordingly, the Directors believe that five years is an
appropriate investment horizon to assess the viability of the Company,
although the life of the Company is not intended to be limited to this or any
other period.
In making an assessment on the viability of the Company, the Board has
considered the following:
· The ongoing relevance of the investment objective in prevailing
market conditions;
· The Company’s level of gearing;
· The Company’s NAV and share price performance;
· The principal and emerging risks and uncertainties facing the
Company and their potential impact as set out above;
· The future demand for the Company’s shares;
· The Company’s share price discount to the NAV;
· The liquidity of the Company’s portfolio;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company’s performance for the five year reporting period to 31 December
2022 was well ahead of the Benchmark Index, with a NAV total return of 53.4%
and a share price total return of 61.2% compared to the Benchmark Index total
return of 29.4%. The Board regularly reviews the investment policy and
considers whether it remains appropriate. The Board has concluded that there
is a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the next five years
based on the following considerations:
· The Investment Manager’s compliance with the Company’s
investment objective and policy, its investment strategy and asset allocation;
· The fact that the portfolio mainly comprises readily realisable
securities which can be sold to meet funding requirements if necessary;
· The Board’s discount management policy; and
· The ongoing processes for monitoring operating costs and income
which are considered to be reasonable in comparison to the Company’s total
assets.
In preparing the Financial Statements, the Directors have considered the
impact of climate change, particularly in the context of the climate change
risk identified within the ESG Risk above. The Board has also considered the
impact of regulatory changes and the uncertainty heightened by the ongoing
Russia and Ukraine conflict, and how this may affect the Company.
In addition, the Directors’ assessment of the Company’s ability to operate
in the foreseeable future is included in the Going Concern Statement which is
below. The Company is also subject to a continuation vote at this year’s AGM
on 10 May 2023 and the Board expect that shareholders will vote in favour of
continuation.
Going Concern Statement
The Directors have considered the Company’s investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company’s
portfolio of investments (being mainly securities which are readily
realisable) and the projected income and expenditure, are satisfied that the
Company is financially sound and has adequate resources to meet all of its
liabilities and ongoing expenses and continue in operational existence for the
foreseeable future. The Board has therefore concluded that the Company has
adequate resources to continue to adopt the going concern basis for the period
to 31 March 2024 which is at least twelve months from the date of approval of
the Financial Statements. This conclusion also takes into account the
Board’s assessment of the ongoing risks from evolving variants of COVID, the
war in Ukraine and significant market events, as set out in the Operational
Resilience Risk in the Strategic Report above. The prospects of the Company
over a period longer than twelve months can be found in the Viability
Statement above.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
The Board has also considered the upcoming continuation vote at the AGM on 10
May 2023 and are not aware of any circumstances that would result in the
continuation vote not being passed.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company
must act in a way they consider, in good faith, would be most likely to
promote the 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 relationships with the
Company’s suppliers, customers and others; the impact of the Company’s
operations on the community and the environment; the desirability of the
Company maintaining a reputation for high standards of business conduct; and
the need to act fairly as between members of the Company.
As an externally managed Investment Trust, the Company has no employees or
physical assets, and a number of the Company’s functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services by the Manager, but other professional service providers
support the Company by providing administration, custodial, banking and audit
services. The Board considers the Company’s key stakeholders to be the
existing and potential shareholders, the external appointed Manager (FIL
Investment Services (UK) Limited) and other third-party professional service
providers. The Board considers that the interest of these stakeholders is
aligned with the Company’s objective of delivering long term capital growth
to investors, in line with the Company’s stated objective and strategy,
while providing the highest standards of legal, regulatory and commercial
conduct.
The Board, with the Portfolio Managers, sets the overall investment strategy
and reviews this at an annual strategy day which is separate from the regular
cycle of board meetings. In order to ensure good governance of the Company,
the Board has set various limits on the investments in the portfolio, whether
in the maximum size of individual holdings, the use of derivatives, the level
of gearing and others. These limits and guidelines are regularly monitored and
reviewed and are set out in the Annual Report.
The Board places great importance on communication with shareholders. The
Annual General Meeting provides the key forum for the Board and the Portfolio
Manager to present to the shareholders on the Company’s performance and
future plans and the Board encourages all shareholders to attend in person or
virtually and raise any questions or concerns. The Chairman and other Board
members are available to meet shareholders as appropriate. Shareholders may
also communicate with Board members at any time by writing to them at the
Company’s registered office at FIL Investments International, Beech Gate,
Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary at the
same address or by email at investmenttrusts@fil.com. The Portfolio Managers
meet with major shareholders, potential investors, stock market analysts,
journalists and other commentators throughout the year. These communication
opportunities help inform the Board in considering how best to promote the
success of the company over the long term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of
strong governance, while encouraging open and constructive debate, in order to
ensure appropriate and regular challenge and evaluation. This aims to enhance
service levels and strengthen relationships with service providers, with a
view to ensuring shareholders’ interests are best served, by maintaining the
highest standards of commercial conduct while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board recognises the
importance of considering the impact of the Company’s investment strategy on
the wider community and environment. The Board believes that a proper
consideration of Environmental, Social and Governance (“ESG”) issues
aligns with the Company’s investment objective to deliver long term growth
in both capital and income, and the Board’s review of the Manager includes
an assessment of their ESG approach, which is set out in detail in the Annual
Report.
In addition to ensuring that the Company’s investment objective was being
pursued, key decisions and actions taken by the Directors during the reporting
year, and up to the date of this report, have included:
· As part of the Board’s succession plan, the appointment and
induction of Milyae Park to the Board as Marion Sear’s successor with effect
from 1 January 2022;
· As part of the Board’s succession plan, the decision to appoint
Paul Yates as the Senior Independent Director on 10 May 2022 when Marion Sear
stepped down from the Board;
· The decision to hold a hybrid AGM in 2022 (and again this year)
in order to make the AGM more accessible and improve the shareholder
experience;
· The decision to pay an interim dividend of 3.08 pence per share
and a final dividend of 4.62 pence per share (a total of 7.70 pence per
share), to maintain the Board’s policy to pay progressive dividends in
normal circumstances. The Company has paid an increased dividend for 12 years
in a row; and
· Authorising the repurchase of 2,285,526 ordinary shares into
Treasury during the reporting year when the Company’s discount widened.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have elected to prepare the
Financial Statements in accordance with UK Generally Accepted Accounting
Practice (“UK Accounting Standards” and applicable law), including
Financial Reporting Standard FRS 102: The Financial Reporting Standard
applicable in the UK and Republic of Ireland (“FRS 102”). Under company
law, the Directors must not approve the Financial Statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
In preparing these Financial Statements, the Directors are required to:
· Select suitable accounting policies in accordance with Section 10
of FRS 102 and then apply them consistently;
· Make judgements and accounting estimates that are reasonable and
prudent;
· Present information, including accounting policies, in a fair and
balanced manner that provides relevant, reliable, comparable and
understandable information;
· State whether applicable UK Accounting Standards, including FRS
102, have been followed, subject to any material departures disclosed and
explained in the Financial Statements; and
· Prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company’s transactions and disclose with
reasonable accuracy, at any time, the financial position of the Company and
enable them to ensure that the Company and the Financial Statements comply
with the Companies Act 2006. They are also responsible for safeguarding the
assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors’ Report, a Corporate Governance
Statement and a Directors’ Remuneration Report which comply with that law
and those regulations.
