London, November 29
THE EUROPEAN INVESTMENT TRUST PLC
Annual Financial Report for the year ended 30 September 2016
The full Annual Report and Financial Statements can be accessed via the Company's website at www.theeuropeaninvestmenttrust.com or by contacting the Company Secretary by telephone on 0131 270 3800.
To achieve long-term capital growth through a diversified portfolio of Continental European securities. A detailed description of the Company’s investment policy is set out in the Strategic Report below.
£350,659,000 at 30 September 2016.
£303,837,000 at 30 September 2016.
As at 30 September 2016, the Company had 42,053,550 ordinary shares of 25p each in issue. As at 29 November 2016, the date of this report, there were 42,016,100 ordinary shares in issue.
Investing in the Company
The Company’s ordinary shares are traded on the London Stock Exchange and the New Zealand Stock Exchange and can be bought or sold through a stockbroker or financial adviser. The ordinary shares are eligible for inclusion in ISAs and SIPPs. The Company’s shares are also available on various share trading platforms.
The Company is a member of the Association of Investment Companies (“AIC”).
Alternative Investment Fund Manager
Edinburgh Partners AIFM Limited (the “AIFM”).
The AIFM has delegated the function of managing the Company’s investment portfolio to Edinburgh Partners Limited (“Edinburgh Partners” or the “Investment Manager”).
0.55% per annum of the Company’s equity market capitalisation payable monthly in arrears.
Ten Year Record
|Performance (rebased to 100 at 30 September 2006)|
|NAV per share|| |
|Earnings per share|| |
|Dividends per share|| |
|Results for year||30 September 2016||30 September 2015||Change|
|Net asset value per ordinary share (“NAV”)||833.8p||742.2p||12.3%|
|Share price per ordinary share||722.5p||673.0p||7.4%|
|Share price discount to NAV||13.4%||9.3%|
|Year to |
30 September 2016
|Year to |
30 September 2015
|Revenue return per ordinary share*||19.0p||16.0p|
|Capital return per ordinary share*||88.6p||(59.2)p|
|Total return per ordinary share*||107.6p||(43.2)p|
|Final dividend per ordinary share**||16.0p||14.0p|
|Special dividend per ordinary share**||6.0p||2.0p|
|Total dividend per ordinary share**||22.0p||16.0p|
* Based on the weighted average number of shares in issue during the year.
** Proposed dividend for the year.
|Year to |
30 September 2016
|Year to |
30 September 2015
|NAV – high||848.3p||909.1p|
|Share price – high||741.0p||843.5p|
|Share price discount to NAV|
|Year to |
30 September 2016
|Year to |
30 September 2015
|NAV Total Return||14.9%||(5.5)%|
|FTSE All-World Europe ex UK Index Total Return*||21.8%||(1.8)%|
* In sterling.
The NAV Total Returns are sourced from Edinburgh Partners and include dividends reinvested. The index performance figures are sourced from Thomson Reuters Datastream. Past performance is not a guide to future performance.
Cost of running the Company
|Year to |
30 September 2016
|Year to |
30 September 2015
* Based on total expenses, excluding finance costs and certain non-recurring items for the year and average monthly net asset value.
PORTFOLIO OF INVESTMENTS
as at 30 September 2016
|% of |
|% of |
|2||14||Royal Dutch Shell A|| |
Oil & Gas
|4||9||Total||Oil & Gas||France||12,782||3.6||3.2|
|6||16||Stora Enso||Basic Materials||Finland||11,937||3.4||2.7|
|10||8||ENI||Oil & Gas||Italy||11,485||3.3||3.2|
|12||-||Ubisoft Entertainment|| |
Oil & Gas
|Prior year investments sold during the year||23.2|
|Total equity investments||361,065||103.0||98.7|
|Cash and other net current (liabilities)/assets||(190)||(0.1)||1.3|
|* The investment is in non-voting preference shares.|
Of the ten largest portfolio investments as at 30 September 2016, the valuations at the previous year end, 30 September 2015, were PostNL £10,732,000; Royal Dutch Shell A £8,999,000; Roche £11,253,000; Total £10,021,000; BNP Paribas £11,399,000; Stora Enso £8,325,000; Bayer £10,880,000; Novartis £10,649,000; Sanofi £9,373,000; ENI £10,037,000.
Distribution of Investments
as at 30 September 2016 (% of net assets)
|Oil and Gas||12.4|
|Cash and other net current liabilities|| |
|Cash and other net current liabilities|| |
All of the Directors are non-executive and independent of the AIFM and the Investment Manager.
Douglas C P McDougall OBE (Chairman)
William D Eason
Michael W M R MacPhee
Michael B Moule (Senior Independent Director)
Dr Michael T Woodward
The Strategic Report has been prepared in accordance with Section 414A of the Companies Act 2006 (the “Act”). Its purpose is to inform members of the Company and help them assess how the Directors have performed their legal duty under Section 172 of the Act to promote the success of the Company.
After the negative returns seen in the prior year, the year under review was a positive period for UK investors in European equities. The most significant contribution to returns came from the weakness of sterling against the euro and other European currencies following the UK referendum vote in June 2016 to leave the European Union.
Over the year to 30 September 2016, the NAV per share increased by 12.3% from 742.2p to 833.8p. After taking account of dividends paid in the year of 16.0p per share, the NAV total return was 14.9%. This compares with the total return of 21.8% from the FTSE All-World Europe ex UK Index, adjusted to sterling. The disappointing relative return follows from the continued lack of favour in the markets for our value-based approach to stock selection.
Over the year, the Company’s share price increased by 7.4% from 673.0p to 722.5p. The share price discount to NAV rose from 9.3% to 13.4%. The share price total return was 9.8%.
From the appointment of Edinburgh Partners as Investment Manager on 1 February 2010, the share price total return to 30 September 2016 was 62.5% and the NAV total return 58.7%. Over the same period, the total return on the FTSE All-World Europe ex UK Index, adjusted to sterling, was 66.6%.
The revenue return per share for the year to 30 September 2016 was 19.0p compared with 16.0p in the previous year, an increase of 18.7%. Revenue benefited from dividend growth, currency movements, utilisation of the borrowing facility and a reduction in management fee, which is based on market capitalisation. The ongoing charges ratio fell from 0.63% to 0.62%.
The Board recommends a final dividend of 16.0p per share and a special dividend of 6.0p per share (which includes 3.0p arising from the settlement of a historic tax reclaim), giving a total of 22.0p per share. This compares with the prior year total dividend of 16.0p per share, which comprised a final dividend of 14.0p and a special dividend of 2.0p per share.
Our aim is to pay a final dividend which we regard as likely to be sustainable and to distribute any further earnings by way of a special dividend. Subject to the approval of shareholders at the forthcoming Annual General Meeting (“AGM”), these dividends will be paid on 31 January 2017 to shareholders on the register at the close of business on 6 January 2017. The ex-dividend date will be 5 January 2017.
Share buy backs
Against a background of a widening discount of the share price to NAV the Company bought back shares for cancellation during the year under review and subsequent to the year-end. Details of these purchases can be seen in the Directors’ Report in the full Annual Report and Financial Statements. The Directors will propose at the forthcoming AGM that the Company’s powers to make purchases of up to 14.99% of its shares in issue be renewed.
In February 2016, the Company entered into a euro 30 million bank overdraft credit facility with The Northern Trust Company, with the objective of using gearing to enhance shareholder returns. As at 30 September 2016, a total of euro 11,809,000, equivalent to 2.9% of net assets, had been drawn down under the facility.
The most significant changes in the portfolio were an increase in the industrial sector and a reduction in the technology sector. Geographically, the main changes were a reduction in Switzerland and an increase in France. For details of portfolio movements, please see the Investment Manager’s Report below.
