Henderson Opportunities Trust

HENDERSON INVESTMENT FUNDS LIMITED

HENDERSON OPPORTUNITIES TRUST PLC

LEGAL ENTITY INDENTIFIER (LEI):  2138005D884NPGHFQS77

5 February 2021

HENDERSON OPPORTUNITIES TRUST PLC

Annual Financial Report for the year ended 31 October 2020

This announcement contains regulated information

Investment Objective

The Company aims to achieve capital growth in excess of the FTSE All-Share Index from a portfolio of UK investments.

PERFORMANCE HIGHLIGHTS

Total Return Performance to 31 October 2020

1 Net Asset Value (NAV) per ordinary share total return (including dividends reinvested)

2 Share price total return (including dividends reinvested)

3 AIC UK All Companies

4 FTSE All-Share Index

5 Calculated based on the NAV per share and share price at year end

6 Ongoing charge excludes performance fee. Ongoing charge including performance fee is 0.88% (2019: 0.91%) as no performance fee was paid during the year

7 This represents three interim dividends of 6.5p each and a proposed final dividend of 7.5p which will be put to shareholders for approval at the Annual General Meeting on 11 March 2021.  See the Annual Report for more details

8 Based on the share price at the year end

A glossary of terms and Alternative Performance Measures can be found in the Annual Report

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

CHAIRMAN'S STATEMENT

Performance review

It has been a very difficult year for UK equities. The COVID-19 pandemic and the resultant lockdown caused a rapid fall in UK economic activity, and the impact on corporate profitability produced widespread cuts in dividend payments. In this meltdown the returns from the Company's investment portfolio held up relatively well, falling by 7.6% but beating the FTSE All-Share Index (the benchmark) by 11.0%. This outperformance has continued in the early months of the new financial year, with the Company's portfolio returning 33.6% against the benchmark's return of 16.1% up to the end of January 2021. The table below shows the short and longer term returns from the portfolio. It illustrates that in spite of shortterm volatility the portfolio approach of blending a mix of shares in companies of different sizes can produce worthwhile returns. The 10-year comparison shows marked outperformance of the benchmark index.

Income review

The revenue return was 12.8p, compared to 29.9p last year. The fall in investment income came about due to widespread dividend cuts in the UK market following COVID-19 and the subsequent policy response. The portfolio began the financial year with a forecast dividend yield of 2.8%, somewhat lower than the FTSE All-Share Index dividend yield of 4.6%. The market expects that investment income will be relatively swift to recover and your Board believes that historic income levels from the portfolio will be reached again in two to three years.

In February 2020, we announced that, from the beginning of the 2020 financial year, quarterly dividends would be paid to shareholders. Three quarterly dividends of 6.5p per ordinary share for the financial year ending 31 October 2020 have been paid to shareholders. A probable 2020 final dividend recommendation of 7.5p per ordinary share was previously indicated, and the Board is pleased to confirm, subject to shareholder approval, that this distribution will be paid on 26 March 2021, resulting in a full year dividend of 27.0p (2019: 26.0p). As a result of the shortfall in revenue for the year, 14.2p will be paid out of revenue reserves and your Board will be prepared to repeat this exercise in future years to support the level of dividend distributions until the Company's portfolio dividend income fully recovers.

Fees and expenses

The ongoing charges ratio for the year was 0.88%. There was no performance fee paid as the NAV, although better than the comparative benchmark figure, was down on the prior year.

Share buybacks and the discount level

During the year 2,813 shares were bought back at an average price of 953p. The discount at the time was over 15% and the purchases marginally enhanced the NAV. The shares are held in treasury and can therefore be sold back to the market if the Company begins to trade at a premium in the future. The Board's policy will be to review buyback opportunities regularly and, make purchases from time to time, as appropriate, if the resultant enhancement to NAV is deemed worthwhile. The Board believes that the discount will be eroded over time with continuing outperformance and an investment strategy that offers the prospect of sustainable growth. A continuation vote is held every three years and the next vote will be in March 2023.

