European Smaller Companies

Legal Entity Identifier: 213800N1B1HCQG2W4V90

TR EUROPEAN GROWTH TRUST PLC

Financial results for the year ended 30 June 2021

This announcement contains regulated information

Investment Objective

The Company seeks capital growth by investing in smaller and medium sized companies which are quoted, domiciled, listed or have operations in Europe (ex UK).

Highlights

·      Net asset value total return¹ per ordinary share of 63.5% compared to a total return from the benchmark² of 36.5%

·      Share price total return³ per ordinary share of 79.5%

·      Total dividend⁴ of 25.00p for the year, an increase of 13.6%

Chairman's Statement

Performance

Our Company has had a good year. The NAV total return per ordinary share was 63.5%, an outperformance against the benchmark of 27.0%, with a share price total return per ordinary share of 79.5%.

Our Fund Manager's long-held approach of finding high quality and growing businesses in which to invest, but also being valuation aware, was a key driver of performance over the year. The consistency of this approach throughout the market volatility that was caused by the Covid-19 pandemic, laid sound foundations for excellent performance through the recovery.

The revenue generated by the portfolio rose from £9.1m for the year ended 30 June 2020 to £13.5m for the year ended 30 June 2021, despite the European Central Bank continuing to restrict dividend payments from financial services companies. This restriction was lifted in October 2020, but investee companies must continue to seek consent from their respective central banks prior to making dividend payments.

Dividend

Following this performance, the Board is proposing a final dividend of 16.80p to shareholders at the annual general meeting later this year. Together with the interim dividend of 8.20p this brings the total dividend for the year to 25.00p, being an increase of 13.6% on the prior year total dividend.

If approved, the dividend will be paid on 3 December 2021, to shareholders on the register on 22 October 2021.

Strategic review

The Board has devoted considerable time this year to carrying out a strategic review of the Company's investment objective, operations and positioning in the market. Without any doubt, the review concluded that the investment objective and policy continued to meet investors' demands and the Fund Manager's approach to investing was well suited to the objective and the long-term nature of the Company.

However, the review did highlight that more could be done to improve the Company's positioning in relation to the retail investor market. To that end, the Board has decided to make a number of changes which we gauge will assist our marketing teams in bringing the Company's investment proposition to the attention of this growing section of the market. The first of these changes is to rename the Company The European Smaller Companies Trust PLC. The purpose of doing so is to make the Company's investment proposition immediately clear to potential investors. The second change, is to implement an 8:1 share split which will improve the liquidity of the Company's shares and enhance the ability of investors to make more efficient regular monthly investments on share dealing platforms. The third change, reduces the management fee from 0.6% of net assets up to £500m and 0.5% thereafter, to 0.55% of net assets up to £800m and 0.45% thereafter.

With this combination of changes, we aim to increase demand for the Company's shares which will, in turn, narrow the discount achieving a better alignment of the share price and NAV, and therefore be of benefit to all shareholders.

As a matter of operational efficiency, we will also replace the benchmark, currently the Euromoney Smaller European Companies (ex UK) Index with the MSCI Europe ex UK Small Cap Index. Our risk assessment of the two indices has indicated that the change is immaterial and the Fund Manager has confirmed it will have no impact on his investment approach. The change will, though, better align the Company with its peers and improve the quality of the data available to the fund management team on a day-to-day basis. This change will only become effective from 1 July 2022 and will not be retrospectively applied to any fee calculations.  The Company's Investment Policy will update in line with the change in benchmark from this date.

Succession planning

When I last provided an update to you on our succession planning, I explained that the Board had asked Andrew Martin Smith to remain as a director for a further year as the Covid-19 pandemic continued to wreak havoc on global economies. We wished to retain his knowledge and experience of the closed end sector as governments and companies navigated their way out of the crisis.

We took stock of the prevailing market conditions when we recently reviewed our succession planning and I can now report that Andrew will be retiring from the Board at the conclusion of the upcoming annual general meeting. I would like to thank Andrew sincerely for his guidance and wisdom. Throughout his time serving our Company, he has made a very significant contribution to important discussions on the Company's performance and the options available. His diligence and thoughtful challenge to the approach taken by the Fund Manager, and Janus Henderson Investors in their wider delivery of services to the Company, has been extremely valuable.