I shall retire from the Board at the conclusion of the AGM on 24 January 2017, when Michael MacPhee will succeed me as Chairman of the Company. I have every confidence in the future of the Company under the direction of my colleagues.
In August 2016, the Company announced that Edinburgh Partners had appointed Craig Armour as portfolio manager for the Company in succession to Dale Robertson. Craig joined Edinburgh Partners in 2009 after working for 18 years in investment banking and private equity. He is an Investment Partner, has been responsible for managing several European portfolios, and worked closely with Dale Robertson for several years. The change of portfolio manager has not led to any fundamental change in the style or composition of the portfolio.
Change of Auditors
The EU Audit Regulation and Directive, which came into force in the UK on 17 June 2016, introduced restrictions on the non-audit services which auditors can provide to their clients. As explained in the Report of the Audit and Management Engagement Committee in the full Annual Report and Financial Statements, the Board and PricewaterhouseCoopers LLP (“PwC”) have agreed that PwC will be unable to continue as auditors whilst providing non-audit services. As required, PwC have written a letter to the Company setting out their reasons for not seeking re-appointment as Auditors, a copy of which is enclosed with the full Annual Report and Financial Statements.
PwC and their predecessor companies have been Auditors since the Company’s launch in 1972 and I should like to thank them for their services to the Company over that period.
In October 2016, the Audit and Management Engagement Committee carried out an external audit tender process, details of which can be seen in the full Annual Report and Financial Statements. Following this, the appointment of BDO LLP as Auditors of the Company is recommended to shareholders for approval at the AGM.
Annual General Meeting
The AGM will be held at 11.00am on Tuesday, 24 January 2017 at Brewers’ Hall, Aldermanbury Square, London EC2V 7HR. I look forward to seeing as many as possible of you there.
The low interest rate policy and monetary easing being pursued by the European Central Bank have resulted in high valuations being placed on stocks considered by European equity investors to be low risk in terms of earnings progress. Our managers have continued to invest in stocks where they believe valuations to be too low, in the expectation that the undervaluation will at some point be recognised by the market. There have been recent signs that investor sentiment may have shifted slightly towards our style. Over the 6 months to 25 November 2016, the NAV rose by 16.3%, which compares with the total return of 13.3% from the FTSE Europe All-World ex UK Index, adjusted to sterling.
Whilst there continue to be geo-political concerns, including the possibility of increasing trade barriers following Brexit and the US presidential election, the outlook for economic growth in Europe appears to be improving, which would benefit the cyclically-sensitive sectors to which the Company has a high exposure.
29 November 2016
INVESTMENT MANAGER’S REPORT
Economic and Market Overview
Since the financial crisis in 2008, the economic recovery has been supported by monetary stimulus, with central banks adopting quantitative easing through bond purchases alongside ultra-low interest rates. In Europe, the initial resistance to this approach was overcome and the European Central Bank followed its counterparts elsewhere in the developed world. While economic growth has been subdued compared to the period prior to the crisis, the policies adopted appear to have been largely successful in allaying fears of deflation and recession. There have been periodic bouts of concern but the evidence points to a global economy emerging intact from intensive care. Indeed there are tangible signs of inflation, partly from the recovery in commodity prices, but also from labour markets.
Recent years have been challenging for valuation-conscious investors. In an environment where the discount rate is based on artificially suppressed interest rates, the valuations of companies with stable and predictable earnings have been boosted, in stark contrast to many cyclical stocks. This is best captured by the premium rating of consumer staples relative to the rest of the equity market, which during the year reached levels comparable with the 2008 financial crisis. We believe that this premium rating is unwarranted given both ongoing economic growth and a subtle shift in the outlook for longer-term interest rates. Towards the end of the year under review, there was evidence that equity markets were starting to price in a restoration of more normal financial conditions.
The one area of almost perpetual uncertainty in Europe is politics. An election is always in sight at national level and the European Union as a collective takes time to gather a consensus and react to issues as they arise. The latest issue is of course Brexit, with the UK voting in June 2016 to leave the European Union. The UK faces a real challenge in implementing the result of the referendum without causing material damage to its economy. In that respect, the European Union and the UK have a shared economic interest, but the European Union is expected to resist an outcome which makes departure look attractive. To date, the principal economic impact from Brexit appears to have been the weakness of sterling, but a prolonged period of uncertainty will not be helpful to economies or equity markets.
Portfolio Strategy and Activity
At Edinburgh Partners, our valuation framework ensures that we retain our discipline through market cycles. In the prior year, we sold a number of stocks which had performed well and were trading at valuations which fully captured their growth prospects. In their place, we purchased stocks where the valuations were significantly lower, often due to depressed expectations or fear of a recession. In the current financial year, we have continued this process and we have also introduced gearing to the portfolio, using part of the euro 30 million bank overdraft facility to add to some of our most undervalued holdings.
An area of the equity market which has been out of favour for some time has been banking stocks. The challenges facing banks are well-known, including regulatory pressure to hold more capital, tepid loan demand, litigation and conduct charges and managing the transition to digital banking. Add in the margin squeeze from low interest rates and the return on equity across the sector has fallen substantially. However banks today have higher levels of capital, are better funded with improved liquidity and have more appropriate loan provisioning. Many of our holdings are trading at significant discounts to book value and have solid dividend yields. While banking stocks made a small positive contribution to performance during the year, the valuations remain attractive and the portfolio exposure at the year-end was 15.2% of net assets.
Our oil and gas holdings performed well in aggregate during the year. Our holdings in the major stocks such as Royal Dutch Shell and Total responded well to the recovery in the oil price and to the efforts of the companies to cut costs. Our holding in seismic testing company, Petroleum Geo-Services, continued to struggle against this backdrop of cost-cutting and performed poorly although, since the year-end, it has announced improved results, indicating that exploration activity is starting to improve. We retain a positive outlook on the sector which had a year-end portfolio weighting of 12.4% of net assets.
Our industrial stocks generally performed well, led by Dutch mail operator PostNL. With a stronger balance sheet after disposing of its stake in TNT Express, the company attracted bid interest from Belgian mail operator BPost. Another strong performer in industrials was Swiss engineer ABB and we sold this holding on valuation grounds.
We suffered a loss on our holding in asset manager GAM which issued a profit warning. After reviewing the prospects for the range of funds managed by the company and in particular, the outlook for performance fees from its flagship funds, we decided to sell the holding.
The stock with the greatest exposure to the UK is Ryanair, which earns around 25% of revenues in sterling. After a sharp fall in the aftermath of the vote in June 2016, the share price has recovered as it continues to deliver strong growth across its markets. As a low cost provider in a segment of the airline market which continues to gain market share, we believe Ryanair remains a solid long-term investment case.
We have continued to sell stocks where the valuations fully discount the prospects and replace them with stocks where we believe the growth prospects are not captured in the valuation. Examples include Swiss-based staffing company, Adecco, and aircraft manufacturer, Airbus. In the case of Airbus, which along with Boeing dominates the market, the long-term demand from Asia in particular underpins demand, and the absence of any new models over the next few years should benefit both margins and cash flow.
A steadily recovering economy in Europe remains our central case, supported by the European Central Bank policy. The recent moves in longer-term interest rates point to some normalisation of the valuation environment which would be negative for bond prices and their stock market equivalents such as consumer staples. It has been encouraging to see renewed takeover interest after the year-end in two of our holdings, PostNL and Delta Lloyd, and the portfolio retains a strong valuation focus.
29 November 2016
Other Statutory Information
The objective of the Company is to achieve long-term capital growth through a diversified portfolio of Continental European securities.
