Henderson EuroTrust

JANUS HENDERSON FUND MANAGEMENT UK LIMITED

HENDERSON EUROTRUST PLC

LEGAL ENTITY IDENTIFIER:  213800DAFFNXRBWOEF12

28 September 2023

HENDERSON EUROTRUST PLC

Annual Financial Results for the year ended 31 July 2023

This announcement contains regulated information

Investment objective

Henderson EuroTrust plc ("the Company") aims to achieve a superior total return from a portfolio of European (excluding the UK) investments where the quality of the business is deemed to be high or significantly improving.

Performance highlights

1 Net asset value ("NAV") per ordinary share total return (including dividends reinvested)

2 Share price total return (including dividends reinvested)

3 FTSE World Europe (ex UK) Index

4 Association of Investment Companies ("AIC") Europe Sector (based on cumulative fair net asset value returns)

5 Including the 0.8p interim dividend paid on 28 April 2023 and the 3.0p final dividend which will be put to shareholders for approval at the Annual General Meeting ("AGM") on 15 November 2023

6 Based on the share price at the year end

7 Excluding the nil value position in OW Bunker (2022: excluding OW Bunker)

8 Calculated using the mid-market closing price

9 Calculated using the methodology prescribed by the AIC

Sources: Morningstar Direct, Janus Henderson

CHAIRMAN'S STATEMENT

Summary:

·    Over the year, the share price and the net asset value were ahead of the benchmark index and ahead of the AIC peer group

·     Stock selection has been the driver of the modest outperformance, an encouraging outcome given that growth stocks on the whole have lagged the market

·      We have increased the board size to five and our new director will be appointed Senior Independent Director following the conclusion of the 2023 AGM

The financial year to 31 July 2023 has seen a significant recovery in the share price and net asset value after the disappointment of the previous financial year. I am pleased to report that, over the year, the share price and net asset value were moderately ahead of the benchmark index and materially ahead of the AIC peer group. In the latest financial year, "value" stocks in Europe outperformed "growth" stocks by over 9 percentage points but individual stock selection in quite a difficult environment was strong enough to result in modest overall outperformance.

In the year to 31 July 2023, net asset value total return was 16.7%. This compared with a total return of 16.1% for the benchmark index (FTSE World Europe (ex UK)) and 14.6% for the AIC peer group. The discount to net asset value narrowed during the year, from 15.2% to 13.5%, and as a result, the share price total return for the Company was 19.7%. The share price at 31 July 2023 was 139.5p, only slightly below the all-time high of 140.5p.

Dividend

We have proposed a final dividend of 3.0p, which brings the total dividend for the year ended 31 July 2023 to 3.8p. Subject to shareholder approval the dividend will be paid on 22 November 2023 to shareholders on the register as at 20 October 2023. The shares will be quoted ex-dividend on 19 October 2023. The Company's dividend approach is broadly to pay out the level of actual income received. In the Chairman's Statement of October 2020, I explained that the Board committed to pay out the majority of the (then significant) revenue reserve over three to four years. The proposed final dividend of 3.0p for the year ended 31 July 2023 means that commitment to shareholders will be fulfilled and, once the dividend has been paid in November 2023, the revenue reserve will effectively be zero.

The Board has also decided that, as only a very small part of the Company's revenue is received in the first half of the financial year (for example, 0.3p per share was received for the six months ended 31 January 2023), going forward the Company will pay a final dividend only, and no interim dividend. This is in line with the Company's commitment that, once the revenue reserve had been paid out, dividends would broadly reflect the level of income received.

Board changes

During the year we implemented a number of key recommendations following an external Board evaluation exercise undertaken in June 2022. First, we expanded the Board from four to five directors, to broaden the diversity of skills and experience. Stephen White, who is a former European investment manager and experienced investment trust director, joined the Board with effect from 1 December 2022 and will seek election from shareholders at the AGM in November 2023.

Second, we are appointing a Senior Independent Director with effect from the AGM in November 2023. Subject to his election by shareholders, Stephen White will assume this role, thereby providing shareholders with an alternative point of contact to raise any concerns should they not wish to discuss these with me or the Chairman of the Audit and Risk Committee.

In my statement last year, I indicated my intention to retire from the Board at the AGM this year. However, the search for my successor has taken longer than anticipated; the Directors have therefore asked me to stay on until its completion. Consequently, I have agreed that I will retire from the Board, at the latest, at the AGM in November 2024 and an update on the recruitment process will be included in our half year results' announcement in March 2024.

