Annual Financial Report
THE EUROPEAN INVESTMENT TRUST PLC
Annual Report and Financial Statements for the year ended 30 September 2012
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.
HIGHLIGHTS
- Net asset value total return for the year 12.1%, compared with FTSE All-World
Europe ex UK Index total return 12.5%. Share price total return was 13.6%.
- Dividend maintained at prior year level. Proposed ordinary dividend of 12.0p
and special dividend of 4.0p, a total of 16.0p.
- Reduced exposure to companies with good earnings visibility where a re-rating
had taken place. Re-investment of proceeds into companies with more obviously
out of favour/value characteristics.
- While European economic risks still elevated, future outlook positive for
many European companies which are on low valuations.
COMPANY SUMMARY
Investment objective
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 Extracts from the Directors' Report below.
Shareholders' funds
£256,724,000 at 30 September 2012.
Market capitalisation
£213,712,000 at 30 September 2012.
Capital structure
As at 30 September 2012 and at the date of this report, the Company had
42,069,371 ordinary shares of 25p each in issue.
Investing in the Company
The Company's ordinary shares are traded on the London Stock Exchange and the
New Zealand Stock Exchange. The Company's ordinary shares can be bought or sold
through a stockbroker or financial adviser. The ordinary shares are eligible
for inclusion in ISAs, Junior ISAs and SIPPs. ISAs and Junior ISAs are
available through Alliance Trust Savings, who also offer the opportunity to
invest in the Company through a Dealing Account.
AIC
The Company is a member of the Association of Investment Companies ("AIC").
Investment Manager
Edinburgh Partners Limited ("Edinburgh Partners").
Investment management fee
0.55% per annum of the Company's market capitalisation payable quarterly in
arrears.
FINANCIAL SUMMARY
Results for year 30 September 30 September
2012 2011 Change
Shareholders' funds £256.72m £237.35m 8.2%
Net asset value per ordinary 610.24p 559.78p 9.0%
share ("NAV")
Share price per ordinary share 508.00p 462.50p 9.8%
Share price discount to NAV 16.8% 17.4%
Year to Year to
30 September 2012 30 September 2011
Revenue return per ordinary 15.38p 16.97p
share*
Capital return per ordinary 50.62p (94.35)p
share*
Total return per ordinary share* 66.00p (77.38)p
Final dividend per ordinary 12.00p 12.00p
share**
Special dividend per ordinary 4.00p 4.00p
share**
Total dividend per ordinary 16.00p 16.00p
share**
* Based on the weighted average number of shares in issue during the year.
** Proposed dividend for the year.
Year to Year to
Year's high/low 30 September 2012 30 September 2011
NAV - high 637.42p 733.11p
- low 536.09p 544.58p
Share price - high 552.00p 621.00p
- low 446.00p 450.13p
Share price discount to NAV
- low 11.8% 11.0%
- high 18.5% 18.7%
Year to Year to
Performance 30 September 2012 30 September 2011
NAV Total Return 12.1% (12.1)%
FTSE All-World Europe ex UK Index Total 12.5% (13.6)%
Return*
* In sterling.
The NAV Total Return is sourced from Edinburgh Partners and includes dividends
reinvested. The index performance figures are sourced from Thomson Reuters
Datastream. Past performance is not a guide to future performance.
Year to Year to
Cost of running the Company 30 September 2012 30 September 2011
Ongoing charges* 0.62% 0.60%
* Based on total expenses, excluding finance costs and certain non-recurring
items, for the year and average monthly net asset value.
CHAIRMAN'S STATEMENT
Results
In the year to 30 September 2012 the net asset value per share of your Company
increased by 9.0% from 559.78p to 610.24p. After taking account of dividends
paid in the year of 16.0p, the total return was 12.1%, compared with the total
return of 12.5% from the FTSE All-World Europe Index, excluding the UK and
adjusted to sterling. The Company's share price increased by 9.8% from 462.5p
to 508.0p as the discount to net asset value narrowed from 17.4% to 16.8%,
giving a share price total return of 13.6%.
The net asset value total return since the appointment of Edinburgh Partners as
Investment Manager on 1 February 2010 to 30 September 2012 was 6.6%. This was
an outperformance of 2.4% when compared with the total return of 4.1% from the
FTSE All-World Europe Index, excluding the UK and adjusted to sterling.