Gearing

Gearing ended the year at 13.6% of net assets, modestly higher than the 12.7% at the beginning of the financial year. This rise in gearing was caused principally by the fall in the Company's NAV as the pandemic impacted market values. As the Fund Managers describe in their report, they were modest net sellers during the year. The near mid-teens gearing level of the Company reflects a high level of conviction by the Fund Managers that there are a number of attractive investment opportunities at reasonable valuations across the UK equity market.

The Board

Davina Curling was appointed to the Board with effect from 1 November 2019 and was elected by shareholders at the AGM in March 2020. Max King retired with effect from the conclusion of the AGM in March 2020.

As announced in December 2020, having served on the Board for nine years I will be retiring with effect from the conclusion of the AGM in March 2021. It has been a great privilege for me to serve firstly as a Director and latterly as Chairman of your Company, and a pleasure to work with conscientious and knowledgeable fellow Directors. I trust that the dedicated team at Janus Henderson who have successfully managed your investments and supported the Board through governance and regulatory challenges in recent years will maintain the same exceptional standards for my successor, Wendy Colquhoun. Wendy joined the Board in September 2018 and has brought to the Board the benefit of over 25 years' experience as a lawyer providing advice to investment trust boards on regulatory and transactional matters.

Chris Hills reached his nine year anniversary in June 2019.  As I am retiring this year and as there will then be a small number of Directors on the Board when I do so, it is expected that Chris will remain on the Board until the conclusion of the Annual General Meeting in March 2022 to allow for the recruitment of his replacement during the coming year.

AGM

The Company's AGM is scheduled to take place at 2.30pm on Thursday 11 March 2021.

Due to the ongoing restrictions on large gatherings, shareholders will be unable to attend the Annual General Meeting on 11 March 2021 in person and it will be held as a "closed meeting".

The Notice of Meeting and details of the resolutions to be proposed at the AGM are contained in the Notice of Meeting being sent to shareholders with the Annual Report. The statutory business of the AGM will be conducted on a poll, counting the Directors in the quorum, and the Chairman will hold the proxy votes. Shareholders are strongly encouraged to submit their proxy forms ahead of the proxy voting deadline of 2.30pm on 9 March 2021 to ensure their vote counts. Shareholders holding shares on share dealing platforms should contact their platform directly to vote their shares.

A presentation from our Fund Managers, James Henderson and Laura Foll, providing their review of the year and thoughts on the future will be available to view on our website at www.hendersonopportunitiestrust.com. If shareholders would like to submit any questions in advance of the AGM, they are welcome to send these to the Corporate Secretary at [email protected], answers to shareholder questions will be provided on our website shortly after the AGM has been held.

The Board commits to holding physical meetings in future when restrictions are not in place and these can be held safely; however in case of any further extraordinary crises such as the COVID-19 lockdown, the Company is putting a proposed amendment to the Company's articles of association to shareholders to enable a combination of virtual and physical shareholder meetings to be held in the future.

Outlook

The prospect of success with the vaccine roll out and a substantial resolution of Brexit tariff concerns provide the ingredients for a pick-up in economic activity in the second half of this year. Stock market prices are not correlated to economic activity and the managers need to be careful as some company valuations already anticipate the better times. Therefore, there will be some reduction in holdings that have performed well to allow the Company to take on new opportunities as they arise.

The approach of having a mix of companies with different attributes that are in a variety of phases of their corporate development can add real value. It is possible with this approach to catch the growth and take out some of the volatility of investing in young companies which can in turn provide a seedbed for future success.