Strategy and business model
The Board believes that investment in the diverse and increasingly accessible markets of this region provides opportunities for capital growth over the long term. At the same time, it considers the structure of the Company as a UK-listed investment trust, with fixed capital and an independent Board of Directors, to be well suited to investors seeking longer-term returns.
The Board recognises that investment in some European countries can be riskier than in others. Investment risks are diversified through holding a wide range of securities in different countries and industrial sectors. No more than 10% of the value of the portfolio in aggregate may be held in securities in those countries which are not included in the FTSE All-World European indices.
The Board has the authority to hedge the Company’s exposure to movements in the rate of exchange of currencies, principally the euro, in which the Company’s investments are denominated, against sterling, its reporting currency. However, it is not generally the Board’s practice to do this and the portfolio is not currently hedged.
No investments in unquoted stocks can be made without the prior approval of the Board. The level of gearing within the portfolio is agreed by the Board and should not exceed 20% in normal market conditions.
No more than 10% of the total assets of the Company may be invested in other listed investment companies (including investment trusts) except in such other investment companies which themselves have stated that they will invest no more than 15% of their total assets in other listed investment companies, in which case the limit is 15%.
The Investment Manager’s compliance with the limits set out in the investment policy is monitored by the Board and the AIFM.
Investments are selected for the portfolio only after extensive research, which the Investment Manager believes to be key. The whole process through which an equity must pass in order to be included in the portfolio is very rigorous. Only a security where the Investment Manager believes that the price will be significantly higher in the future will pass the selection process. The Company’s Investment Manager believes the key to successful stock selection is to identify the long-term value of a company’s shares and to have the patience to hold the shares until that value is appreciated by other investors. Identifying long-term value involves detailed analysis of a company’s earnings prospects over a five-year time horizon. The portfolio will normally consist of around 40 investments.
Business and status of the Company
The principal activity of the Company is to carry on business as an investment trust.
The Company is registered as a public limited company and is an investment company within the terms of Section 833 of the Act. The Company has been approved by HM Revenue & Customs (“HMRC”) as an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 (“CTA”), subject to there being no subsequent serious breaches of the regulations. In the opinion of the Directors, the Company has directed its affairs so as to enable it to continue to qualify for such approval.
The Company’s shares have a premium listing on the Official List of the UK Listing Authority and are traded on the main market of the London Stock Exchange. The Company has a secondary listing and its shares are traded on the New Zealand Stock Exchange.
The Company is a member of the AIC, a trade body which promotes investment companies and also develops best practice for its members.
A detailed review of how the Company’s assets have been invested is contained in the Investment Manager’s Report above. A detailed list of all the Company’s investments is contained in the Portfolio of Investments above. The Portfolio of Investments details that the Company held 38 investments, excluding cash and other net current liabilities, as at 30 September 2016, with the largest representing 5.1% of net assets, thus ensuring that the Company has a suitable spread of investment risk. A sector and geographical distribution of investments is shown above.
Results and dividends
The results for the year are set out in the Income Statement and the Statement of Changes in Equity below.
For the year ended 30 September 2016, the net revenue return attributable to shareholders was £8.0 million (2015: £6.7 million) and the net capital return was £37.3 million (2015: -£24.9 million). Total shareholders’ funds increased by 12.3% to £350.7 million (2015: £312.2 million).
Details of the dividends recommended by the Board are set out above in the Chairman’s Statement and below.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objective. The key performance indicators used to measure progress and performance of the Company over time are established industry measures and are as follows:
Net asset value
In the year to 30 September 2016, the net asset value per share increased by 12.3% from 742.2p to 833.8p. After taking account of dividends paid in the year of 16.0p, the net asset value total return was 14.9%. This compares with the total return of 21.8% from the FTSE All-World Europe ex UK Index, adjusted to sterling.
The net asset value total return since the appointment of Edinburgh Partners as Investment Manager on 1 February 2010 to 30 September 2016 was 58.7%. This compares with the total return of 66.6% from the FTSE All-World Europe ex UK Index, adjusted to sterling.
In the year to 30 September 2016, the Company’s share price increased by 7.4% from 673.0p to 722.5p. The share price total return, taking account of the 16.0p dividend paid in the year, was 9.8%.
Share price premium/discount to net asset value per share
The share price discount to net asset value per share widened from 9.3% to 13.4% in the year to 30 September 2016.
Revenue return per ordinary share
There was an increase in the revenue per share in the year to 30 September 2016 of 18.7% from 16.0p to 19.0p.
Dividends per ordinary share
The Directors are recommending a final dividend of 16.0p per ordinary share and a special dividend of 6.0p per ordinary share (which includes 3.0p arising from the settlement of a historic tax reclaim), making a total dividend of 22.0p per ordinary share. This compares with the prior year total dividend of 16.0p per ordinary share.
The Company continues to have low expenses. The ongoing charges ratio was 0.62% (2015: 0.63%) in the year to 30 September 2016.
The longer-term records of the key performance indicators are shown in the Ten Year Record in the full Annual Report and Financial Statements.
The Board also takes into consideration how the Company performs compared to other investment trusts investing in Europe.
In order to comply with the Alternative Investment Fund Managers’ Directive (“AIFMD”), the Company appointed Edinburgh Partners AIFM Limited as its AIFM with effect from 17 July 2014. Edinburgh Partners AIFM Limited has been approved as an AIFM by the UK’s Financial Conduct Authority (“FCA”). With the approval of the Directors of the Company, the AIFM appointed Edinburgh Partners as Investment Manager to the Company pursuant to a delegation agreement with effect from 17 July 2014.
The AIFM receives a management fee of 0.55% per annum of the Company’s equity market capitalisation, payable monthly in arrears.
The Management Agreement may be terminated by either party giving three months’ written notice. No additional compensation is payable to the AIFM on the termination of this agreement other than the fees payable during the notice period. No performance fee will be paid. Further details relating to the agreement are detailed in note 3 of the Financial Statements below.
Continuing appointment of the AIFM
The Board keeps the performance of the AIFM under review through the Audit and Management Engagement Committee. As the AIFM has delegated the investment management function to Edinburgh Partners, the performance of the Investment Manager is also regularly reviewed. It is the opinion of the Directors that the continuing appointment of the AIFM on the terms agreed is in the interests of shareholders as a whole. The remuneration of the AIFM is reasonable both in absolute terms and compared to that of managers of comparable investment companies. The Directors believe that by paying the management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the AIFM are more closely aligned with those of shareholders.
AIFM remuneration disclosures
In accordance with the AIFMD, information in relation to the remuneration of the Company’s AIFM, Edinburgh Partners AIFM Limited, is required to be made available to investors. The AIFM’s remuneration policy is incorporated within a group policy which is available at www.edinburghpartners.com. The disclosure also includes those remuneration disclosures in respect of the AIFM’s staff and ‘Identified staff’ for the reporting period, the year ended 29 February 2016.
Risk management by the AIFM
As required under the AIFMD, the AIFM has established and maintains a permanent and independent risk management function to ensure that there is a comprehensive and effective risk management policy in place and to monitor compliance with risk limits. This risk policy covers the risks associated with the management of the investment portfolio, and the AIFM reviews and approves the adequacy and effectiveness of the policy on at least an annual basis, including the risk management processes and controls and limits for each risk area.
The AIFM sets risk limits that take into account the risk profile of the Company’s investment portfolio, as well as its investment objectives and strategy. The AIFM monitors the risk limits, including leverage, and periodically assesses the portfolio’s sensitivity to key risks.
The AIFM reviews risk limit reports at regular meetings of its risk committee.