Looking further forward, I can also let you know that Alexander Mettenheimer has indicated his intention to retire from the Board at the annual general meeting due to be held in 2022. We will, of course, review these plans next year and report in more detail to you in due course.

Senior Independent Director

We were pleased to announce the appointment of Simona Heidempergher as the Company's senior independent director with effect from 26 July 2021.

She has a great wealth of asset management experience and is very familiar with the Company's portfolio. In addition, she brings, as do all of our European-based directors, insight into the prevailing sentiment in European markets.

Annual General Meeting

The Company's 31st Annual General Meeting is due to be held on Monday, 29 November 2021 and, Covid-19 restrictions permitting, we look forward to being able to report to our shareholders in person. The meeting will be held at the offices of our investment manager, Janus Henderson Investors, at 201 Bishopsgate, London, EC2M 3AE with proceedings commencing at 12.30 pm. As is our usual practice, voting will take place on a show of hands for those physically present at the meeting.

A copy of the Company's Notice of Meeting has been included with this annual report. We are proposing a number of additional resolutions for shareholder consideration this year which include the share split which I have already mentioned, and the adoption of new articles of association to facilitate the share split, as well as afford us the opportunity to bring them in line with current best practice.

For any shareholders unable to attend, we will be offering you the opportunity to join using the video conferencing software, Zoom. Due to technological restrictions, we are unable to offer voting to those attending via Zoom and therefore encourage all shareholders, particularly those who will not be present in person, to submit their votes by proxy ahead of the deadline to ensure their vote is taken into account.

Outlook

Equity markets and the Company more specifically have had an excellent year as economies bounced back from the darkest days of the Covid-19 pandemic. Our Fund Manager's investment approach - which emphasises the importance of valuation discipline in addition to seeking future growth - has been very beneficial, particularly when the vaccine roll out seemed to have delivered some semblance of normality. Over the summer, concern over Covid-19 variants and a belief that inflation is merely transitory, led to a fall in bond yields. This resulted in high multiple growth stocks providing market leadership again, leading to disappointing performance by the Company.

A global backdrop of increasing GDP and a pick-up in corporate earnings is supportive for European smaller companies. The Fund Manager and I would caution that, as growth inevitably slows post the Covid-19 recovery and the Central Bank liquidity fuelled re-rating wanes, it would be reasonable to expect more modest returns in the medium term.

With the backdrop outlined above and, we think, the heightened risk of inflation in the coming years, we believe the days of stocks trading on ever-higher valuation multiples, justified by no inflation and low bond yields, are coming to an end. Therefore, we remain supportive of our Fund Manager's valuation approach.

The fund management team believes that the growth opportunities offered in the European smaller company space - in areas such as energy transition, companies like Nexans and Friedrich Vorwerk - means that the asset class remains a very attractive investment area with the opportunity to uncover good investments in the years ahead.

Christopher Casey

Chairman

13 October 2021

FUND MANAGER'S REPORT

Introduction

The financial year ending 30 June 2021 was a period of strong performance for the Company, which generated a total return of 63.5% compared to the benchmark of 36.5%. During this time, a number of very effective vaccines to protect against Covid-19 were produced and, after some initial missteps, efficiently distributed throughout much of the developed world. This offered a pathway out of the pandemic and prompted considerable market optimism. Meanwhile, unprecedented global monetary and fiscal stimulus in response to the pandemic globally, raised concerns around inflation and rising interest rates for the first time since the global financial crisis of 2009. As a result, the market was subjected to a substantial rotation away from growth and into value stocks. Our strategy's strong valuation discipline proved to be an important protection during this period.

Over the period, we noted a change in sentiment towards Europe from an investment perspective. In the US, the election of President Biden incited drama as the result was contested by the outgoing Trump administration. Despite this, the change in regime seems to have ushered in a slightly calmer style of government and the former President's Twitter account no longer serves as a source of market volatility in Europe. The development of mRNA vaccines for Covid-19, highlighted ingenuity in the European technology sector. Important steps were taken to create a fiscal capacity for the European Union and a more coherent banking sector and significant heat was taken out of the soap opera that was the Brexit saga. All this combined to alter the widespread prejudice that Europe was a region that could be ignored by investors.