Peter Jones

Chairman

5 February 2021

FUND MANAGERS' REPORT

Investment backdrop

COVID-19 has accelerated the pace of pre-existing structural changes in the UK economy. The move towards online retailing had shown substantial growth for a number of years but was given a further enormous boost by lockdown with consumers staying at home. Some traditional older businesses are fast adapting to the changed circumstances but many have seen very large falls in revenue without having much chance of offsetting it. They have pulled what levers they can and that usually means a real attack on their cost base, the result of which hits the supply chain hard. The government schemes have allowed many businesses to survive, but they are struggling and much weaker. As a result of the acceleration in trends that were already established, it is the new economy stocks that have found favour with investors. These are usually companies that have a technological lead and have relatively light capital requirements. It has been traditional businesses such as aviation that have been most materially impacted.

Our portfolio is a blend of very different businesses serving a diverse mix of end markets. This diversification has helped the relative performance of the portfolio but there has still been a negative return for the year. However, in aggregate the companies in the portfolio have adapted well to the challenging circumstances. This has meant we have remained fully committed to UK equities and we believe the action taken by the companies leaves them well placed for some sort of return to normality. The valuations for many have fallen to very cheap levels.

Portfolio review

The portfolio is divided into the seven classifications below. These classifications are not meant to be prescriptive and are, to a degree, subjective. The aim is to ensure that the portfolio remains diverse in its exposure, as the different classifications will perform differently depending on the economic backdrop.

Since the previous year end, the largest changes to the portfolio on a classification basis were a smaller exposure to the recovery area, a smaller exposure to large companies, and a higher exposure to early stage companies and growth small cap. In all cases this change has come about primarily as a result of passive movements in share prices rather than active allocation changes. For example, in early stage companies Ceres Power, Mirriad Advertising and Ilika were all among the best contributors to performance, and in growth small cap Blue Prism and LoopUp were also among the top ten contributors during the year.

The recovery area performed poorly, despite many shares held beginning the year trading at an already low valuation versus history. This area of the portfolio is most exposed to traditional business models which were among the most impacted by the pandemic. With a few exceptions, we have maintained the Company's holdings in this area, and in the case of International Consolidated Airlines, Rolls-Royce and Hammerson, participated in rights issues in order to fund companies through the current challenging end markets. There was one new recovery position established during the year in International Personal Finance, a sub-prime lender outside the UK that has a strong digital lending business.

Income

It was a very difficult year for UK dividends, resulting in earnings per share falling to 12.8p versus 29.9p in the prior year. Many companies in the portfolio suspended dividends during the spring in response to COVID-19. The most material loss of income came from the financials sector, where banks were mandated by the UK regulator to suspend their dividends, and some non-life insurers held (such as Direct Line Insurance) temporarily suspended their dividend as a result of an uncertain claims outlook. Since the summer there has been an encouraging trend of companies across a broad range of sectors reinstating their dividends. Examples include Mondi, XP Power, Keystone Law and Direct Line Insurance.

At the Company level, the dividend was grown modestly from 26.0p the previous financial year to 27.0p. The Company entered the financial year with a strong revenue reserve of £3.4m, which has been partially utilised to fund this year's dividend, ending the year at £1.9m (prior to the payment of the third interim and final dividend payment). As the Chairman describes in his statement, the dividend guidance that we originally described in last year's annual report was adhered to despite the loss of investment income. This is because we can see a bridge to investment income recovering to its historic trend on a two to three year time horizon.

Portfolio activity

During the year we were small net sellers, purchasing £13.3m in aggregate and selling £14.9m. As a result of the fall in net asset value during the year, gearing ended the year at 13.6%, modestly higher than at the beginning of the year when it was 12.7%. The gearing level continues to be determined not by our view of the macroeconomic backdrop, but by valuation opportunities across the UK equity market. The near mid-teens level of gearing currently deployed in the Company signals that we are finding a broad array of attractive opportunities.

During the year we fully sold out of eight holdings. Four of the eight sales were driven by takeover approaches and we go into more detail below. There were seven new purchases, and on the classifications basis (described in the 'portfolio review' section), these purchases were deliberately spread across early stage companies, large companies, recovery, natural resources and growth small cap. The portfolio finished the year with 87 holdings (not including those written down to zero).