Principal risks and uncertainties
The Board considers that the following are the principal financial risks associated with investing in the Company: investment and strategy risk, discount volatility risk, market risk (comprising interest rate risk, currency risk and price risk), liquidity risk, credit risk and gearing risk. An explanation of these risks and how they are managed and the policy and practice with regard to financial instruments are contained in note 17 of the Financial Statements below.
In addition, the Board also considers the following as principal risks:
Relevant legislation and regulations which apply to the Company include the Act, the CTA, the Listing Rules and the Disclosure Guidance and Transparency Rules of the FCA, and the AIFMD. A breach of the CTA could result in the Company losing its status as an investment trust and becoming subject to capital gains tax, whilst a breach of the Listing Rules of the FCA might result in censure by the FCA and suspension of the listing of the Company’s shares on the London Stock Exchange.
At each Board meeting, the status of the Company is considered and discussed, so as to ensure that all regulations are being adhered to by the Company and its service providers.
The Board is not aware of any breaches of laws or regulations during the year under review and up to the date of this report.
In common with most other investment companies, the Company has no employees. The Company therefore relies upon the services provided by third parties. There are a number of operational risks associated with the fact that third parties undertake the Company’s administration, depositary and custody functions. The main risk is that the third parties may fail to ensure that statutory requirements, such as compliance with the Act and the Listing Rules of the FCA, are met.
The Board regularly receives and reviews management information from third parties which the Company Secretary compiles. In addition, each of the third parties provides a copy of its report on internal controls (ISAE 3402, SSAE 16 or equivalent) to the Board, through the Audit and Management Engagement Committee, each year to evidence that adequate controls are in place and are operating satisfactorily.
Other financial risk
It is possible that inappropriate accounting policies or failure to comply with current or new accounting standards may lead to a breach of regulations.
The AIFM employs an independent administrator to prepare all financial statements and the Audit and Management Engagement Committee meets with the independent auditors at least once a year to discuss audit issues, including appropriate accounting policies.
The Board undertakes a robust annual assessment and review of all the risks stated above and in note 17 of the Financial Statements below, together with a review of any new risks which may have arisen during the year, including those that would threaten its business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk assessment matrix.
Internal financial control
In accordance with guidance issued to directors of listed companies, the Directors confirm that they have carried out a review of the effectiveness of the systems of internal financial control during the year ended 30 September 2016, as set out in the full Annual Report and Financial Statements. There were no matters arising from this review that required further investigation and no significant failings or weaknesses were identified.
Leverage is defined in the AIFMD as any method by which the Company increases its exposure, whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means. As detailed in note 6 of the Financial Statements below, during the year ended and as at 30 September 2016, the Company had utilised a borrowing facility. The Company did not use any derivative instruments during the year ended 30 September 2016.
In accordance with the detailed requirements of the AIFMD, leverage has been measured in terms of the Company’s exposure, and is expressed as a ratio of net asset value. The AIFMD requires this ratio to be calculated in accordance with both the Gross Method and the Commitment Method. Details of these methods of calculation can be found by referring to the AIFMD. In summary, these methods express leverage as a ratio of the exposure of debt, non-sterling currency, equity or currency hedging and derivatives exposure against the net asset value. The principal difference between the two methods is that the Commitment Method enables derivative instruments to be netted off to reflect hedging arrangements and the exposure is effectively reduced, while the Gross Method aggregates the exposure.
The AIFMD introduced a requirement for the AIFM to set maximum levels of leverage for the Company. The Company’s AIFM has set a maximum limit of 1.20 for both the Gross and Commitment Methods of calculating leverage. However, the AIFM anticipates that the figures are likely to be lower than this under normal market conditions. At 30 September 2016, the Company’s Gross ratio was 1.03 and its Commitment ratio was 1.03. In accordance with the AIFMD, any changes to the maximum level of leverage set by the Company will be communicated to shareholders.
The Board appointed Northern Trust Global Services Limited to act as its depositary (the “Depositary”) under an agreement dated 22 July 2014 (the “Depositary Agreement”), to which the AIFM is also a party. The Depositary is authorised by the Prudential Regulation Authority and regulated by the FCA and the Prudential Regulation Authority. Custody services are provided by The Northern Trust Company (as a delegate of the Depositary). A fee of 0.01% per annum of the net assets of the Company, plus fees in relation to safekeeping and other activities undertaken to facilitate the investment activity of the Company, are payable to the Depositary. The Company and the Depositary may terminate the Depositary Agreement at any time by giving six months’ written notice. The Depositary may only be removed from office when a new depositary is appointed by the Company.
Main trends and future development
A review of the main features of the year and the outlook for the coming year is to be found in the Chairman’s Statement and the Investment Manager’s Report above. The Board’s main focus is on the investment return and approach, with attention paid to the integrity and success of the investment approach and on factors which may have an impact on this approach.
This Strategic Report contains “forward-looking statements” with respect to the Company’s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events that are beyond the Company’s control. Factors that could cause actual results to differ materially from those estimated by the forward-looking statements include, but are not limited to:
- Global economic conditions and equity market performance and prices, particularly those in Europe
- Changes in government policies and monetary and interest rate policies worldwide, particularly those in Europe
- Changes to regulations and taxes worldwide, particularly in Europe
- Currency exchange rates
- Use of gearing
- The Company’s success in managing its assets and business to mitigate the impact of the above factors.
As a result, the Company’s actual future condition, performance and results may differ materially from the plans set out in the Company’s forward-looking statements. The Company undertakes no obligation to update the forward-looking statements contained within this review or any other forward-looking statements it makes.
Employees, human rights and community issues
The Board recognises the requirement under Section 414C of the Act to detail information about employees, human rights and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements do not apply to the Company as it has no employees, all the Directors are non-executive and it has outsourced all its functions to third party service providers. The Company has therefore not reported further in respect of these provisions.
The Company is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore, no further disclosure is required in this regard.
As at 30 September 2016, the Board of Directors of the Company comprised five male Directors. The appointment of any new Director is made on the basis of merit.
Social, environmental and ethical policy
The Company seeks to invest in companies that are well-managed, with high standards of corporate governance, as the Directors believe this creates the proper conditions to enhance long-term value for shareholders. The Company adopts a positive approach to corporate governance and engagement with companies.
In pursuit of the above objective, the Directors believe that proxy voting is an important part of the corporate governance process. It is the policy of the Company to vote, as far as is practicable, at all shareholder meetings of investee companies. The Company follows the relevant regulatory and legislative requirements, with the guiding principles being to make proxy voting decisions which favour proposals that will lead to maximising shareholder value while avoiding any conflicts of interest. To this end, voting decisions take into account corporate governance, including disclosure and transparency, board composition and independence, control structures, remuneration, social and environmental issues.
The day-to-day management of the Company’s business has been delegated by the AIFM to the Company’s Investment Manager, Edinburgh Partners, which has an Environmental, SRI and Corporate Governance (“ESG”) policy in place, which can be found on its website at www.edinburghpartners.com.
The assessment of the quality of investee companies in relation to environmental considerations, socially responsible investment and corporate governance is embedded in the Investment Manager’s stock selection process.
On behalf of the Board
29 November 2016
EXTRACTS FROM THE DIRECTORS’ REPORT
As at 30 September 2016, the Company had 42,053,550 ordinary shares of 25p each in issue. No shares were held in treasury during the year or as at the date of this report as all shares purchased are cancelled.
At general meetings of the Company, ordinary shareholders are entitled to one vote on a show of hands and on a poll, one vote for each ordinary share held.
Issue of shares
No shares were issued during the year.
Purchase of shares
The Board has continued to monitor the discount at which the ordinary shares of the Company trade relative to the NAV per share. During the year ended 30 September 2016, the Company purchased in the stock market 15,821 ordinary shares (nominal value of £3,955.25) for cancellation, at a total cost of £113,000. This represented 0.04% of the issued share capital at 30 September 2015.