The Directors have delegated the responsibility for the maintenance and
integrity of the corporate and financial information included on the
Company’s pages of the Manager’s website at www.fidelity.co.uk/europe to
the Manager. They have delegated this responsibility to the Manager. Visitors
to the website need to be aware that legislation in the UK governing the
preparation and dissemination of the Financial Statements may differ from
legislation in their own jurisdictions.
The Directors confirm, to the best of their knowledge:
· The Financial Statements, prepared in accordance with UK
Generally Accepted Accounting Practice, including FRS 102, give a true and
fair view of the assets, liabilities, financial position and loss of the
Company;
· The Annual Report, including the Strategic Report, includes a
fair review of the development and performance of the business and the
position of the Company, together with a description of the principal risks
and uncertainties it faces; and
· The Annual Report and Financial Statements, taken as a whole, are
fair, balanced and understandable and provide the information necessary for
shareholders to assess the Company’s performance, business model and
strategy.
The Statement of Directors’ Responsibilities was approved by the Board on 20
March 2023 and signed on its behalf by:
VIVIAN BAZALGETTE
Chairman
FINANCIAL STATEMENTS
Income Statement for the year ended 31 December 2022
Year ended 31 December 2022 Year ended 31 December 2021
Notes Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
(Losses)/gains on investments 10 – (63,812) (63,812) – 221,090 221,090
(Losses)/gains on derivative instruments 11 – (22,034) (22,034) – 38,145 38,145
Income 3 43,042 – 43,042 37,879 – 37,879
Investment management fees 4 (2,362) (7,087) (9,449) (2,438) (7,313) (9,751)
Other expenses 5 (919) – (919) (908) – (908)
Foreign exchange losses – (372) (372) – (27) (27)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before finance costs and taxation 39,761 (93,305) (53,544) 34,533 251,895 286,428
Finance costs 6 (196) (586) (782) (134) (403) (537)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before taxation 39,565 (93,891) (54,326) 34,399 251,492 285,891
Taxation on return/(loss) on ordinary activities 7 (2,641) – (2,641) (3,547) – (3,547)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities after taxation for the year 36,924 (93,891) (56,967) 30,852 251,492 282,344
========= ========= ========= ========= ========= =========
Return/(loss) per ordinary share 8 9.00p (22.88p) (13.88p) 7.50p 61.15p 68.65p
========= ========= ========= ========= ========= =========
The Company does not have any other comprehensive income. Accordingly the net
return/(loss) on ordinary activities after taxation for the year is also the
total comprehensive income for the year and no separate Statement of
Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes below form an integral part of these Financial Statements.
Statement of Changes in Equity for the year ended 31 December 2022
Notes Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Capital reserve £’000 Revenue reserve £’000 Total shareholders’ funds £’000
Total shareholders’ funds at 31 December 2021 10,411 58,615 5,414 1,372,360 27,433 1,474,233
--------------- --------------- --------------- --------------- --------------- ---------------
Net (loss)/return on ordinary activities after taxation for the year – – – (93,891) 36,924 (56,967)
Repurchase of ordinary shares 14 – – – (6,473) – (6,473)
Dividends paid to shareholders 9 – – – – (29,798) (29,798)
--------------- --------------- --------------- --------------- --------------- ---------------
Total shareholders’ funds at 31 December 2022 10,411 58,615 5,414 1,271,996 34,559 1,380,995
========= ========= ========= ========= ========= =========
Total shareholders’ funds at 31 December 2020 10,411 58,615 5,414 1,122,325 23,520 1,220,285
Net return on ordinary activities after taxation for the year – – – 251,492 30,852 282,344
Repurchase of ordinary shares 14 – – – (1,457) – (1,457)
Dividends paid to shareholders 9 – – – – (26,939) (26,939)
--------------- --------------- --------------- --------------- --------------- ---------------
Total shareholders’ funds at 31 December 2021 10,411 58,615 5,414 1,372,360 27,433 1,474,233
========= ========= ========= ========= ========= =========
The Notes below form an integral part of these Financial Statements.
Balance Sheet as at 31 December 2022
Company number 2638812
Notes 2022 £’000 2021 £’000
Fixed assets
Investments 10 1,325,389 1,447,997
--------------- ---------------
Current assets
Derivative instruments 11 521 4,010
Debtors 12 8,128 8,957
Amounts held at futures clearing houses and brokers 12,891 2,962
Cash and cash equivalents 44,884 11,366
--------------- ---------------
66,424 27,295
========= =========
Current liabilities
Derivative instruments 11 (9,633) –
Other creditors 13 (1,185) (1,059)
--------------- ---------------
(10,818) (1,059)
========= =========
Net current assets 55,606 26,236
========= =========
Net assets 1,380,995 1,474,233
========= =========
Capital and reserves
Share capital 14 10,411 10,411
Share premium account 15 58,615 58,615
Capital redemption reserve 15 5,414 5,414
Capital reserve 15 1,271,996 1,372,360
Revenue reserve 15 34,559 27,433
--------------- ---------------
Total shareholders’ funds 1,380,995 1,474,233
========= =========
Net asset value per ordinary share 16 337.87p 358.68p
========= =========
The Financial Statements above and below were approved by the Board of
Directors on 20 March 2023 and were signed on its behalf by:
VIVIAN BAZALGETTE
Chairman
The Notes below form an integral part of these Financial Statements.