Annual General Meeting

Our meeting will be held on Wednesday 15 November 2023 at 2.30pm at Janus Henderson Investors' offices at 201 Bishopsgate, London EC2M 3AE. I hope as many shareholders as possible will be able to attend to take the opportunity to meet the Board and to hear a presentation from the Fund Manager. However, if you are unable to attend in person, you can watch the meeting live by visiting www.janushenderson.com/trustslive. Full details are set out in the Notice which has been sent to shareholders with this report and are also available online at www.hendersoneurotrust.com.

Outlook

We are heartened by the absolute and relative performance of the Company over the last year. We believe that attitudes towards investing in European shares are becoming more positive; Europe is home to many strong global businesses on attractive valuations and also demonstrates an above average focus on sustainability. Inevitably, there will be headwinds at times but we remain committed to seeking out growth companies which have the ability to achieve consistent growth in the long run.  There is a wealth of such opportunities in this region.

Over the financial year the discount to net asset value at which our shares trade has ranged from approximately 11.4% to 18.7%, ending the year at 13.5% (2022: 15.2%). In the long run, strong absolute and relative performance is a necessary - but not sufficient - factor in reducing the discount. Therefore, we continue to consider all other factors which might contribute to the appeal of the Company to all types of shareholder, and retail investors in particular. As part of this process, I extend an invitation to any shareholders who have questions, whether specific or general, or who would welcome a more general discussion with me or the Senior Independent Director to get in touch via the Corporate Secretary ([email protected]). I also direct current and potential shareholders to the wealth of materials on the Janus Henderson website (www.janushenderson.com) including short videos and articles by our portfolio manager Jamie Ross, and a video by Jamie on our year end results at www.hendersoneurotrust.com.

Nicola Ralston

Chairman

27 September 2023

FUND MANAGER'S REPORT

Summary:

·    I am pleased to report a positive year for performance, both in absolute terms (the value of your shares has increased), and in relative terms (our net asset value per share has increased by more than the index return).

·     This performance has been driven by the positive impact of our stock selection.

·     We have also found opportunity to increase our exposure to some of the highest quality companies in Europe.

Key messages

I am pleased to report a positive year for performance, both in absolute terms (the value of your shares has increased), and in relative terms (our net asset value per share has increased by more than the index return). This performance has been achieved in an environment where our style of investing (buying and owning high quality growing businesses) has been out of favour, but our stock picking has been strong enough to outweigh this.

What has driven our performance?

The best performing sectors in the financial year tended to be those of a cyclical, interest rate sensitive nature: consumer discretionary, financials, industrials and technology. The sectors that lagged tended to be less economically sensitive: consumer staples, health care, real estate and telecommunications. As has been usual for us, our sector allocations have had little bearing on our relative performance. Stock picking within each sector has been a much more important determinant of performance: we are 'stock pickers' not 'sector pickers'.

Our best performing positions were in three areas: financials, luxury goods companies and semi-conductor equipment businesses.

Within financials, we were particularly well-rewarded for our decision to maintain a large position in UniCredit even through the early days of the Russia-Ukraine conflict in 2022, when investors were concerned about UniCredit's Russian exposure. We felt that their exposure was small enough to be manageable, even in a worst-case scenario, and that the undervaluation of the company's shares was far too extreme for us to sell just at the time when higher inflation and interest rates were coming back into the system (typically a good thing for banks, at least initially). UniCredit shares have delivered a total return of more than 150% over the last twelve months and have benefitted from higher interest rates, strong control of the cost base, a benign environment for loan losses and strong capital returns to shareholders. Management have done an excellent job. Munich Re, a longstanding position for us, has been another financial that has performed well in this environment.

We have three luxury goods companies in the portfolio: Hermès and Moncler have been longstanding positions and LVMH was added more recently, in 2021. Luxury goods companies sell aspiration and desirability - intangible characteristics for which people are prepared to pay a high price. The best companies curate their brand allure with decades of consistent investment, avoid discounting and partner with well-known trend-setters. Within the sector, we have taken the approach of owning brands with the strongest and most longstanding cultural heritage. This approach has led us to owning Hermès, Moncler and LVMH; these are three of the more expensive companies in the sector, but we think it is worth paying up for brands of this quality. We were pleased to see our companies perform well in the period, in part due to short-term factors such as recovery in China after Covid restrictions were lifted, but our investment view takes a much longer-term perspective. We continue to see attractive growth prospects for these high margin and high return companies over the medium- to long-term.