Subsequent to the year end, and up to the date of this report, the Company purchased 37,450 ordinary shares (nominal value of £9,362.50) for cancellation, at a total cost of £282,000, representing 0.09% of the issued share capital at 30 September 2016.
The Company’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report above. In addition, notes 17 and 18 of the Financial Statements below include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its risk exposure. The Company’s principal risks are detailed in the Strategic Report above. The Company’s assets consist principally of a diversified portfolio of listed European equity shares, which in most circumstances are realisable within a short period of time and exceed its liabilities to creditors by a significant amount.
The Directors have concluded that the Company has adequate resources to continue in operational existence for the foreseeable future, being a period of at least 12 months from the date this Annual Report is approved. For this reason, they have adopted the going concern basis in preparing the Financial Statements.
Long-term Viability Statement
In accordance with the February 2015 revision to the AIC Code, the Directors have assessed the prospects of the Company over a longer period than the one year required by the ‘Going Concern’ provision of the Code. The Board considers that, for a company with an investment objective to achieve long-term capital growth through a diversified portfolio of Continental European securities, a period of five years is an appropriate period to consider for the purpose of the Long-term Viability Statement.
The Board has undertaken an assessment of its future prospects in order that the Directors may state that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
In making its assessment, the Board considered a number of factors, including those detailed below:
- the Company’s current financial position;
- the principal risks the Company faces, as detailed above in the Strategic Report;
- that the portfolio comprises principally of investments traded on major European stock markets and that there is a satisfactory spread of investments. There is no expectation that the nature of the investments held within the portfolio will be materially different in the future;
- that the expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position;
- that the Company has no employees except for the Directors, who are all non-executive and consequently do not have redundancy or other employment-related liabilities or responsibilities;
- that European stock markets will continue to be a significant component of international stock markets and that investors will still wish to have an exposure to such investments;
- that there will continue to be a demand for closed-ended investment trusts from investors;
- that regulation will not increase to a level that makes the running of the Company uneconomical in comparison to other competitive products; and
- that, should the performance be less than the Board considers to be acceptable, it has appropriate powers to replace the AIFM.
As a consequence of its assessment, the Board considers 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 five year period of their assessment.
The full Annual Report and Financial Statements contain the following statements regarding responsibility for the Annual Report and Financial Statements.
MANAGEMENT REPORT AND STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RELATION TO THE ANNUAL REPORT AND FINANCIAL STATEMENTS
Listed companies are required by the FCA’s Disclosure Guidance and Transparency Rules (the “Rules”) to include a management report within their annual report and financial statements.
The information required to be included in the management report for the purpose of these Rules is detailed in the Strategic Report above, including the Chairman’s Statement and the Investment Manager’s Report. Therefore no separate management report has been included.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and the 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 prepared the Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard (FRS) 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” and applicable law). 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 and then apply them consistently;
- make judgements and accounting estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements respectively;
- notify the Company’s shareholders in writing about the use of disclosure exemptions in FRS 102, used in the preparation of 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 Financial Statements comply with the Act and include the information required by the Listing Rules of the FCA. 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.
Each of the Directors, whose names are set out above, confirms that, to the best of his knowledge:
- the Financial Statements, which have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company; and
- the Strategic Report and the Directors’ Report include 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 that it faces.
The Annual Report and Financial Statements, taken as a whole, are considered by the Board to be fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
On behalf of the Board
29 November 2016
The financial information set out below does not constitute the Company’s statutory Financial Statements for the year ended 30 September 2016 but is derived from those Financial Statements. Statutory Financial Statements for the year ended 30 September 2016 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those Financial Statements; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors’ report can be found in the Company’s full Annual Report and Financial Statements on the Company’s website at www.theeuropeaninvestmenttrust.com and on the website of Edinburgh Partners at www.edinburghpartners.com.
for the year ended 30 September 2016
|Gains/(losses) on investments at fair value||10||-||37,740||37,740||-||(23,876)||(23,876)|
|Foreign exchange gains/(losses)||240||(479)||(239)||(41)||(1,012)||(1,053)|
|Net return before finance costs and taxation||8,577||37,261||45,838||7,297||(24,888)||(17,591)|
|Net return before taxation||8,526||37,261||45,787||7,281||(24,888)||(17,607)|
|Tax on ordinary activities||7||(523)||-||(523)||(573)||-||(573)|
|Net return attributable to shareholders||8,003||37,261||45,264||6,708||(24,888)||(18,180)|
|Return per ordinary share*||9||19.0||88.6||107.6||16.0||(59.2)||(43.2)|
* Based on the weighted average number of shares in issue during the year. The return per ordinary share is both the basic and diluted return per ordinary share.
All revenue and capital items in the above statement derive from continuing operations.
The total column of this statement is the Profit and Loss Account of the Company. The revenue and capital columns are prepared under guidance published by the AIC.
There were no items of other comprehensive income in the year and therefore the profit/(loss) for the year is also the comprehensive income/(loss) for the year.
The notes below form part of these Financial Statements.
as at 30 September 2016
|Fixed asset investments:|
|Investments at fair value through profit or loss||10||361,065||308,228|
|Cash at bank and short-term deposits||105||8,451|
|Net current (liabilities)/assets||(10,406)||4,011|
|Capital and reserves:|
|Called-up share capital||14||10,513||10,517|
|Share premium account||123,749||123,749|
|Capital redemption reserve||8,298||8,294|
|Total shareholders’ funds||350,659||312,239|
|Net asset value per ordinary share||15||833.8||742.2|
The Financial Statements were approved and authorised for issue by the Board of Directors of The European Investment Trust plc on 29 November 2016 and were signed on its behalf by:
Registered in England and Wales No. 1055384
The notes below form part of these Financial Statements.
STATEMENT OF CHANGES IN EQUITY
for the year ended 30 September 2016
|Year ended 30 September 2016|
|At 1 October 2015||10,517||123,749||8,294||158,690||10,989||312,239|
|Net return after taxation for the year||-||-||-||37,261||8,003||45,264|
|Shares purchased for cancellation||14||(4)||-||4||(113)||-||(113)|
|At 30 September 2016||10,513||123,749||8,298||195,838||12,261||350,659|
|Year ended 30 September 2015|
|At 1 October 2014||10,517||123,749||8,294||183,578||10,591||336,729|
|Net return after taxation for the year||-||-||-||(24,888)||6,708||(18,180)|
|At 30 September 2015||10,517||123,749||8,294||158,690||10,989||312,239|
The notes below form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
at 30 September 2016
1 Accounting policies
Basis of accounting
These Financial Statements are prepared in accordance with the AIC SORP. The Company has adopted FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” for the year ended 30 September 2016, the date of transition being 1 October 2015. Adoption of FRS 102 has not materially impacted the Company’s Financial Statements or the accounting policies as set out in this note 1, and the comparative figures for the year ended 30 September 2015 remain unchanged.
Following the adoption of FRS 102, the Company has elected to remove the Cash Flow Statement from the Annual Report for the year ended 30 September 2016.
The principal accounting policies detailed below have been applied consistently throughout the period. As detailed above, the Directors consider that it is appropriate for the Financial Statements to be prepared on a going concern basis.
Dividend and other investment income is included as revenue (except where, in the opinion of the Directors, its nature indicates it should be recognised as capital) on the ex-dividend date or, where no ex-dividend date is quoted, when the Company’s right to receive payment is established. Income arising on holdings of fixed income securities is recognised on a time apportionment basis so as to reflect the effective interest rate on that security. Deposit interest is included on an accruals basis.