The more constructive attitude to Europe was combined with an enormous amount of capital market activity. With the huge number of initial public offerings ('IPOs') taking place over the course of the year, we were able to add some solid businesses to the portfolio as a result of the IPO wave. We saw an increase in mergers and acquisitions activity, with many companies being acquired by private equity. It is interesting to note that the companies being acquired by private equity are cash generating and the companies being sold are often high growth and cash consumptive.

The Portfolio

The strategy is to blend a mix of early stage growth stocks with sensibly priced high return structural growth stocks, undervalued cash generative mature names and self-help turnaround stocks. We care intensely about the price that we pay for the cash generated by a company, and while we do not manage a 'value fund', we are acutely valuation aware. Valuation discipline has not been in vogue for most of the last decade, but proved its worth in the last financial year. Our inclusion of early stage high growth names helped the Company in the previous year as many of those stocks found their growth to be turbocharged by Covid-19. This year, the inclusion of self-help turnaround stories and more cyclical value names benefited the performance of the portfolio.

Notable turnaround additions to the portfolio over the period include Swiss-listed specialist manufacturer of highly engineered aerospace parts, Montana Aerospace. The company listed in May 2021 to repair its balance sheet and finance acquisitive growth. It has a strong skillset in creating lightweight parts to improve the environmental impact of air travel and we believe it will benefit as global travel begins to re-open. We opened a position in French mail related conglomerate Quadient. The core of the business is a letter franking machine business that is in decline, but which offers customer relationships that have been leveraged into digital communication software and a parcel locker business. The company has been through a big transformation that the stock market has not yet fully appreciated and we hope for a substantial rerating in due course.

Additions to the early stage growth names include German listed electronic systems and solutions designer, Katek. The company operates with blue chip customers; one example is designing a mobile charging solution for the electric Porsche Taycan. Another early stage German business is Apontis Pharma, whose business is to combine multiple off-patent pharmaceuticals to create 'single pills' which have far superior compliance outcomes from patients who require multiple medicines.

In the sensibly priced high return structural growth area, we added names such as Irish-listed Uniphar, a provider of pharmaceutical and medtech services. We invested in German energy infrastructure engineer, Friedrich Vorwerk, a company that is at the forefront of the green energy transition. We added mature businesses such as German communication equipment manufacturer Adva Optical Networking, and Swedish-listed aluminium manufacturer Granges, which has exciting exposures to structural growth trends such as electric vehicles and heating, ventilation and air conditioning.

Performance attribution

There were dramatic price moves in some stocks over the course of the financial year ending June 2021, and the Company benefited from owning a handful of stocks that exhibited substantial price increases in that time. German online retailer of furniture and decorative items, Westwing, increased by 535.7% over the course of the year, contributing a helpful sum to performance. Similarly, French commerce and marketing technology company Criteo increased 297.5% over the course of the year as the extremely cheap valuation unwound with the advent of a new CEO and the urgent need for businesses to get online during the pandemic. Dutch bank and wealth manager Van Lanschot increased 66.0% in the period.

Detractors from performance included German pharmaceutical distributor, Medios, which struggled to obtain sufficient drug supply due to the pandemic. We felt that valuation was stretched and decided to exit the position. Norwegian electricity distributor, Fjordkraft, suffered as rising spot electricity prices squeezed the profitability of their semi-fixed price electricity contracts. Finally, Norwegian harvester and producer of krill oil, Aker Biomarine, delivered lacklustre performance due to a poor krill harvest and weak sales of oil in South Korea.

Geographical and sector distribution

The investment process is fundamentally one of bottom-up stock picking rather than allocating capital to specific sectors or geographies, although we carefully monitor the overall structure of the portfolio to avoid risky concentrations. We do not use the benchmark as a guide to structure and are content to run the portfolio with substantial divergence from the benchmark.