The semiconductor industry encompasses businesses of highly variable quality. The industry is exposed to attractive structural growth drivers such as the growing ubiquity of semiconductor usage and powerful technological themes such as machine learning, artificial intelligence and the internet of things. However, not all companies have a sufficiently commanding market position to translate this growth potential into a high margin and high return business. The three semiconductor companies that we own share one key characteristic: they have consistently high market shares in their core technology. ASML has a 100% market share in high end lithography, ASM International has a commanding market share in a packaging technology called Atomic Layer Deposition, while Besi dominate the nascent area of Hybrid Bonding. Strong market shares in niche technologies drive high margins and return on capital for these companies. We have had a longstanding position in ASML and initiated a new position in ASM International during the year and Besi in June 2022, taking advantage of a period when investors seemed overly concerned about a potential short-term cyclical downswing in industry demand. These two positions rallied particularly strongly over the year.

Finally, Novo Nordisk is worthy of mention. Novo is our largest position and a long standing holding in the portfolio. Novo has recently launched an obesity drug in the US and this has attracted a huge amount of media attention. We have been following their progress in this therapeutic area for a number of years and it is pleasing to see the company finally able to bring an efficacious and well-tolerated product to market. We believe that the obesity franchise is extremely well positioned for growth and this reinforces our positive views on the company. We continue to own a large position in Novo even after the strong multi-year share price performance. 

Our underperformers have tended to be defensive in nature. When investors want to buy into improving economic sentiment, they tend to avoid steady, consistent, dependable companies such as Roche, Cellnex and Sartorius. We ignore these short-term swings in sentiment and continue to value the long-term compounding nature of these businesses. In addition to this issue of style, there were a small number of companies whose operational performance was not as impressive as we would wish. Allfunds, DSM Firmenich and Kion have each struggled this year.

Allfunds, a business that links up fund houses with fund distributors, is exposed to three major drivers of growth in assets under administration: the onboarding of new clients, inflows from existing clients and long-term growth in market levels. Over the past year or two, market volatility across multiple asset classes has impacted the latter two of these drivers whilst the onboarding of new clients, an area where they have more control, has remained resilient. We retain faith in the ability of this high market share, high margin business to generate significant growth over time, but a period of more benign markets would be welcome. DSM has struggled with a number of issues, some industry-wide and some stockspecific. On the former, there has been some post-Covid unwind with a number of US customers destocking their ingredients inventory. On the latter, DSM has suffered from weakness in vitamin pricing and have had to deal with disruption related to the Firmenich merger and senior management changes. We have maintained our positions in both Allfunds and DSM (now DSM Firmenich). Finally, Kion has suffered from cost overruns in its warehouse automation business as well as signs of slowing demand. We felt that our long-term thesis had been sufficiently challenged to sell out of our position in Kion.

1 Total may not sum to the value shown due to rounding differences

Source: Factset

What changes have we made?

We have now had three years of value outperforming growth and quality. Notwithstanding the fact that we managed to outperform marginally over the last year, this style environment has been tough for us. Our inclination throughout the period has been to increase our exposure to high quality companies at a time when they have been out of favour. Each of our purchases and sales over the past twelve months can be seen as moving us in this direction. I will illustrate this with two of our new positions highlighting why we think these are high quality businesses with very attractive long-term prospects.

In March, we initiated a new position in Alcon, the Swiss listed manufacturer of ophthalmic equipment and contact lenses. Over the long term, the industry has experienced healthy growth of 4-5% per annum. Alcon, after years of underinvestment under Novartis ownership, is playing catch up. They have been growing faster than the overall market and expect to continue to do so. Margin potential since the spin-out from Novartis has been clear but the delivery has been slower than hoped for. Recently, however, margin progress has started to come through and the outlook for further margin gains is strong. Finally, on valuation, in MedTech, investors tend to pay for durable growth, i.e. organic revenue growth and the sector trades on around 25 times forward price to earnings. Alcon has usually traded at a 0-10% premium, but when we bought our position, it traded at a small discount. Over the next few years, revenue growth should be faster than the sector (6% versus 4%) and so should earnings per share growth (greater than 15% versus 11%) if they achieve margin progress as guided. We thus see Alcon as a superior growth business capable of margin improvement and a valuation rerating over time.