Purchases

The largest five purchases during the year were:

Sales

The largest five sales during the year were:

There were four takeover approaches during the year, including SDL described above. Eland Oil & Gas, Aggregated Micro Power and Be Heard also received approaches and were subsequently sold.

Attribution

While it is encouraging to see the diversity of end markets among the top ten largest contributors to performance, were there to be a common theme, it would be that the majority of the companies are in structurally growing areas and often challenging traditional incumbents. Two of the top ten are, for example, in the alternative energy space; Ceres Power designs fuel cells and Ilika designs and manufactures solid state batteries.

A number of the earlier stage companies that performed well this year received external validation of their technology from larger companies. This took the form of either a commercial partnership (for example Ceres Power signed a manufacturing licensing agreement with Bosch) or the larger company becoming a customer (for example Surface Transforms, which makes high performance ceramic brakes, signed a contract with a large electric vehicle manufacturer). In other cases good performance was as a result of resilient sales growth despite the pandemic; Blue Prism, LoopUp, Boku and XP Power are all forecast to grow sales in 2020 (their results had not been published at the time of writing this report).

LoopUp, the second largest contributor to performance, was in the previous financial year the largest detractor from performance. They are a software-as-a-service conference call provider. While in the previous year they were impacted by lower than expected demand among UK professional services firms, in the current year the transition of a significant proportion of workers to working from home meant a material step change in their revenues, with sales growing over 40% in the first six months of the year.

(See chart in the Annual Report)

The common themes among the majority of the largest detractors from performance are civil aerospace, physical property and banks. In all cases the primary cause of weakness was the pandemic. Examining each in more detail:

The Board

We will miss Peter Jones' guidance as the Chairman of the Company. His calmness during the market volatility that occurred in the early stages of the pandemic helped the portfolio to be well placed for the subsequent recovery. We look forward to working with Wendy Colquhoun who will become the new Chairman after the AGM.

Outlook

Since the end of the financial year (to the end of January 2021) the portfolio has performed well, with the net asset value rising 33.6% compared to a rise in the FTSE All-Share of 16.1%. This performance has been driven predominantly by strength in the alternative energy area, with positions including AFC Energy, Ceres Power and Ilika performing well. COVID-19 has accelerated the desire of governments and the private sector to make tangible progress in targeting climate change and there is material investment going into the area. Some of the early stage companies held in the portfolio could be the market leaders in, for example, fuel cells in the future, while others may see their technologies outcompeted and become obsolete. The size of these end markets is large and therefore the 'prize' is big for companies that become market leaders, but we need to be aware of the risks involved and the difficulties of precisely valuing companies at an early stage of their lifecycle. Further volatility is to be expected on the route to full commercialisation. We have, therefore, continued to take some profits in the area. Elsewhere in the portfolio it is encouraging to see companies in more traditional industries such as housebuilding and building materials also performing well. We are continuing to find a number of attractive valuation opportunities in the UK across both new and existing holdings, and intend to remain fully invested with a modest (low to mid-teens) level of gearing.

James Henderson and Laura Foll

Fund Managers

5 February 2021

MANAGING OUR RISKS

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks and uncertainties facing the Company, including those that would threaten its business model, future performance, solvency, liquidity and reputation. The principal risks and uncertainties facing the Company relate to investing in the shares of companies that are listed in the United Kingdom, including small companies. Although the Company invests almost entirely in securities that are listed on recognised markets, share prices may move rapidly, whether upwards or downwards, and it may not be possible to realise an investment at the Manager's assessment of its value. Falls in the value of the Company's investments can be caused by unexpected external events. The companies in which investments are made may operate unsuccessfully, or fail entirely, such that shareholder value is lost. The Company is also exposed to the operational risk that one or more of its contractors or sub-contractors may not provide the required level of service.