Revenue
After a very substantial increase in the revenue return per share in the prior
year, there was a reduction in the revenue return in the year to 30 September
2012 of 9.4%, from 16.97p to 15.38p. There was a slightly lower yield from the
portfolio in the year under review and the previous year's income benefited
from a number of special dividends.
There was a marginal reduction in total expenses when compared with the prior
year and the Company continues to have a low expense ratio. The ongoing charges
ratio was 0.62% in the year to 30 September 2012.
Dividend
After the 14.3% increase in the dividend in the prior year, and despite the
reduction in the income generated from the portfolio in the year to 30
September 2012, the Board is recommending a maintained final dividend of 12.0p
per share and a special dividend of 4.0p per share, a total of 16.0p per share,
the same as in the prior year.
Subject to the approval of shareholders at the Annual General Meeting on 22
January 2013, these dividends will be paid on 31 January 2013 to shareholders
on the register at the close of business on 11 January 2013. The ex-dividend
date will be 9 January 2013.
Share buybacks
The Company bought back and cancelled 331,377 shares during the year to 30
September 2012 at a total cost of £1.7m. The shares bought back represented
0.8% of the share capital in issue at the beginning of the Company's financial
year on 1 October 2011. Over the past three years the Company has bought back a
total of 3,683,377 shares, over 8% of the shares in issue at the start of the
three year period.
The Directors will propose at the Annual General Meeting on 22 January 2013
that the Company's powers to make further purchases of up to 14.99% of its
shares in issue be renewed.
Portfolio activity
Within the portfolio the principal geographic changes were to reduce the
Company's exposure to Switzerland and the Netherlands to 10.2% and 9.5% of net
assets respectively (2011: 19.8% and 16.2%). These reductions were offset by an
increased exposure to France to 17.9% (2011: 14.3%) and to Spain to 9.5% (2011:
6.6%). In addition to the Company's existing investment in Sweden, new
investments were made in the other Scandinavian countries (Denmark 1.9% and
Norway 2.5%). There was a marginal decrease in the number of investments held
from 42 to 39.
During the year, the opportunity was taken to reduce exposure within the
portfolio to companies with good earnings visibility where a re-rating had
taken place. Banks face additional structural regulatory impediments as well as
the current cyclical issues. As a consequence, the most significant sector
reduction was in the financial sector where exposure was reduced by 5.8% from
14.0% last year to 8.2%. This reduction was more than offset by a significant
increase in industrial sector exposure, which increased by 8.2% to 28.1%. It
should be noted, however, that this exposure to industrial companies is not as
significant as it appears. Many of the companies classified as industrial do
not have classic cyclical features, for example Wirecard and Amadeus (both
software companies), DCC (energy distribution), Imtech (service company) and
Orkla (food manufacturing).
Gearing
In September 2011, the Company entered into a Euro 30m secured multicurrency
revolving loan facility agreement with Scotiabank Europe PLC. The facility is
available for three years and interest will be payable on amounts drawn down at
the rate of 1.55% per annum above the British Bankers' Association Interest
Settlement Rate. If fully utilised it would result in a gearing level of
approximately 9% of net assets. No amount was drawn under the facility in the
year under review.
Investing in the Company
The Company's ordinary shares are eligible for inclusion in ISAs, Junior ISAs
and SIPPs. It had previously been possible to acquire shares in the Company in
Savings Plans and ISAs through the BNP Paribas - Edinburgh Partners Savings
Scheme and ISA, both for lump sum investments and regular contributions. BNP
Paribas gave notice that they were ceasing to provide investment trust savings
scheme and ISA services and as a consequence shareholders in the scheme were
given the opportunity to transfer to similar schemes administered by Alliance
Trust Savings in November 2012.
Association of Investment Companies
As stated in last year's report, we continue to support the activities of the
AIC, including their input on proposals made by the UK Government and the
European Union in relation to the political and regulatory framework in which
your Company operates.
Annual General Meeting
We hope that as many shareholders as possible will attend the Annual General
Meeting which will be held at 11.00 am on Tuesday, 22 January 2013 at Brewers'
Hall, Aldermanbury Square, London EC2V 7HR. We look forward to meeting all
shareholders who are able to attend.
Outlook
Despite the uncertainty around the Euro, double digit returns were obtained
from investing in European stocks during the year under review. From an equity
investment perspective, we believe the future outlook is positive as many of
the companies in the portfolio should be able to continue to achieve market
share gains and as a consequence deliver growth in profits. With many European
stocks continuing to be on low valuations this offers the prospect of further
positive returns from European equity investment.