In May, we bought a position in the Swiss testing company SGS. We have long liked the characteristics of the testing sector. The companies provide a cheap, but essential function to a number of businesses across a wide range of end markets. Often their work is mandated by regulation. The industry is fragmented but is increasingly being consolidated by the large, listed companies, with smaller players disadvantaged in a world where customers want broad, global services. This means that the large companies can consistently acquire the smaller ones at inexpensive valuations, taking advantage of inherent scale benefits to create shareholder value over the medium term. We also believe that increasingly stringent environmental testing regulation is resulting in a boost to testing intensity and this should bring higher growth rates for SGS and their peers especially in the consumer goods-facing part of the business. SGS are the global leader in consumer testing and are in the strongest position to benefit.

Our most notable sales during the period were Enel, CNH International and Kion (a utility company, a tractor company and a forklift truck company respectively).

Our medium term outlook

I am pleased that we have managed to outperform modestly in yet another year of value outperformance. We have used the last few years to increase our exposure to growth and quality and I am confident that our companies are well-placed to deliver strong growth, attractive margins and robust return on capital.

Classification of holdings as at 31 July 2023

Fundamentals are based on weighted averages at the stock level, excluding net cash/borrowing

1 Compounders - high-return businesses

2 Improvers - companies whose return profile should materially improve over time

3 The weight percentages of Compounders and Improvers are shown including net cash/borrowing

Net cash/(borrowing) was -5.1% at 31 July 2023

OW Bunker, a nil value position, is not included in the analysis

Source: Factset/Fundamentals in Sterling and Janus Henderson

Top ten contributors to and bottom detractors from relative performance

Data illustrating the top ten contributors to relative performance is set out below:

Data illustrating the bottom ten detractors from relative performance is set out below:

Jamie Ross

Fund Manager

27 September 2023

PRINCIPAL RISKS AND UNCERTAINTIES

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 and liquidity.

With the assistance of the Manager, the Board has drawn up a risk register facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's Investment Objective and Policy, in order to mitigate these risks as far as practicable. The Board monitors the Manager, other suppliers 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. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

Details of how the Board monitors the services provided by Janus Henderson and its other suppliers, and the key elements designed to provide effective internal control, are explained further in the internal controls section of the Corporate Governance report of the 2023 Annual Report. Further details of the Company's exposure to market risk (including market price risk, currency risk and interest rate risk), liquidity risk and credit and counterparty risk and how they are managed are contained in the Notes to the Financial Statements within the Annual Report.

VIABILITY STATEMENT AND GOING CONCERN

The Company is a long-term investor. The Board believes it is appropriate to assess the Company's viability over a five year period in recognition of the Company's 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 the Strategic Report within the Annual Report.

The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. In addition, 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 potential impact of the principal risks and uncertainties facing the Company, in particular the impact of the rise in inflation, COVID-19, the risks arising from the wider ramifications of the conflict between Russia and Ukraine, investment strategy and performance against the benchmark (whether from stock or sector attribution 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. 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.

The Directors consider it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements (see note 1(b) for further details).

BORROWINGS

During the year under review, the Company had in place an unsecured loan facility of £25 million (2022: £25 million) which allowed it to borrow as and when appropriate. The maximum amount drawn down in the year under review was £17.7 million (2022: £12.8 million), with borrowing costs for the year totalling £217,000 (2022: £84,000). £8.6 million of the facility was in use at the year end (2022: £12.6 million). Actual gearing at 31 July 2023 was 4.6% (2022: 2.5%) of NAV. Since the year end the Company has put in place an unsecured loan facility of €30 million to replace the previous facility. The Board has delegated responsibility for day to day gearing levels to the Fund Manager. The Fund Manager expects to maintain some level of gearing in most conditions and the normal level of gearing is expected to be between 2% and 6% of NAV, but at times it may be above or below these levels. The Fund Manager does not use gearing in an attempt to time prospective market moves. Instead, the Company's gearing will increase when the Fund Manager sees attractive, stock specific, opportunities to deploy capital and will reduce gearing when the Fund Manager is a net seller of existing positions, again for stock specific reasons.

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 2023 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 to the Financial Statements within the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

On behalf of the Board

Nicola Ralston

Chairman

27 September 2023

TWENTY LARGEST HOLDINGS AS AT 31 JULY 2023

Market capitalisation (excluding cash) of the portfolio by weight at 31 July 2023

Performance drivers over the year ended 31 July 2023

¹Sector allocation is the effect of asset allocation, less the effects of gearing, share buy-backs / issues and currency.

Source: Morningstar Direct, Janus Henderson

AUDITED INCOME STATEMENT

The total return column of this statement represents the Income Statement of the Company.

All revenue and capital items in the above statement derive from continuing operations. 

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the AIC. 

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

NOTES TO THE FINANCIAL STATEMENTS

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.