Notes to the Financial Statements
1 Principal Activity
Fidelity European Trust PLC is an Investment Company incorporated in England
and Wales with a premium listing on the London Stock Exchange. The Company’s
registration number is 2638812, and its registered office is Beech Gate,
Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has
been approved by HM Revenue & Customs as an Investment Trust under Section
1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 Accounting Policies
The Company has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102
“The Financial Reporting Standard applicable in the UK and Republic of
Ireland”, issued by the Financial Reporting Council (“FRC”). The
Financial Statements have also been prepared in accordance with the Statement
of Recommended Practice: Financial Statements of Investment Trust Companies
and Venture Capital Trusts (“SORP”) issued by the Association of
Investment Companies (“AIC”) in July 2022. The Company is exempt from
presenting a Cash Flow Statement as a Statement of Changes in Equity is
presented and substantially all of the Company’s investments are highly
liquid and are carried at market value.
a) Basis of accounting – The Financial Statements have been prepared on a
going concern basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative instruments. The
Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence up to 31 March 2024 which is at
least twelve months from the date of approval of these Financial Statements.
In making their assessment the Directors have reviewed income and expense
projections, reviewed the liquidity of the investment portfolio and considered
the Company’s ability to meet liabilities as they fall due. This conclusion
takes into account the Director’s assessment of the risks faced by the
Company and their consideration of the upcoming continuation vote at the AGM
on 10 May 2023 as detailed in the Going Concern Statement above. The Directors
recommend that the shareholders vote in favour of the continuation of the
Company.
In preparing these Financial Statements, the Directors have considered the
impact of climate change risk as an emerging risk as well as a principal risk
as set out above, and have concluded that there was no further impact of
climate change to be taken into account as the investments are valued based on
market pricing. In line with FRS 102, investments are valued at fair value,
which for the Company are quoted bid prices for investments in active markets
at the balance sheet date and therefore reflect the market participants view
of climate change risk on the investments held by the Company.
The Company’s Going Concern Statement above takes account of all events and
conditions up to 31 March 2024 which is at least twelve months from the date
of approval of these Financial Statements.
b) Significant accounting estimates and judgements – The Directors make
judgements and estimates concerning the future. Estimates and judgements are
continually evaluated and are based on historical experience and other
factors, such as expectations of future events, and are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates. The Company’s Financial Statements contain no key sources of
estimation or uncertainty.
c) Segmental reporting – The Company is engaged in a single segment business
and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement – In order to reflect better the
activities of an investment company and in accordance with guidance issued by
the AIC, supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been prepared alongside the Income
Statement. The net return after taxation for the year is the measure the
Directors believe appropriate in assessing the Company’s compliance with
certain requirements set out in Section 1159 of the Corporation Tax Act 2010.
e) Income – Income from equity investments is accounted for on the date on
which the right to receive the payment is established, normally the
ex-dividend date. Overseas dividends are accounted for gross of any tax
deducted at source. Amounts are credited to the revenue column of the Income
Statement. Where the Company has elected to receive its dividends in the form
of additional shares rather than cash, the amount of the cash dividend
foregone is recognised in the revenue column of the Income Statement. Any
excess in the value of the shares received over the amount of the cash
dividend is recognised in the capital column of the Income Statement. Special
dividends are treated as a revenue receipt or a capital receipt depending on
the facts and circumstances of each particular case.
Derivative instrument income received from dividends on long contracts for
difference (“CFDs”) is accounted for on the date on which the right to
receive the payment is established, normally the ex-dividend date. The amount
net of tax is credited to the revenue column of the Income Statement.
Interest received on CFDs, bank deposits, collateral and money market funds is
accounted for on an accruals basis and credited to the revenue column of the
Income Statement. Interest received on CFDs represent the finance costs
calculated by reference to the notional value of the CFDs.
f) Investment management fees and other expenses – Investment management
fees and other expenses are accounted for on an accruals basis and are charged
as follows:
· The investment management fee is allocated 25% to revenue and 75%
to capital in line with the Board’s expected long term split of revenue and
capital return from the Company’s portfolio of investments; and
· All other expenses are allocated in full to revenue with the
exception of those directly attributable to share issues or other capital
events.
g) Functional currency and foreign exchange – The functional and reporting
currency of the Company is UK sterling, which is the currency of the primary
economic environment in which the Company operates. Transactions denominated
in foreign currencies are reported in UK sterling at the rate of exchange
ruling at the date of the transaction. Assets and liabilities in foreign
currencies are translated at the rates of exchange ruling at the Balance Sheet
date. Foreign exchange gains and losses arising on translation are recognised
in the Income Statement as a revenue or a capital item depending on the nature
of the underlying item to which they relate.
h) Finance costs – Finance costs comprises interest paid on collateral and
bank deposits, and finance costs paid on CFDs, which are accounted for on an
accruals basis. Finance costs are allocated 25% to revenue and 75% to capital
in line with the Board’s expected long term split of revenue and capital
return from the Company’s portfolio of investments.
i) Taxation – The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas income less
amounts recoverable under taxation treaties. Taxation is charged or credited
to the revenue column of the Income Statement, except where it relates to
items of a capital nature, in which case it is charged or credited to the
capital column of the Income Statement. Where expenses are allocated between
revenue and capital any tax relief in respect of the expenses is allocated
between revenue and capital returns on the marginal basis using the
Company’s effective rate of corporation tax for the accounting period. The
Company is an approved Investment Trust under Section 1158 of the Corporation
Tax Act 2010 and is not liable for UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or
substantively enacted when the taxation is expected to be payable or
recoverable. Deferred tax assets are only recognised if it is considered more
likely than not that there will be sufficient future taxable profits to
utilise them.
j) Dividend paid – Dividends payable to equity shareholders are recognised
when the Company’s obligation to make payment is established.
k) Investments – The Company’s business is investing in financial
instruments with a view to profiting from their total return in the form of
income and capital growth. This portfolio of investments is managed and its
performance evaluated on a fair value basis, in accordance with a documented
investment strategy, and information about the portfolio is provided on that
basis to the Company’s Board of Directors. Investments are measured at fair
value with changes in fair value recognised in profit or loss, in accordance
with the provisions of both Section 11 and Section 12 of FRS 102. The fair
value of investments is initially taken to be their cost and is subsequently
measured as follows:
· Listed investments are valued at bid prices, or last market
prices, depending on the convention of the exchange on which they are listed.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within (losses)/gains on
investments in the capital column of the Income Statement and has disclosed
these costs in Note 10 below.