Douglas McDougall
Chairman
26 November 2012
INVESTMENT MANAGER'S REPORT AND PORTFOLIO ANALYSIS
Economic and investment overview
The evolution of the Eurozone has been driven more by politics than economics
and the combination of economic and political stress has made the development
of the Eurozone crisis particularly difficult to forecast. However, as we
review the situation at the end of 2012, I think it is appropriate that we
reflect on the progress that has been made to date. This progress is both by
the Eurozone in its own right, as well as progress relative to the other
imbalances which still exist in the world economy.
Europe has front-loaded its economic medicine. Whilst the remaining fiscal
tightening by governments will still lead to a protracted period of lower
growth, by the end of 2012, Europe should have significantly lower fiscal
deficits as a proportion of GDP than the US, UK and Japan.
The European Central Bank has played its part in reducing the risks within
European economies. Its announcement in autumn 2012 that it would undertake
fresh measures, including government bond repurchases, indicated a willingness
to do whatever it took to save the Euro, so long as affected countries met
tight conditions on fiscal repair and pro-growth reforms.
This does not mean that the outlook is uniformly positive. Within Europe there
is still a chance that the austerity measures will test and break the patience
of the electorates of major economies such as Spain or Italy or, conversely
that the German electorate will vote against the support programmes in the
federal election in the autumn of 2013. In addition, the extent of the role the
European Central Bank is forced to play in crisis resolution will determine the
extent of any inflation concerns that might have to be addressed in the longer
term. Outside of Europe, the fiscal imbalances yet to be addressed,
particularly in the US, as well as Chinese growth stabilising at lower levels,
will continue to provide headwinds to world economic growth.
Portfolio strategy
We have followed a relatively balanced portfolio strategy over the past few
years, in part due to the macroeconomic uncertainties. This strategy has
changed in recent months as we have progressively shifted the portfolio towards
a more explicit value/contrarian strategy. This is especially apparent in two
areas that I will expand upon: peripheral countries and the telecoms sector.
Your portfolio is currently 28% invested in companies listed on the stock
exchanges of Italy, Spain and Ireland, compared with 23% at 30 September 2011.
This weighting consists of two types of company. Firstly, it consists of
companies with stock exchange listings in these countries but with
predominantly international operations. Secondly, it consists of more
domestically oriented companies which are trading on low multiples of our
estimate of their profits at the low point in the economic cycle. Piaggio in
Italy and Indra in Spain, the latter purchased after the year end, are both
examples of high quality domestic companies completely overlooked due to their
countries of listing.
Piaggio is the manufacturer of the iconic scooter brand, Vespa. In recent years
the company has invested substantially in plants in India and Vietnam. Over the
next few years the returns from this capital investment should come with
increased market penetration of strongly growing markets. The company is seen
as Italian but the vast majority of its profit growth over the next five years
should come from India, Indonesia and Vietnam. At some point a turnaround in
the Italian operation should also occur as the average age of scooters on the
road is already three years beyond their typical life. We estimate the company
is trading on a multiple of six times its future earnings and it has a dividend
yield of almost 5%.
Indra is a Spanish technology company that was purchased after the year end.
Indra has developed market leading proprietary software in the areas of
transport (e.g. air traffic control, high speed rail, land traffic) and defence
(border control, radar systems) as well as other areas. Revenues are split 40%
Spain and 60% international, mainly Latin America. The shares are trading on a
price earnings multiple of ten times our estimate of earnings at the low point
of the economic cycle, with this multiple expected to fall to five to six times
when profits recover. The dividend yield is expected to be at least 5% and
could be higher.
An interesting investment case is emerging in the telecoms sector. For the last
decade, telecom regulation has favoured both the consumer and the
infrastructure-light telecom new entrants who have re-sold capacity created by
capital investment made by other companies. This has been good for consumers
but bad for new investment and the productivity benefits this brings to
economies. Within the last few months, the regulator has realised that for
Europe to be able to obtain the benefits of high speed broadband a new attitude
towards regulation will be needed. This attitude should allow incumbent telecom
companies to make a sensible return on new investment. This should be positive
for both incumbent telecom companies and the cable companies who should benefit
from more relaxed pricing regimes, especially in countries where the
competitive environment is benign. In our opinion, this represents a major
inflection point for the European telecoms sector and we have built up
positions in the following companies, including France Telecom and Ziggo
subsequent to the year end:
• France Telecom, the incumbent French operator trading on seven times current
earnings and yielding 9%;
• Belgacom, the Belgian incumbent, trading on ten times current earnings and
yielding 9%;
• Vivendi, a French telecom/media conglomerate trading on seven and a half
times current earnings and yielding 6.5%;
• Kabel Deutschland (Germany) and Ziggo (Netherlands), both cable companies.