The Board considers regularly the principal risks facing the Company in order to mitigate them as far as practicable. The Board monitors the Manager, its other service providers and the internal and external environments in which the Company operates to identify new and emerging risks. The Board's policy on risk management has not materially changed from last year, although the inherent likelihood of the occurrence of poor investment performance, failure or serious difficulties of one of the Company's third-party service providers, the loss of bank borrowing facilities and failure of the Manager to manage financial or administrative controls due to the increased possibility of cyberattacks or issues with bandwidth as many employees worked from home were increased due to the COVID-19 pandemic. The Board has received regular updates from the Fund Managers during the pandemic. These have enabled the Directors to monitor and manage risks related to the pandemic. COVID-19 will continue to affect the value of the Company's investments due to the disruption of supply chains and demand from products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has triggered a share fall in global stock markets and created uncertainty around future dividend income. The Board notes that the Fund Managers' investment process remains unchanged by the COVID-19 pandemic and they continue to focus on long-term company fundamentals and detailed analysis of current and future investments. It is the Board's view that demographic change, technological change, environmental sustainability and political change are emerging risks.

The Board has drawn up a risk map which identifies the substantial risks to which the Company is exposed. The Board has also put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy. These principal risks fall broadly under the following categories:

BORROWINGS

The Company has an unsecured loan facility in place which allows it to borrow as and when appropriate. £20m (2019: £20m) is available under the facility. Net gearing is limited by the Board to 25% of net assets. The maximum amount drawn down in the period under review was £14.1m (2019: £14.6m), with borrowing costs for the year totalling £131,000 (2019: £177,000). £14.1m (2019: £12.6m) of the facility was in use at the year end. Net gearing at 31 October 2020 was 13.6% (2019: 12.7%) of net asset value.

VIABILITY STATEMENT

The Company is normally a long-term investor; the Board believes it is appropriate to assess the Company's viability over a five year period in recognition of its long-term horizon and what the Board believes to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented in this Strategic Report.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, materialising in severe but plausible scenarios, and the effectiveness of any mitigating controls in place. The Directors took into account the liquidity of the portfolio and the borrowings in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's borrowing facilities and how a breach of any covenants could impact on the Company's net asset value and share price.

The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. In coming to this conclusion, the Board has considered the current COVID-19 pandemic and the impact of the end of the UK's transition phase of leaving the European Union. The Company's revenue stream has been severely impacted by widespread dividend cuts in the UK market as a result of the COVID-19 pandemic. The Board believes that income will recover to historic income levels within a two to three year period and the Company has sufficient distributable reserves to meet any dividend distributions until dividend income fully recovers. The Board does not believe that these factors will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding the short-term uncertainty they have caused in the markets.

Based on this assessment, the Board has 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 year period.

RELATED PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with its Directors and the Manager. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the Annual Report.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there have been no material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in the Notes of the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors, who are listed in the Annual Report, confirms that, to the best of his or her knowledge:

For and on behalf of the Board

Peter Jones

Chairman

5 February 2021

Twenty Largest Holdings at 31 October 2020

The stocks in the portfolio are a diverse mix of businesses operating in a wide range of end markets.

At 31 October 2020 these investments totalled £46,482,000 or 49.1% of the portfolio.

* Not in the top 20 largest holdings last year

¹ Quoted on the Alternative Investment Market ('AIM')

Portfolio by Sector

As a percentage of the investment portfolio excluding cash

Portfolio by Index

As a percentage of the investment portfolio excluding cash

1 Other also includes AIM investments outside the FTSE AIM Index and shares listed on the main market which are not included in the FTSE All-Share Index

Market capitalisation of the portfolio at 31 October 2020

A glossary of terms can be found in the Annual Report

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

AUDITED INCOME STATEMENT

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no recognised gains or losses other than those disclosed in the Income Statement.

AUDITED STATEMENT OF CHANGES IN EQUITY

AUDITED STATEMENT OF FINANCIAL POSITION

AUDITED STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

¹ Also includes special capital dividends of £110,000 (2019: £92,000)

For further information, please contact:

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.