At a geographical level, the Company is substantially overweight to Germany where we continue to find a good mix of sensibly valued companies and strong growth prospects. In Germany we have added names such as online bicycle and accessories retailer, Bike24, and windfarm developer EnergieKontor. Other overweight countries include France, the Netherlands and Ireland. We have added global financial advisory specialist, Rothschild & Co as well as omnichannel electronics retailer FNAC Darty in France. Meanwhile, the Company is underweight in Switzerland, Austria and Sweden where we perceive the markets to be populated with relatively expensive shares.

At a sector level we are overweight in the industrials, financials and consumer goods sectors, and underweight in the real estate and health care sectors. In the industrials space, we have added German supplier of laser-based processing tools LPKF Laser & Electronics, as we believe the company's technology in thin film solar modules will increase in uptake. In financials we have added Irish bank, AIB, where we believe a combination of cost cutting plans and a far more consolidated market will benefit the company. Finally, we added Danish housebuilder, HusCompagniet, within the consumer goods sector.

Other purchases

We added Swedish listed Media and Games Invest that publishes video games and provides marketing services to the wider industry. We see both legs of the business having strong synergy benefits from consolidating their respective areas of focus. We added Grenergy Renovables, a Spanish listed renewable energy developer that operates in Western Europe and South America. The energy transition is driving a huge demand for renewable energy, which presents a structural growth tailwind for this company.

Other disposals

We exited French semiconductor material producer SOITEC having originally invested as a turnaround idea. The company makes silicon-on-insulator, a very power-efficient semiconductor material that is included in a range of 5G applications. The shares had seen a dramatic rerating, but we had concerns that the company may need to invest substantial capital expenditure and that the increasing capitalised development cost was flattening profitability.

We exited our position in Swiss-listed online pharmacy Zur Rose, whose shares had performed very strongly after the pandemic boosted online business models, before becoming quite fully valued. We had reservations that the balance sheet looked stretched given the business is loss-making and that the history of substantial mergers and acquisitions might create some digestion issues. We exited our holding in German manufacturer of patent free pharmaceuticals and medical devices, Dermapharm, which has been a very profitable investment for the Company. After the company became involved in manufacturing the BioNtech-Pfizer vaccine the shares attained an expensive multiple and we decided to take profit.

Currency

The Company is denominated in Sterling, while investing in largely Euro-denominated assets. We do not hedge this currency exposure.

Outlook

It has become apparent that Covid-19 is unlikely to be entirely eradicated and that society will need to cope with yet another endemic virus forevermore. The advent of multiple vaccines with such high levels of efficacy is a tribute to European science and technology. This offers a route towards something that will seem a lot like normality. The advent of the incredibly transmissible Delta variant seems to suggest that those who don't get vaccinated will acquire immunity through infection. This may well cause problems in the final few months of 2021 as health care systems in the US and some European countries may be stretched. The reappearance of Covid-19 in China may cause further disruption with new lockdowns.

We believe that the policy environment in the US and Europe remains constructive. Monetary policy is relatively loose and fiscal policy, especially in the US, is expansionary. There are notes of caution to be had from the Chinese clamp down on technology companies and efforts to suppress inflation given European smaller companies are largely driven by global growth.

Political leadership in Europe has changed with the retirement of Angela Merkel. A French Presidential election will no doubt be presented as the usual drama in certain parts of the media while cultural tensions between the European Commission and Eastern states such as Poland and Hungary will likely persist. However, the direction of travel on many of the structural issues within the European Union and the Eurozone are moving in the right direction, specifically around fiscal powers and banking union.

Europe is one of the principal drivers of the environmental agenda and we are fortunate in our area of investment focus to be naturally bestowed with companies with strong environmental, social and governance ('ESG') characteristics. However, smaller companies are often less focused on presenting what they do in these areas, and more focused on the operations of their business. This leaves our market laden with hidden ESG. We have considerable exposure to companies that can easily benefit from the premium attached to ESG companies once they improve the presentation of their activities. The energy transition is going to be a big factor in the investment world for some time to come, with a shift away from fossil fuels and the internal combustion engine. Significant capital expenditure and research and development will be required and disruptive smaller companies are well placed to take advantage of this shift.