l) Derivative instruments – When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the
Company may enter include long and short CFDs and futures. Derivatives are
classified as other financial instruments and are initially accounted and
measured at fair value on the date the derivative contract is entered into and
subsequently measured at fair value as follows:
· Long and short CFDs – the difference between the strike price
and the value of the underlying shares in the contract; and
· Futures – the difference between the contract price and the
quoted trade price.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in net income in
the revenue column of the Income Statement. Where such transactions are used
to protect or enhance capital, if the circumstances support this, the income
and expenses derived are included in gains/(losses) on derivative instruments
in the capital column of the Income Statement. Any positions on such
transactions open at the year end are reflected on the Balance Sheet at their
fair value within current assets or current liabilities.
m) Debtors – Debtors include accrued income, taxation recoverable and other
debtors and prepayments incurred in the ordinary course of business. If
collection is expected in one year or less (or in the normal operating cycle
of the business, if longer) they are classified as current assets. If not,
they are presented as non-current assets. They are recognised initially at
fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
n) Amounts held at futures clearing houses and brokers – These are amounts
held in segregated accounts on behalf of brokers as collateral against open
derivative contracts. These are carried at amortised cost.
o) Cash and cash equivalents – Cash and cash equivalents may comprise cash
at bank and money market funds which are short term, highly liquid and are
readily convertible to a known amount of cash. These are subject to an
insignificant risk of changes in value.
p) Other creditors – Other creditors include investment management fees and
other creditors and expenses accrued in the ordinary course of business. If
payment is due within one year or less (or in the normal operating cycle of
the business, if longer) they are classified as current liabilities. If not,
they are presented as non-current liabilities. They are recognised initially
at fair value and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
q) Capital reserve
The following are accounted for in the capital reserve:
· Gains and losses on the disposal of investments and derivative
instruments;
· Changes in the fair value of investments and derivative
instruments held at the year end;
· Foreign exchange gains and losses of a capital nature;
· 75% of investment management fees and finance costs;
· Dividends receivable which are capital in nature; and
· Cost of repurchasing shares.
Technical guidance issued by the Institute of Chartered Accountants in England
and Wales in TECH 02/17BL, guidance on the determination of realised profits
and losses in the context of distributions under the Companies Act 2006,
states that changes in the fair value of investments which are readily
convertible to cash, without accepting adverse terms at the Balance Sheet
date, can be treated as realised. Capital reserves realised and unrealised are
shown in aggregate as capital reserve in the Statement of Changes in Equity
and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company
consisted of investments listed on a recognised stock exchange and derivative
instruments contracted with counterparties having an adequate credit rating,
and the portfolio was considered to be readily convertible to cash.
3 Income
Year ended 31.12.22 £’000 Year ended 31.12.21 £’000
Investment income
Overseas dividends 35,333 30,799
Overseas scrip dividends 1,052 513
UK dividends 1,910 1,374
--------------- ---------------
38,295 32,686
========= =========
Derivative income
Income recognised from futures contracts 1,208 1,834
Dividends received on long CFDs 3,025 2,700
Interest received on CFDs (1) 422 659
--------------- ---------------
4,655 5,193
========= =========
Investment and derivative income 42,950 37,879
========= =========
Other interest
Interest received on collateral, bank deposits and money market funds 88 –
Interest received on tax reclaims 4 –
--------------- ---------------
92 –
========= =========
Total income 43,042 37,879
========= =========
1 Due to negative interest rates during the current and prior year, the
Company received interest on its long CFDs.
Special dividends of £1,115,000 (2021: £82,000) have been recognised in
capital.
4 Investment Management Fees
Year ended 31 December 2022 Year ended 31 December 2021
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Investment management fees 2,362 7,087 9,449 2,438 7,313 9,751
========= ========= ========= ========= ========= =========
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International (“FII”). Both companies are Fidelity group companies.
From 1 April 2021, FII charges investment management fees at an annual rate of
0.85% of net assets up to £400 million and 0.65% of net assets in excess of
£400 million. Prior to this date, the investment management fees were charged
at an annual rate of 0.85% of net assets up to £400 million and 0.75% of net
assets in excess of £400 million. Fees are payable monthly in arrears and are
calculated on a daily basis.
Investment management fees have been allocated 75% to capital reserve in
accordance with the Company’s accounting policies.
5 Other Expenses
Year ended 31.12.22 £’000 Year ended 31.12.21 £’000
AIC fees 21 21
Custody fees 123 143
Depositary fees 61 64
Directors’ fees (1) 174 158
Legal and professional fees 60 170
Marketing expenses 209 126
Printing and publication expenses 132 116
Registrars’ fees 75 61
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements (2) 45 29
Other expenses 19 20
--------------- ---------------
919 908
========= =========
1 Details of the breakdown of Directors’ fees are disclosed in the
Directors’ Remuneration Report in the Annual Report.
2 The VAT payable on audit fees is included in other expenses.
6 Finance Costs
Year ended 31 December 2022 Year ended 31 December 2021
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Interest paid on collateral and bank deposits (1) 28 82 110 40 122 162
Interest paid on CFDs 168 504 672 94 281 375
--------------- --------------- --------------- --------------- --------------- ---------------
196 586 782 134 403 537
========= ========= ========= ========= ========= =========
1 Due to negative interest rates during the current and prior year,
the Company paid interest on its collateral and deposits.
Finance costs have been allocated 75% to capital reserve in accordance with
the Company’s accounting policies.
7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES
Year ended 31 December 2022 Year ended 31 December 2021
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
a) Analysis of the taxation charge for the year
Overseas taxation 2,641 – 2,641 3,547 – 3,547
Taxation charge for the year (see Note 7b) 2,641 – 2,641 3,547 – 3,547
========= ========= ========= ========= ========= =========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 19% (2021: 19%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
Year ended 31 December 2022 Year ended 31 December 2021
Revenue £’000 Capital £’000 Total £’000 Revenue £’000 Capital £’000 Total £’000
Net return/(loss) on ordinary activities before taxation 39,565 (93,891) (54,326) 34,399 251,492 285,891
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 19% (2021: 19%) 7,517 (17,839) (10,322) 6,536 47,783 54,319
Effects of:
Capital losses/(gains) not taxable (1) – 16,381 16,381 – (49,249) (49,249)
Income not taxable (7,276) – (7,276) (6,210) – (6,210)
Expenses not deductible – 111 111 – 76 76
Excess management expenses (241) 1,347 1,106 (326) 1,390 1,064
Overseas taxation 2,641 – 2,641 3,547 – 3,547
--------------- --------------- --------------- --------------- --------------- ---------------
Total taxation charge for the year (see Note 7a) 2,641 – 2,641 3,547 – 3,547
========= ========= ========= ========= ========= =========
1 The Company is exempt from UK taxation on capital gains as it meets the
HM Revenue & Customs criteria for an investment company set out in Section
1159 of the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £15,501,000 (2021: £14,046,000), in respect of
excess expenses of £56,499,000 (2021: £50,680,000) and excess loan interest
of £5,505,000 (2021: £5,505,000), has not been recognised as it is unlikely
that there will be sufficient future taxable profits to utilise these
expenses.