Dividends are accounted for on the basis of income actually receivable, without adjustment for the tax credit attaching to the dividends. Dividends from overseas companies are shown gross of withholding tax.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash (scrip dividends), the amount of the cash dividend foregone is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend foregone is recognised in the capital reserve.
Loans and overdrafts are recorded at the proceeds received, net of issue costs, irrespective of the duration of the instrument.
Finance costs, including interest, are accrued using the effective interest rate method. See below for allocation of finance costs within the Income Statement.
Expenses and finance costs
All expenses are accounted for on an accruals basis. All operating expenses including finance costs and management fees are charged through revenue in the Income Statement except costs that are incidental to the acquisition or disposal of investments, which are charged to capital in the Income Statement. Transaction costs are included within the gains and losses on investment sales, as disclosed in the Income Statement. No performance fees are charged by the AIFM.
All investments held by the Company are classified as ‘fair value through profit or loss’. Investments are initially recognised at cost, being the fair value of the consideration given. Interest accrued on fixed interest rate securities at the date of purchase or sale is accounted for separately as accrued income, so that the value or purchase price or sale proceeds is shown net of such items.
After initial recognition, investments are measured at fair value, with changes in the fair value of investments and impairment of investments recognised in the Income Statement and allocated to capital. Gains and losses on investments sold are calculated as the difference between sales proceeds and cost.
For investments actively traded in organised financial markets, fair value is generally determined by reference to stock exchange quoted market bid prices at the close of business on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. Investments which are not quoted or which are not frequently traded are stated at Directors’ best estimate of fair value, using the guidelines on valuation published by the International Private Equity and Venture Capital Association. This represents the Directors’ view of the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction. This does not assume that the underlying business is saleable at the reporting date or that its current shareholders have any intention to sell their holding in the near future. Where no reliable fair value can be estimated, investments may be carried at cost less any provision for impairment.
Cash at bank and short-term deposits
Cash at bank and short-term deposits comprise cash in hand and demand deposits that mature within three months. The carrying value of cash at bank and short-term deposits is equal to its fair value.
The functional and presentational currency of the Company is sterling because that is the currency of the primary economic environment in which the Company operates.
Transactions denominated in foreign currencies are converted to sterling at the actual exchange rate as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rate of exchange to sterling at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or in revenue depending on whether the gain or loss is of a capital or revenue nature.
The charge for taxation is based on the net return for the year and takes into account taxation deferred or accelerated because of timing differences between the treatment of certain items for accounting and taxation purposes. Full provision for deferred taxation is made under the liability method, without discounting, on all timing differences that have arisen but not been reversed by the Balance Sheet date, unless such provision is not permitted by FRS 102. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company’s taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent years.
Capital redemption reserve
The nominal value of ordinary share capital purchased and cancelled is transferred out of called-up share capital and into the capital redemption reserve on the relevant trade date.
The following are accounted for in this reserve:
- gains and losses on the realisation of investments;
- increases and decreases in the valuation of investments held at the year end;
- realised foreign exchange differences of a capital nature;
- unrealised foreign exchange differences of a capital nature;
- costs of professional advice (including related irrecoverable VAT) relating to the capital structure of the Company;
- other capital charges and credits charged or credited to this account in accordance with the above policies; and
- costs of purchasing ordinary share capital.
The revenue reserve is distributable by way of a dividend.
Dividends payable to shareholders
Final and special dividends are recognised as a liability in the year in which they have been approved by shareholders in a general meeting.
|Income from investments:|
3 Management fee
On 17 July 2014, the Company appointed Edinburgh Partners AIFM Limited as its AIFM. Under the Management Agreement, the AIFM is entitled to a fee paid monthly in arrears at a rate of 0.55% per annum of the equity market capitalisation of the Company. Under the Management Agreement no performance fee is payable.
During the year ended 30 September 2016, the management fees payable to the AIFM totalled £1,586,000 (2015: £1,785,000). At 30 September 2016, there was £137,000 outstanding payable to the AIFM (2015: £141,000) in relation to management fees.
At 30 September 2016, there was £nil (2015: £4,000) outstanding to Edinburgh Partners in relation to expenses incurred on behalf of the Company. This cost is included in other expenses as detailed in note 4 of these Financial Statements.
4 Other expenses
* See the Directors’ Remuneration Report in the full Annual Report and Financial Statements.
5 Finance costs
|Negative interest on cash balances||9||16|
|Bank overdraft arrangement fee||6||-|
|Bank overdraft interest||36||-|
In February 2016, the Company entered into a euro 30,000,000 bank overdraft credit facility agreement with The Northern Trust Company for the purpose of pursuing its investment objective. As at 30 September 2016, euro 11,809,000 equivalent to £10,216,000 had been drawn down under the facility. The facility is uncommitted.
7 Tax on ordinary activities
|a) Analysis of charge for the year||2016||2015|
|UK corporation tax||-||-||-||-||-||-|
|Overseas tax suffered||523||-||523||573||-||573|
|Total tax charge for the year||523||-||523||573||-||573|
The Company has no corporation tax liability for the year ended 30 September 2016 (2015: nil).
b) The standard rate of corporation tax in the UK (“corporation tax rate”) was 20% in the year to 31 March 2016 and is 20% in the year to 31 March 2017. Accordingly, the Company’s profits for the year ended 30 September 2016 are taxed at an effective rate of 20% (2015: 20.5%). The corporation tax rate is expected to reduce to 19% for the year beginning 1 April 2017 and, as a consequence, the effective rate of corporation tax for the Company for the year ending 30 September 2017 would be 19.5%.
The taxation charge for the Company for the year ended 30 September 2016 is lower (2015: lower) than the effective rate of 20% (2015: 20.5%). The differences are explained below:
|Net return before taxation||8,526||37,261||45,787||7,281||(24,888)||(17,607)|
|Theoretical tax at UK corporation tax rate of 20% (2015: 20.5%)||1,705||7,452||9,157||1,493||(5,102)||(3,609)|
|- Foreign dividends that are not taxable||(2,073)||-||(2,073)||(1,895)||-||(1,895)|
|- Non-taxable investment (gains)/losses||-||(7,452)||(7,452)||-||5,102||5,102|
|- Disallowable expenses||1||-||1||1||-||1|
|- Unrelieved management expenses||368||-||368||401||-||401|
|- Overseas tax suffered||523||-||523||573||-||573|
|- Accrued income taxable on receipt||(1)||-||(1)||-||-||-|
c) Factors that may affect future tax charges
At 30 September 2016, the Company had unrelieved management expenses of £8,152,000, (30 September 2015: £6,312,000) that are available to offset future taxable revenue. A deferred tax asset of £1,630,000 (2015: £1,262,000) has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.
Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an Investment Trust company.
d) Contingent assets
The Company is currently pursuing a number of potential reclaims of tax. The first relates to Franked Investment Group (FII GLO) computational based claims, filed on the basis that the tax treatment of dividends received from EU-resident companies is contrary to Article 43 (freedom of establishment) and/or Article 56 (free movement of capital and payments) of the European Community Treaty. The second relates to a reclaim of VAT charged on investment management fees: Commissioners for Her Majesty's Revenue and Customs (Appellant) v Investment Trust Companies (In Liquidation) and others (Respondents). The third relates to retrospective reclaims for overseas withholding tax suffered above treaty rates. In relation to the last of these, a reclaim was received subsequent to the year end as detailed in note 21 of these Financial Statements below. Potential tax reclaims which remain outstanding are treated as contingent assets. Contingent assets have not been recognised in these Financial Statements as in all instances at the balance sheet date the amounts receivable were not certain.