Over the summer the consensual view was that the inflation in the global system was transitory. This led to falling bond yields and a period of disappointing performance for the Company, as high multiple growth stocks outperformed. However, we remain of the view that the prospect of inflation is not adequately reflected in market prices. The rising oil price and the recent surge in the gas price may be a harbinger of this.  The expansionary policy environment, bottlenecks in global supply chains and the constraints imposed by Covid-19 are creating inflationary pressures that may be with us longer than many assume. Shortages in the shipping market are coupled with uncertainty as to what the environmental fuel standards mean for investment decisions. Freight costs are unlikely to reduce much in such an environment. Near-shoring in Europe and the US appears to be an increasing theme as a result. All of this abates some of the disinflationary pressure we have seen in recent decades.

After the strong economic recovery following the nadir of the Covid-19 crisis, it is hard to argue that the markets look cheap. There is a very noticeable bifurcation of the market into a subset of incredibly expensive growth stocks and a long tail of more reasonably priced companies. As managers, we have been trying to recycle capital from the expensive into the attractively priced, aiming to find the next stock that will be perceived as a market darling. While the market in general is skewed by the tail of expensive stocks, we feel that the multiples paid on the broader portfolio remain attractive. There continues to be a large number of neglected opportunities for us to pursue and we believe we can continue to deliver value for our shareholders.

Ollie Beckett, Rory Stokes and Julia Scheufler

13 October 2021

MANAGING risks

Investing, by its nature, carries inherent risk. The Board, with the assistance of the Manager, carries out a robust assessment of the principal and emerging risks and uncertainties facing the Company which could threaten the business model and future performance, solvency and liquidity of the portfolio. A matrix of these risks, along with the steps taken to mitigate them, is maintained and is kept under regular review. The mitigating measures include a schedule of investment limits and restrictions within which the Manager must operate.

Our assessment includes consideration of the possibility of severe market disruption, which this year, focused on the ongoing impact of the Covid-19 pandemic and Europe's ability to continue economic activity. The principal risks which have been identified and the steps we have taken to mitigate these are set out in the below. We do not consider these risks to have changed during the period.

·      Investment strategy and objective

The investment objective or policy is not appropriate in the prevailing market or sought by investors, leading to a wide discount and hostile shareholders.

Poor investment performance over an extended period of time, driven by either external (political, financial shock, pandemic) or internal factors (poor stock selection), leading to shareholders voting to wind up the Company.

The Manager periodically reviews the Investment Objective and Policy in line with best practice and taking account of investor appetites. The Board receives regular updates on professional and retail investor activity from the Manager, and reports from the corporate broker, to inform themselves of investor sentiment and how the Company is perceived in the market.

The Board reviews the Key Performance Indicators ('KPIs') at each meeting and the Fund Manager maintains a diversified portfolio with a view to spreading risk.

·      Operational

Failure of, disruption to or inadequate service levels provided by principal third-party service providers leading to a loss of shareholder value or reputational damage.

The Board engages reputable third-party service providers and formally evaluates their performance, and terms of appointment, at least annually.

The Audit Committee assesses the effectiveness of internal controls in place at the Company's key third-party services providers through review of their ISAE 3402 reports, quarterly internal control reports from the Manager and monthly reporting on compliance with the investment limits and restrictions established by the Board.

·      Legal and regulatory

Loss of investment trust status, breach of the Companies Act 2006, Listing Rules, Prospectus and/or Disclosure Guidance and Transparency Rules or the Alternative Fund Managers Directive and/or legal action brought against the Company and/or directors and/or the investment manager leading to decrease in shareholder value and reputational damage.

The Board engages reputable third-party service providers and formally evaluates their performance, and terms of appointment, at least annually.

The Audit Committee assesses the effectiveness of internal controls in place at the Company's key third-party service providers through review of their ISAE 3402 reports and, in respect of the Manager's investment trust operations, reporting from the Manager's internal audit function. The Manager's Compliance function has reporting obligations under AIFMD, with any non-compliance being captured in the Manager's quarterly internal control reporting to the Board.

·      Financial

Market, liquidity and/or credit risk, inappropriate valuation of assets or poor capital management leading to a loss of shareholder value.