In the Spring Budget of 2021, the UK Government announced that from 1 April
2023 the corporation tax rate would increase to 25%. This rate has been
substantively enacted at the balance sheet date and has therefore been applied
to calculate the unrecognised deferred tax asset for the current year (2021:
25%).
8 Return/(Loss) per Ordinary Share
Year ended 31.12.22 Year ended 31.12.21
Revenue return per ordinary share 9.00p 7.50p
Capital (loss)/return per ordinary share (22.88p) 61.15p
Total (loss)/return per ordinary share (13.88p) 68.65p
========= =========
The net return/(loss) per ordinary share is based on the net return/(loss) on
ordinary activities after taxation for the year divided by the weighted
average number of ordinary shares held outside Treasury during the year, as
shown below:
£’000 £’000
Net revenue return on ordinary activities after taxation 36,924 30,852
Net capital (loss)/return on ordinary activities after taxation (93,891) 251,492
--------------- ---------------
Total (loss)/return on ordinary activities after taxation (56,967) 282,344
========= =========
Number Number
Weighted average number of ordinary shares held outside Treasury 410,346,447 411,286,049
========== ==========
9 Dividends Paid to Shareholders
Year ended 31.12.22 £’000 Year ended 31.12.21 £’000
Dividends paid
Interim dividend of 3.08 pence per ordinary share paid for the year ended 31 December 2022 12,618 –
Final dividend of 4.18 pence per ordinary share paid for the year ended 31 December 2021 17,180 –
Interim dividend of 2.65 pence per ordinary share paid for the year ended 31 December 2021 – 10,892
Final dividend of 3.90 pence per ordinary share paid for the year ended 31 December 2020 – 16,047
--------------- ---------------
29,798 26,939
========= =========
Dividends proposed
Final dividend of 4.62 pence per ordinary share proposed for the year ended 31 December 2022 18,883 –
Final dividend of 4.18 pence per ordinary share proposed for the year ended 31 December 2021 – 17,180
--------------- ---------------
18,883 17,180
========= =========
The Directors have proposed the payment of a final dividend for the year ended
31 December 2022 of 4.62 pence per ordinary share which is subject to approval
by shareholders at the Annual General Meeting on 10 May 2023 and has not been
included as a liability in these Financial Statements. The dividend will be
paid on 16 May 2023 to shareholders on the register at the close of business
on 31 March 2023 (ex-dividend date 30 March 2023).
10 Investments
2022 £’000 2021 £’000
Investments held at fair value 1,325,389 1,447,997
Opening book cost 862,576 784,273
Opening investment holding gains 585,421 416,390
--------------- ---------------
Opening fair value 1,447,997 1,200,663
========= =========
Movements in the year
Purchases at cost 136,091 166,196
Sales – proceeds (194,887) (139,952)
(Losses)/gains on investments (63,812) 221,090
--------------- ---------------
Closing fair value 1,325,389 1,447,997
========= =========
Closing book cost 872,694 862,576
Closing investment holding gains 452,695 585,421
--------------- ---------------
Closing fair value 1,325,389 1,447,997
========= =========
The Company received £194,887,000 (2021: £139,952,000) from investments sold
in the year. The book cost of these investments when they were purchased was
£125,973,000 (2021: £87,893,000). These investments have been revalued over
time and until they were sold any unrealised gains/losses were included in the
fair value of the investments.
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments,
which are included in the (losses)/gains on investments above, were as
follows:
Year ended 31.12.22 £’000 Year ended 31.12.21 £’000
Purchases transaction costs 164 239
Sales transaction costs 57 48
--------------- ---------------
221 287
========= =========
The portfolio turnover for the year was 12.7% (2021: 11.6%). The portfolio
turnover rate measures the Company’s trading activity. It is calculated by
taking the average of the total amount of securities purchased and the total
amount of the securities sold in the reporting year divided by the average
investment portfolio value of the Company.
11 Derivative Instruments
Year ended 31.12.22 £’000 Year ended 31.12.21 £’000
(Losses)/gains on derivative instruments
(Losses)/gains on long CFD positions closed (4,300) 27,807
Losses on short CFD positions closed – (471)
(Losses)/gains on futures contracts closed (4,612) 8,515
Movement in investment holding (losses)/gains on long CFDs 9,718 1,525
Movement in investment holding gains on short CFDs – 300
Movement in investment holding (losses)/gains on futures (3,404) 469
--------------- ---------------
(22,034) 38,145
========= =========
2022 Fair value £’000 2021 Fair value £’000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 521 4010
Derivative instrument liabilities (9,633) –
--------------- ---------------
(9,112) 4, 010
========= =========
Fair value £’000 2022 Asset exposure £’000 Fair value £’000 2021 Asset exposure £’000
At the year end the Company held the following derivative instruments
Long CFDs (6,658) 152,446 3,060 136,841
Long Futures (2,454) 65,056 950 53,348
--------------- --------------- --------------- ---------------
(9,112) 217,502 4,010 190,189
========= ========= ========= =========
12 Debtors
2022 £’000 2021 £’000
Accrued income 784 555
Taxation recoverable 7,232 8,286
Other debtors and prepayments 112 116
--------------- ---------------
8,128 8,957
========= =========
13 Other Creditors
2022 2021
£’000 £’000
Creditors and accruals 1,185 1,059
========= =========
14 Share Capital
2022 2021
Number of shares £’000 Number of shares £’000
Issued, allotted and fully paid
Ordinary shares of 2.5 pence each held outside Treasury
Beginning of the year 411,016,049 10,275 411,466,049 10,286
Ordinary shares repurchased into Treasury (2,285,526) (57) (450,000) (11)
----------------- ----------------- ----------------- -----------------
End of the year 408,730,523 10,218 411,016,049 10,275
========== ========== ========== ==========
Ordinary shares of 2.5 pence each held in Treasury*
Beginning of the year 5,431,861 136 4,981,861 125
Ordinary shares repurchased into Treasury 2,285,526 57 450,000 11
----------------- ----------------- ----------------- -----------------
End of the year 7,717,387 193 5,431,861 136
========== ========== ========== ==========
Total share capital 10,411 10,411
========== ==========
* Ordinary shares held in Treasury carry no rights to vote, to
receive a dividend or to participate in a winding up of the Company.