Declared and paid
|Final dividend for the year ended 30 September 2015 of 14.0p||31 January 2016||5,889||-|
|Special dividend for the year ended 30 September 2015 of 2.0p||31 January 2016||842||-|
|Final dividend for the year ended 30 September 2014 of 14.0p||31 January 2015||-||5,889|
|Special dividend for the year ended 30 September 2014 of 1.0p||31 January 2015||-||421|
The Directors recommend a final dividend in respect of the year ended 30 September 2016 of 16.0p and a special dividend of 6.0p payable on 31 January 2017 to all shareholders on the register at the close of business on 6 January 2017, a total of 22.0p (2015: 16.0p). The ex-dividend date will be 5 January 2017. The recommended final dividend and special dividend are subject to approval by shareholders at the Annual General Meeting to be held on 24 January 2017. At the date of this report, the total dividend payment will amount to £9,244,000 as detailed below.
|2016 final dividend of 16.0p (2015: 14.0p) per ordinary share*||6,723||5,889|
|2016 special dividend of 6.0p (2015: 2.0p) per ordinary share*||2,521||842|
* Based on 42,016,100 shares in issue at 29 November 2016.
9 Return per ordinary share
|Net revenue return after taxation||8,003||42,067,630||19.0||6,708||42,069,371||16.0|
|Net capital return after taxation||37,261||42,067,630||88.6||(24,888)||42,069,371||(59.2)|
* Weighted average number of ordinary shares in issue during the year.
10 Listed investments
|Analysis of investment portfolio movements|
|Opening book cost||331,813||307,072|
|Opening investment holding (losses)/gains||(23,585)||26,624|
|Movements in the year:|
|Purchases at cost||119,219||135,962|
|Sales – proceeds||(104,122)||(137,554)|
|– realised gains on sales||22,725||26,333|
|Investment holding gains/(losses)||15,015||(50,209)|
|Closing book cost||369,635||331,813|
|Closing investment holding (losses)/gains||(8,570)||(23,585)|
|Analysis of capital gains and losses|
|Gains on sales||22,725||26,333|
|Investment holding gains/(losses)||15,015||(50,209)|
|Gains/(losses) on investments||37,740||(23,876)|
Fair value hierarchy
In accordance with FRS 102, the Company must disclose the fair value hierarchy that classifies 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.
|Level 1||Valued using quoted prices in active markets for identical assets|
|Level 2||Valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1|
|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 note 1 of these Financial Statements, above. All of the Company’s financial instruments fall into Level 1, being valued at quoted prices in active markets.
During the year ended 30 September 2016, the Company incurred transaction costs of £145,000 (2015: £173,000) and £102,000 (2015: £171,000) on purchases and sales of investments respectively. These amounts are included in gains/(losses) on investments at fair value, as disclosed in the Income Statement above.
11 Significant holdings
The Company had no holdings of 3% or more of the share capital of any portfolio companies.
|Due from brokers||-||1,687|
|Prepayments and accrued income||252||149|
|Due to brokers||1,542||6,874|
|Other creditors and accruals||157||147|
|Management fee accrued||134||141|
14 Called-up share capital
|Allotted, called-up and fully paid:|
|Cancelled shares of 25p||(4)||-|
|42,053,550 (2015: 42,069,371) ordinary shares of 25p each||10,513||10,517|
During the year ended 30 September 2016, 15,821 ordinary shares were purchased and cancelled at a total cost of £113,000 (2015: no ordinary shares were issued or purchased and cancelled).
Duration of the Company
The Company neither has a termination date nor the requirement for any periodic continuation votes.
15 Net asset value per ordinary share
|Net asset value per ordinary share||833.84||742.20|
The net asset value per ordinary share is based on net assets of £350,659,000 (2015: £312,239,000) and on 42,053,550 (2015: 42,069,371) ordinary shares, being the number of ordinary shares in issue at the year end.
16 Analysis of financial assets and liabilities
Interest rate and currency profile
The interest rate and currency profile of the Company’s financial assets and liabilities were:
|Cash at bank and |
|New Zealand dollar||8||-||8||6||-||6|
|New Zealand dollar||(1)||-||(1)||-||-||-|
|Foreign exchange rates|
17 Risk analysis
The Company is an investment company, whose shares are traded on the London Stock Exchange and the New Zealand Stock Exchange. It conducts its affairs so as to qualify in the UK as an investment trust under the provisions of Sections 1158 and 1159 of the CTA. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.
As an investment trust, the Company invests in equities and makes other investments so as to achieve its investment objective of long-term capital growth through a diversified portfolio of Continental European securities. In pursuing its investment objective, the Company is exposed to risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. The Board, together with the AIFM, is responsible for the Company’s risk management, as set out above in the Strategic Report.
The principal risks the Company faces are:
- Investment and strategy risk
- Discount volatility risk
- Market risk (comprising: interest rate risk, currency risk and price risk)
- Liquidity risk
- Credit risk
- Gearing risk
The AIFM monitors the risks affecting the Company on an ongoing basis within the policies and guidelines determined by the Board. The Directors receive financial information, which is used to identify and monitor risk, quarterly. The Company may enter into derivative contracts to manage risk but has not done so to date. A description of the principal risks the Company faces is detailed below and in the Strategic Report above.
Investment and strategy risk
There can be no guarantee that the objective of the Company will be achieved due to poor stock selection or as a result of being geared in a falling market.
The Investment Manager meets regularly with the Board to discuss the portfolio performance and strategy. The Board receives regular reports from the Investment Manager detailing all portfolio transactions and any other significant changes in the market or stock outlooks. Details of the investment policy are given in the Strategic Report above.
Discount volatility risk
The Board recognises that it is in the long-term interests of shareholders to reduce discount volatility and believes that the prime driver of discounts over the longer term is investment performance. The Company is permitted to employ gearing, a process whereby funds are borrowed principally for the purpose of purchasing securities, should the Board consider that it is appropriate to do so. The use of gearing can magnify discount volatility.
The Board actively monitors the discount at which the Company’s shares trade but it does not intend to issue a precise discount target at which shares will be bought back as it believes that the announcement of specific targets is likely to hinder rather than help the successful execution of a buy back policy. Equally, the Company will issue shares in order to meet demand as it arises.
The Board’s commitment to allot or repurchase ordinary shares is subject to the Directors being satisfied that any offer to allot or to purchase shares is in the best interests of shareholders of the Company as a whole.
During the year ended 30 September 2016, 15,821 ordinary shares were purchased and cancelled at a total cost of £113,000 (2015: no ordinary shares were issued or purchased and cancelled). Subsequent to the year ended 30 September 2016 and up to 29 November 2016, the date of this report, 37,450 shares were bought back for cancellation at a total cost of £282,000.
Interest rate risk
The Company’s assets and liabilities, excluding short-term debtors and creditors, may comprise financial instruments which include investments in fixed interest securities.
Details of the Company’s interest rate exposure as at 30 September 2016 are disclosed in note 16 of these Financial Statements.
The majority of the Company’s assets were non-interest bearing during the year ended and as at 30 September 2016. Some of the Company's cash at bank and short-term deposits were subject to a negative interest charge during the year ended and as at 30 September 2016. There was exposure to interest bearing liabilities during the year ended and as at 30 September 2016 through the bank overdraft credit facility agreement.
If interest rates had reduced by 0.25% (2015: 0.25%) from those obtained as at 30 September 2016, it would have the effect, with all other variables held constant, of increasing the net revenue return before taxation and therefore increasing net assets on an annualised basis by £26,000 (2015: reducing the net revenue return before taxation by £21,000). If there had been an increase in interest rates of 0.25% (2015: 0.25%), there would have been an equal and opposite effect in the net revenue return before taxation. The calculations are based on cash at bank, short-term deposits and bank overdrafts as at 30 September 2016 and these may not be representative of the year as a whole. This level of change is considered to be reasonable based on observation of current market conditions.