The Board determines the investment parameters and monitors compliance with these at each meeting. The directors review the portfolio liquidity at each meeting and periodically consider the appropriateness of hedging the portfolio against currency risk.

The Board reviews the portfolio valuation at each meeting.

Investment transactions are carried out by a large number of approved brokers whose credit standard is periodically reviewed and limits are set on the amount that may be due from any one broker, cash is only held with the depositary/custodian or reputable banks.

The Board monitors the broad structure of the Company's capital including the need to buy back or allot ordinary shares and the extent to which revenue in excess of that which is required to be distributed, should be retained.

Assessing our viability

In keeping with provisions of the Code of Corporate Governance issued by the Association of Investment Companies (the 'AIC Code'), the Board has assessed the prospects of the Company over a period longer than the 12 months required by the going concern provision.

We consider the Company's viability over a three-year period as we believe this is a reasonable timeframe reflecting the longer-term investment horizion for the portfolio, but acknowledges the inherent shorter term uncertainties in equity markets.

As part of the assessment, we have considered the Company's financial position, as well as its ability to liquidate the portfolio and meet expenses as they fall due. The following aspects formed part of our assessment:

·      the purpose of the Company continued to be focussed on long-term returns;

·      a robust assessment of the principal risks and uncertainties facing the Company had been undertaken and no materially adverse issues had been identified;

·      the nature of the portfolio remained diverse and comprised a wide range of stocks which are traded on major international exchanges meaning that, in normal market conditions, three quarters of the portfolio could be liquidated in ten days;

·      the closed end nature of the Company which does not need to account for redemptions;

·      the level of the Company's revenue reserves and banking facility;

·      the expenses incurred by the Company, which are predictable and modest in comparison with the assets and the fact that there are no capital commitments currently foreseen which would alter that position; and

·      the next continuation vote for the Company which will take place at the annual general meeting in 2022 and its performance against objectives leading up to this.

As a matter of routine business, shareholders have the opportunity to wind up the Company every three years. In the past, this resolution has readily been passed with the support of the majority of shareholders. The Board supports the continuation of the Company as it offers investors a unique exposure to small and medium sized European companies and has a reasonable expectation that similar resolutions will attract shareholder support in future. However, if such a resolution was not passed, the directors would follow the provisions in the Company's articles relating to the winding up of the assets.

Based on the results of the viability assessment, we have a reasonable expectation that the Company will be able to continue its operations and meet its expenses and liabilities as they fall due for our assessment period of three years. We will revisit this assessment annually and provide shareholders with an update on our view in the annual report.

Related party transactions

The Company's transactions with related parties in the year were with the directors and the Manager, Janus Henderson.

There have been no material transactions between the Company and its directors during the year. 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.

As a matter of operational efficiency, the Company will replace its current benchmark, the Euromoney Smaller European Companies (ex UK) Index with the MSCI Europe ex UK Small Cap Index.  The change will improve the quality of the benchmark data available to the fund management team on a day-to-day basis and aligns the benchmark with a number of the Company's peers.  The change will become effective from 1 July 2022, the start of the next financial year.  This change in the benchmark index will have an indirect impact on the Company's investment policy, which is managed by reference to the benchmark, and performance fees payable by the Company to the Manager, as such fees are determined based on performance relative to the benchmark.

The Company and the Manager have entered into an agreement to reflect the change in the benchmark in connection with the calculation of the performance fee with effect from 1 July 2022. The performance relative to the benchmark for years prior to 1 July 2022 for the purposes of the calculation of any performance fees (which is calculated on a three-year rolling basis), shall remain unchanged and will continue to be calculated relative to the Euromoney Smaller European (ex UK) Index.

The agreement is considered a smaller related party transaction for the purposes of Listing Rule 11.1.10R.

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 provision of marketing activities, there have been no material transactions 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 note 21 on page 70 of the annual report.

Directors' responsibility STATEMENTS

Each of the directors confirms that, to the best of his or her knowledge:

·      the financial statements prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the consolidation taken as a whole; and

·      the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Daniel Burgess

Director

13 October 2021