The cost of ordinary shares repurchased into Treasury during the year was
£6,473,000 (2021: £1,457,000).
15 Capital and Reserves
Share capital £’000 Share premium account £’000 Capital redemption reserve £’000 Capital reserve £’000 Revenue shareholders’ reserve £’000 Total funds £’000
At 1 January 2022 10,411 58,615 5,414 1,372,360 27,433 1,474,233
Losses on investments (see Note 10) – – – (63,812) – (63,812)
Losses on derivative instruments (see Note 11) – – – (22,034) – (22,034)
Foreign exchange losses – – – (372) – (372)
Investment management fees (see Note 4) – – – (7,087) – (7,087)
Finance costs (see Note 6) – – – (586) – (586)
Repurchase of ordinary shares (see Note 14) – – – (6,473) – (6,473)
Revenue return on ordinary activities after taxation for the year – – – – 36,924 36,924
Dividends paid to shareholders (see Note 9) – – – – (29,798) (29,798)
--------------- --------------- --------------- --------------- --------------- ---------------
At 31 December 2022 10,411 58,615 5,414 1,271,996 34,559 1,380,995
========= ========= ========= ========= ========= =========
At 1 January 2021 10,411 58,615 5,414 1,122,325 23,520 1,220,285
Gains on investments (see Note 10) – – – 221,090 – 221,090
Gains on derivative instruments (see Note 11) – – – 38,145 – 38,145
Foreign exchange losses – – – (27) – (27)
Investment management fees (see Note 4) – – – (7,313) – (7,313)
Finance costs (see Note 6) – – – (403) – (403)
Repurchase of ordinary shares (see Note 14) – – – (1,457) – (1,457)
Revenue return on ordinary activities after taxation for the year – – – – 30,852 30,852
Dividends paid to shareholders (see Note 9) – – – – (26,939) (26,939)
--------------- --------------- --------------- --------------- --------------- ---------------
At 31 December 2021 10,411 58,615 5,414 1,372,360 27,433 1,474,233
========= ========= ========= ========= ========= =========
The capital reserve balance at 31 December 2022 includes investment holding
gains of £452,695,000 (2021: gains of £585,421,000) as detailed in Note 10
above. See Note 2 (q) above for further details. The revenue and capital
reserves are distributable by way of dividend.
16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the
following:
2022 2021
Total shareholders’ funds £1,380,995,000 £1,474,233,000
Ordinary shares held outside of Treasury at year end 408,730,523 411,016,049
Net asset value per ordinary share 337.87p 358.68p
============ ============
It is the Company’s policy that shares held in Treasury will only be
reissued at net asset value per ordinary share or at a premium to net asset
value per ordinary share and, therefore, shares held in Treasury have no
dilutive effect.
17 FINANCIAL INSTRUMENTS
Management of risk
The Company’s investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the
Company. The Board with the assistance of the Manager, has developed a risk
matrix which, as part of the internal control process, identifies the risks
that the Company faces. Principal risks identified are economic and
geopolitical, market, discount control, operational risk from cybercrime,
investment performance, environmental, social and governance (“ESG”), key
person and operational support and operational resilience. Other risks
identified are tax and regulatory. Risks are identified and graded in this
process, together with steps taken in mitigation, and are updated and reviewed
on an ongoing basis. These risks and how they are identified, evaluated and
managed are shown in the Strategic Report above.
This note refers to the identification, measurement and management of risks
potentially affecting the value of financial instruments. The Company’s
financial instruments may comprise:
· Equity shares held in accordance with the Company’s investment
objective and policies;
· Derivative instruments which comprise CFDs and futures on equity
indices; and
· Cash, liquid resources and short term debtors and creditors that
arise from its operations.
The risks identified arising from the Company’s financial instruments are
market price risk (which comprises interest rate risk, foreign currency risk
and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instrument risk. The Board reviews and agrees policies for managing
each of these risks, which are summarised below. These policies are consistent
with those followed last year.
Market price risk
Interest rate risk
The Company finances its operations through its share capital and reserves. In
addition, the Company has gearing through the use of derivative instruments.
The level of gearing is reviewed by the Board and the Portfolio Manager. The
Company is exposed to a financial risk arising as a result of any increases in
interest rates associated with the funding of the derivative instruments.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to
movements in interest rates are shown below:
2022 £’000 2021 £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 159,104 133,781
Exposure to financial instruments that earn interest
Amounts held at futures clearing houses and brokers 12,891 2,962
Cash and cash equivalents 44,884 11,366
--------------- ---------------
57,775 14,328
========= =========
Net exposure to financial instruments that bear interest 101,329 119,453
========= =========
Foreign currency risk
The Company’s net return/(loss) on ordinary activities after taxation for
the year and its net assets can be affected by foreign exchange rate movements
because the Company has income, assets and liabilities which are denominated
in currencies other than the Company’s functional currency which is UK
sterling. The Company can also be subject to short term exposure from exchange
rate movements, for example, between the date when an investment is purchased
or sold and the date when settlement of the transaction occurs.
Three principal areas have been identified where foreign currency risk could
impact the Company:
· Movements in exchange rates affecting the value of investments
and derivative instruments;
· Movements in exchange rates affecting short term timing
differences; and
· Movements in exchange rates affecting income received.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown
below:
Currency Investments held at fair value £’000 Long exposure to derivative instruments £’000 Debtors (1) £’000 Cash and cash equivalents (2) £’000 2022 Total £’000
Euro 788,014 217,502 5,086 17,473 1,028,075
Swiss franc 323,257 – 1,798 3,724 328,779
Danish krone 83,544 – 414 1,548 85,506
Swedish krona 39,892 – – 19,362 59,254
Norwegian krone 31,369 – – 378 31,747
UK sterling 59,313 – 13,721 2,399 75,433
--------------- --------------- --------------- --------------- ---------------
1,325,389 217,502 21,019 44,884 1,608,794
========= ========= ========= ========= =========
1 Debtors include amounts held at futures clearing houses and brokers.
2 Cash and cash equivalent are made up of £44,878,000 cash at bank
and £6,000 held in Fidelity Institutional Liquidity Fund.