The base currency of the Company is sterling. The international nature of the Company’s investment activities gives rise to a currency risk which is inherent in the performance of its overseas investments. The Company’s overseas income is also subject to currency fluctuations.
It is not the Company’s policy to hedge this risk on a continuing basis.
Details of the Company’s foreign currency risk exposure as at 30 September 2016 are disclosed in note 16 of these Financial Statements.
If sterling had strengthened by 10% against all other currencies on 30 September 2016, with all other variables held constant, it would have had the effect of reducing the net capital return before taxation by £35,085,000 (2015: £31,243,000) and the net revenue return before taxation by £1,055,000 (2015: £952,000) and therefore would have reduced net assets by £36,140,000 (2015: £32,195,000). If sterling had weakened by 10% against all other currencies, there would have been an equal and opposite effect on both the net capital return and net revenue return before taxation. This level of change is considered to be reasonable based on observation of current market conditions.
The Company is exposed to market risk due to fluctuations in the market prices of its investments. Market 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 Investment Manager monitors the prices of financial instruments held by the Company on an ongoing basis.
The Investment Manager actively monitors market and economic data and reports to the Board, which considers investment policy on a regular basis. The net asset value per share of the Company is issued daily to the London Stock Exchange and the New Zealand Stock Exchange and is also available on the Company’s website at www.theeuropeaninvestmenttrust.com and on the website of Edinburgh Partners at www.edinburghpartners.com.
Fixed asset investments are valued at their fair value. Details of the Company’s investment portfolio as at 30 September 2016 are disclosed above. In addition, an analysis of the investment portfolio by sector and geographical distribution is detailed above.
The maximum exposure to price risk at 30 September 2016 is the fair value of investments of £361,065,000 (2015: £308,228,000).
If the investment portfolio valuation fell by 20% from the amount detailed in the Financial Statements as at 30 September 2016, it would have the effect, with all other variables held constant, of reducing the net capital return before taxation and therefore reducing net assets by £72,213,000 (2015: £61,646,000). An increase of 20% in the investment portfolio valuation would have an equal and opposite effect on the net capital return before taxation. The calculations are based on the Company’s price risk at 30 September 2016 and may not be representative of the year as a whole. This level of change is considered to be reasonable based on observation of current market conditions.
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s policy with regard to liquidity is to ensure continuity of funding. Short-term flexibility is achieved through cash management and increased borrowing, including the use of overdraft facilities.
Liquidity risk is not considered significant as the Company’s assets comprise of readily realisable securities which are industrially and geographically diverse and which can be sold freely to meet funding requirements if necessary. Securities listed on a recognised stock exchange have been valued at bid prices and exchange rates ruling at the close of business on 30 September 2016. In certain circumstances, the market prices at which investments are valued may not represent the realisable value of those investments, taking into account both the size of the Company’s holding and the frequency with which such investments are traded. The Company does not normally invest in derivative products. The Investment Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.
Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.
The carrying amounts of financial assets best represent the maximum credit risk exposure at the Balance Sheet date. There are no financial assets which are either past due or impaired.
The Company’s listed investments are held on its behalf by The Northern Trust Company acting as the Company’s custodian. Bankruptcy or insolvency of the custodian may cause the Company’s rights with respect to securities held by the custodian to be delayed. The Board monitors the Company’s risk by reviewing the custodian’s internal controls reports.
Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company’s custodian ensures that the counterparty to any transaction entered into by the Company has delivered in its obligations before any transfer of cash or securities away from the Company is completed.
Cash is only held at banks that have been identified by the Board as reputable and of high credit quality. As at 30 September 2016, The Northern Trust Company London Branch had a long-term rating from Standard and Poor’s of AA-.
The maximum exposure to credit risk as at 30 September 2016 was £362,708,000 (2015: £319,401,000). The calculation is based on the Company’s credit risk exposure as at 30 September 2016 and this may not be representative of the year as a whole.
The aim of gearing is to enhance long-term returns to shareholders by investing borrowed funds in equities and other assets. The Company is permitted to employ gearing should the Board consider it appropriate to do so. The Board’s policy is that the level of gearing should not exceed 20% in normal market conditions. The use of gearing can cause both gains and losses in the asset value of the Company to be magnified.
As detailed in note 6, during the year ended and as at 30 September 2016, the Company had utilised a borrowing facility.
The Board undertakes an annual assessment and review of all the risks stated in this note 17 and in the Strategic Report together with a review of any new risks which may have arisen during the year. These risks are formalised within the Company’s risk assessment matrix.
18 Capital management policies
The objective of the Company is to achieve long-term capital growth through a diversified portfolio of Continental European securities. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company’s ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to: issue and buy back share capital within limits set by the shareholders in general meeting; borrow monies in the short and long term; and pay dividends to shareholders out of current year revenue earnings as well as out of brought-forward revenue reserves.
The Company is subject to externally imposed capital requirements, including the requirement as a public company to have a minimum share capital of £50,000, which have been met throughout the year.
Any changes to the ordinary share capital are set out in note 14 of these Financial Statements. Dividend payments are set out in note 8 of these Financial Statements.
The Company’s capital comprises:
|Called-up share capital||10,513||10,517|
|Share premium account||123,749||123,749|
|Capital redemption reserve||8,298||8,294|
|Total shareholders’ funds||350,659||312,239|
The capital reserve consists of realised capital reserves of £204,414,000 and unrealised capital losses of £8,576,000 (2015: realised capital reserves of £182,277,000 and unrealised capital losses of £23,587,000). The unrealised capital losses consist of unrealised investment holding losses of £8,570,000 (2015: losses of £23,585,000) and unrealised foreign exchange losses of £6,000 (2015: losses of £2,000).
The Company’s objectives for managing capital are the same as the previous year and have been complied with throughout the year.
19 Transactions with the AIFM and the Investment Manager
Information with respect to transactions with the AIFM and the Investment Manager is detailed in note 3 of these Financial Statements and in the Strategic Report above.
20 Related parties
The Directors’ fees for the year are detailed in the Directors’ Remuneration Report in the full Annual Report and Financial Statements. Under the AIC SORP, an investment manager is not considered to be a related party of the Company.
21 Post balance sheet events
Subsequent to the year end, on 14 October 2016, the Company received euro 1,479,000, including interest, equivalent to £1,334,000, in relation to a successful claim for the receipt of French withholding tax suffered during the calendar years 2009 to 2012, which was not anticipated at the year end.
As disclosed in note 17 of these Financial Statements above, subsequent to the year end of 30 September 2016 and up to the date of this report, 37,450 shares were bought back for cancellation at a cost of £282,000.
Annual General Meeting
The Company’s forty-fourth Annual General Meeting will be held at 11.00am on Tuesday, 24 January 2017 at Brewers’ Hall, Aldermanbury Square, London EC2V 7HR.
National Storage Mechanism
A copy of the Annual Report and Financial Statements will be submitted shortly to the National Storage Mechanism (“NSM”) and will be available for inspection at the NSM, which is situated at www.morningstar.co.uk/uk/NSM.
A copy of the Annual Report and Financial Statements and Notice of Annual General Meeting will be delivered to shareholders shortly and can also be found on the Company’s website at www.theeuropeaninvestmenttrust.com and on the website of Edinburgh Partners at www.edinburghpartners.com.
Kenneth J Greig
Edinburgh Partners AIFM Limited
Telephone: 0131 270 3800
The Company’s registered office address is:
51 New North Road
29 November 2016
Neither the contents of the Company’s website and the Edinburgh Partners’ website nor the contents of any website accessible from hyperlinks on this announcement (or any other website) is incorporated into, or forms part of this announcement.