Currency Investments held at fair value £’000 Long exposure to derivative instruments £’000 Debtors (1) £’000 Cash and cash equivalents (2) £’000 2021 Total £’000
Euro 824,825 190,189 3,258 1,629 1,019,901
Swiss franc 362,721 – 4,655 1,872 369,248
Swedish krona 83,699 – – 50 83,749
Danish krone 64,182 – 352 80 64,614
Norwegian krone 48,096 – – 2,909 51,005
UK sterling 64,474 – 3,654 4,826 72,954
--------------- --------------- --------------- --------------- ---------------
1,447,997 190,189 11,919 11,366 1,661,471
========= ========= ========= ========= =========
1 Debtors include amounts held at futures clearing houses and brokers.
2 Cash and cash equivalent are made up of £10,696,000 cash at bank
and £670,000 held in Fidelity Institutional Liquidity Fund.
Currency exposure of financial liabilities
The currency profile of the Company’s financial liabilities is shown below:
Currency Other creditors £’000 2022 Total £’000
Euro 126 126
UK sterling 1,059 1,059
--------------- ---------------
1,185 1,185
========= =========
Currency Other creditors £’000 2021 Total £’000
UK sterling 1,059 1,059
========= =========
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company’s business. It represents the
potential loss the Company might suffer through holding market positions in
the face of price movements. The Board meets quarterly to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors within the parameters of the investment objective. The Portfolio
Managers are responsible for actively monitoring the existing portfolio
selected in accordance with the overall asset allocation parameters described
above and seeks to ensure that individual stocks also meet an acceptable
risk/reward profile.
Liquidity risk
Due to the closed-ended nature of the Company, the liquidity risk is limited.
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company’s
assets mainly comprise readily realisable securities and derivative
instruments which can be sold easily to meet funding commitments if necessary.
Short term flexibility is achieved by the use of a bank overdraft, if
required.
Liquidity risk exposure
At 31 December 2022, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £9,633,000 (2021: £nil) and creditors of
£1,185,000 (2021: £1,059,000).
Counterparty risk
Certain derivative instruments in which the Company invests are not traded on
an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association’s (“ISDA”) market standard derivative legal
documentation. These are known as Over The Counter (“OTC”) trades. As a
result, the Company is subject to the risk that a counterparty may not perform
its obligations under the related contract. In accordance with the risk
management process which the Manager employs, this risk is minimised by only
entering into transactions with counterparties which are believed to have an
adequate credit rating at the time the transaction is entered into, by
ensuring that formal legal agreements covering the terms of the contract are
entered into in advance, and through adopting a counterparty risk framework
which measures, monitors and manages counterparty risk by the use of internal
and external credit agency ratings and by evaluating derivative instrument
credit risk exposure.
For derivative transactions, collateral is used to reduce the risk of both
parties to the contract. Collateral is managed on a daily basis for all
relevant transactions. At 31 December 2022, there was no amounts held by
brokers in a segregated collateral account on behalf of the Company, to reduce
the credit risk exposure of the Company (2021: J.P. Morgan Securities plc
£3,225,000). £12,891,000 (2021: £2,962,000), shown as amounts held at
futures clearing houses and brokers on the Balance Sheet, was held by the
Company in cash denominated in UK sterling in a segregated collateral account
on behalf of the brokers, to reduce the credit risk exposure of the brokers.
This collateral comprised of: J.P. Morgan Securities plc £4,540,000 (2021:
£nil) and UBS AG £8,351,000 (2021: £2,962,000) in cash.
Credit risk
Financial instruments may be adversely affected if any of the institutions
with which money is deposited suffer insolvency or other financial
difficulties. All transactions are carried out with brokers that have been
approved by the Manager and are settled on a delivery versus payment basis.
Limits are set on the amount that may be due from any one broker and are kept
under review by the Manager. Exposure to credit risk arises on unsettled
security transactions and derivative instrument contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use of
derivative instruments, are set out in a documented Risk Management Process
Document. Derivative instruments are used by the Manager for the following
purposes:
· To gain unfunded long exposure to equity markets, sectors or
single stocks. Unfunded exposure is exposure gained without an initial flow of
capital; and
· To position short exposures in the Company’s portfolio. These
uncovered exposures benefit from falls in the prices of shares which the
Portfolio Managers believe to be over valued. These positions, therefore,
distinguish themselves from other short exposures held for hedging purposes
since they are expected to add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 December
2022, an increase of 1.00% in interest rates throughout the year, with all
other variables held constant, would have increased the net loss on ordinary
activities after taxation for the year and decreased the net assets of the
Company by £1,013,000 (2021: decreased the net return and decreased the net
assets by £1,195,000). A decrease of 1.00% in interest rates throughout the
year would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at the
Balance Sheet date, a 10% strengthening of the UK sterling exchange rate
against foreign currencies, with all other variables held constant, would have
increased the Company’s net loss on ordinary activities after taxation for
the year and decreased the Company’s net assets (2021: decreased the net
return and decreased the net assets) by the following amounts:
Currency 2022 £’000 2021 £’000
Euro 93,450 92,718
Swiss franc 29,889 33,568
Danish krone 7,773 5,874
Swedish krona 5,387 7,614
Norwegian krone 2,886 4,637
--------------- ---------------
139,385 144,411
========= =========
Based on the financial instruments held and currency exchange rates at the
Balance Sheet date, a 10% weakening of the UK sterling exchange rate against
foreign currencies, with all other variables held constant, would have
decreased the Company’s net loss on ordinary activities after taxation for
the year and increased the Company’s net assets (2021: increased the net
return and increased the net assets) by the following amounts:
Currency 2022 £’000 2021 £’000
Euro 114,216 113,322
Swiss franc 36,531 41,028
Danish krone 9,501 7,179
Swedish krona 6,584 9,305
Norwegian krone 3,527 5,667
--------------- ---------------
170,359 176,501
========= =========
Other price risk – exposure to investments sensitivity analysis
Based on the investments held and share prices at 31 December 2022, an
increase of 10% in share prices, with all other variables held constant, would
have decreased the Company’s net loss on ordinary activities after taxation
for the year and increased the net assets of the Company by £132,539,000
(2021: increased the net return and increased the net assets by
£144,800,000). A decrease of 10% in share prices would have had an equal and
opposite effect.
Other price risk – net exposure to derivative instruments sensitivity
analysis
Based on the derivative instruments held and share prices at 31 December 2022,
an increase of 10% in the share prices underlying the derivative instruments,
with all other variables held constant, would have decreased the Company’s
net loss on ordinary activities after taxation for the year and increased the
net assets of the Company by £21,750,000 (2021: increased the net return and
increased the net assets by £19,019,000). A decrease of 10% in share prices
of the investments underlying the derivative instruments would have had an
equal and opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values
which are not materially different to their fair values. As explained in Notes
2 (k) and (l) above, investments and derivative instruments are shown at fair
value. In the case of cash and cash equivalents, book value approximates to
fair value due to the short maturity of the instruments.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Notes 2 (k) and (l). The table below sets out the Company’s fair value
hierarchy:
Financial assets at fair value through profit or loss Level 1 £’000 Level 2 £’000 Level 3 £’000 2022 Total £’000
Investments 1,325,389 – – 1,325,389
Derivative instrument assets – 521 – 521
--------------- --------------- --------------- ---------------
1,325,389 521 – 1,325,910
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (2,454) (7,179) – (9,633)
========= ========= ========= =========
Financial assets at fair value through profit or loss Level 1 £’000 Level 2 £’000 Level 3 £’000 2021 Total £’000
Investments 1,447,997 – – 1,447,997
Derivative instrument assets 950 3,060 – 4,010
--------------- --------------- --------------- ---------------
1,448,947 3,060 – 1,452,007
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – – – –
========= ========= ========= =========
18 Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet above, and any gearing, which is managed by the
use of derivative instruments. Financial resources are managed in accordance
with the Company’s investment policy and in pursuit of its investment
objective, both of which are detailed in the Strategic Report in the Annual
Report. The principal risks and their management are disclosed in the
Strategic Report above and in Note 17 above.
The Company’s gross gearing and net gearing at the year end is set out
below:
2022
Gross gearing Net gearing
Asset exposure £’000 % (1) Asset exposure £’000 % (1)
Investments 1,325,389 96.0 1,325,389 96.0
Long CFDs 152,446 11.0 152,446 11.0
Long futures 65,056 4.7 65,056 4.7
Gross asset exposure/net market exposure 1,542,891 111.7 1,542,891 111.7
Shareholders’ funds 1,380,995 1,380,995
Gearing (2) 11.7 11.7
========= ========= ========= =========
2021
Gross gearing Net gearing
Asset exposure £’000 % (1) Asset exposure £’000 % (1)
Investments 1,447,997 98.2 1,447,997 98.2
Long CFDs 136,841 9.3 136,841 9.3
Long futures 53,348 3.6 53,348 3.6
Gross asset exposure/net market exposure 1,638,186 111.1 1,638,186 111.1
Shareholders’ funds 1,474,233 1,474,233
Gearing (2) 11.1 11.1
========= ========= ========= =========
1 Asset exposure to the market expressed as a percentage of
shareholders’ funds.
2 Gearing is the amount by which gross asset exposure/net market
exposure exceeds shareholders’ funds expressed as a percentage of
shareholders’ funds.
19 Transactions with the Managers and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International (“FII”). Both companies are
Fidelity group companies.
Details of the current fee arrangements are given in the Directors’ Report
in the Annual Report and in Note 4 above. During the year, fees for portfolio
management services of £9,449,000 (2021: £9,751,000) were payable to FII. At
the Balance Sheet date, fees for portfolio management services of £832,000
(2021: £871,000) were accrued and included in other creditors. FII also
provides the Company with marketing services. The total amount payable for
these services during the year was £209,000 (2021: £126,000). At the Balance
Sheet date, marketing services of £nil (2021: £5,000) were accrued and
included in other creditors.
Disclosures of the Directors’ interests in the ordinary shares of the
Company and Directors’ fees and taxable expenses relating to reasonable
travel expenses paid to the Directors are given in the Directors’
Remuneration Report in the Annual Report. In addition to the fees and taxable
expenses disclosed in the Directors’ Remuneration Report, £18,000 (2021:
£16,000) of Employers’ National Insurance Contributions was also paid by
the Company. As at 31 December 2022, Directors’ fees of £14,000 (2021:
£14,000) were accrued and payable.
Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure.
It is the difference between the NAV of the Company and the ordinary share
price and is expressed as a percentage of the NAV. Details of the Company’s
discount/premium are on the Financial Highlights page in the Annual Report and
both are defined in the Glossary of Terms in the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18
above for details of the Company’s gearing.
Net Asset Value (“NAV”) per Ordinary Share
The NAV per ordinary share is considered to be an Alternative Performance
Measure. See the Balance Sheet above and Note 16 above.
Ongoing Charges
Ongoing charges are considered to be an Alternative Performance Measure. The
ongoing charges ratio has been calculated in accordance with guidance issued
by the AIC as the total of investment management fees and other expenses
expressed as a percentage of the average net asset values throughout the year.
2022 2021
Investment management fees (£’000) 9,449 9,751
Other expenses (£’000) 919 908
Ongoing charges (£’000) 10,368 10,659
Average net assets (£’000) 1,330,434 1,346,519
Ongoing charges ratio 0.78% 0.79%
========= =========
Revenue, Capital and Total Returns per Ordinary Share
Revenue, capital and total returns per ordinary share are considered to be
Alternative Performance Measures. See the Income Statement above and Note 8
above for further details.
Total Return Performance
Total return performance is considered to be an Alternative Performance
Measure. NAV per ordinary share total return includes reinvestment of the
dividend in the NAV of the Company on the ex-dividend date. Ordinary share
price total return includes the reinvestment of the net dividend in the month
that the share price goes ex-dividend.
The tables below provide information relating to the NAVs and ordinary share
prices of the Company, the impact of the dividend reinvestments and the total
returns for the years ended 31 December 2022 and 31 December 2021.
2022 Net asset value per ordinary share Ordinary share price
31 December 2021 358.68p 340.50p
31 December 2022 337.87p 319.50p
Change in year -5.8% -6.2%
Impact of dividend reinvestment +2.2% +2.4%
--------------- ---------------
Total return for the year -3.6% -3.8%
========= =========
2021 Net asset value per ordinary share Ordinary share price
31 December 2020 296.57p 286.00p
31 December 2021 358.68p 340.50p
Change in year +20.9% +19.1%
Impact of dividend reinvestment +2.6% +2.6%
--------------- ---------------
Total return for the year +23.5% +21.7%
========= =========
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 December 2022 are an
abridged version of the Company's full Annual Report and Financial Statements,
which have been approved and audited with an unqualified report. The 2021 and
2022 statutory accounts received unqualified reports from the Company's
Auditor and did not include any reference to matters to which the Auditor drew
attention by way of emphasis without qualifying the reports and did not
contain a statement under s.498 of the Companies Act 2006. The financial
information for 2021 is derived from the statutory accounts for 2021 which
have been delivered to the Registrar of Companies. The 2022 Financial
Statements will be filed with the Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at:
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and
additional copies will be available from the registered office of the Company
and on the Company's website: www.fidelity.co.uk/specialvalues where up to
date information on the Company, including daily NAV and share prices,
factsheets and other information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
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