These companies are less out of favour but should benefit as the stockmarket
appreciates their strong cash flows and their ability to deliver increasing
shareholder returns. Ziggo in particular is likely to be involved in
consolidation activity within the sector; and
• Prysmian, the Italian cable manufacturer, is the clear market leader in the
provision of fibre optic cables for voice, data and video transmission.
Outlook
The scope to find groups of undervalued stocks with a positive earnings outlook
is a more constructive backdrop than we have seen for some time. Risks are
still elevated owing to the unprecedented set of circumstances requiring to be
addressed, but at current market levels European equities look sound value,
compared with other international markets, and since the year end the Company
has moved close to a fully invested position.
Dale Robertson
Edinburgh Partners Limited
26 November 2012
PORTFOLIO OF INVESTMENTS
as at 30 September 2012
% of % of
Net Net
Rank Rank Company Sector Country Valuation Assets Assets
2012 2011 £'000 2012 2011
1 11 Ryanair Consumer Services Ireland 8,912 3.5 2.7
2 3 Sanofi Health Care France 8,315 3.2 3.1
3 21 Gerresheimer Health Care Germany 8,092 3.2 2.4
4 20 Belgacom Telecommunications Belgium 7,906 3.1 2.4
5 8 Vivendi Consumer Services France 7,649 3.0 2.7
6 12 Swedbank Financials Sweden 7,572 2.9 2.6
7 6 DCC Industrials Ireland 7,496 2.9 2.8
8 37 D'Ieteren Consumer Services Belgium 7,436 2.9 2.0
9 4 CAF Industrials Spain 7,202 2.8 2.9
10 - Wirecard Industrials Germany 7,200 2.8 -
11 35 Swatch Consumer Goods Switzerland 7,151 2.8 2.1
12 16 SAP Technology Germany 7,115 2.8 2.5
13 19 GEA Industrials Germany 7,108 2.8 2.4
14 24 Kabel Consumer Services Germany 7,057 2.7 2.3
Deutschland
15 13 ENI Oil & Gas Italy 7,001 2.7 2.6
16 17 Gazprom Oil & Gas Russia 6,973 2.7 2.5
17 14 Intesa Financials Italy 6,788 2.6 2.6
Sanpaolo
18 38 Michelin Consumer Goods France 6,633 2.6 1.8
19 - Mediaset Consumer Services Spain 6,583 2.6 -
España
20 - Orkla Industrials Norway 6,491 2.5 -
21 2 Royal Imtech Industrials Netherlands 6,315 2.5 3.1
22 7 Total Oil & Gas France 6,156 2.4 2.8
23 18 ABB Industrials Switzerland 6,098 2.4 2.5
24 28 Prysmian Industrials Italy 6,038 2.4 2.3
25 - Safran Industrials France 6,029 2.3 -
26 1 Ahold Consumer Services Netherlands 5,921 2.3 3.2
27 39 Syngenta Basic Materials Switzerland 5,877 2.3 1.8
28 - Ipsos Consumer Services France 5,738 2.2 -
29 27 Novartis Health Care Switzerland 5,655 2.2 2.3
30 - Arcelormittal Basic Materials France 5,616 2.2 -
31 30 BBVA Financials Spain 5,607 2.2 2.1
32 22 Heineken Consumer Goods Netherlands 5,259 2.0 2.4
33 - Metro Consumer Services Germany 5,074 2.0 -
34 41 Amadeus Industrials Spain 4,938 1.9 1.6
35 - Piaggio Consumer Goods Italy 4,895 1.9 -
36 - A.P. Industrials Denmark 4,828 1.9 -
Moller-Maersk
37 9 Unilever Consumer Goods Netherlands 4,637 1.8 2.7
38 - Randstad Industrials Netherlands 2,399 0.9 -
39 36 Julius Baer Financials Switzerland 1,163 0.5 2.0
Prior year investments sold during the year 28.5
Total equity investments 244,923 95.4 99.7
Cash and other net assets 11,801 4.6 0.3
Net assets 256,724 100.0 100.0
The geographic distribution is based on each investment's principal stock
exchange listing, except in instances where this would not give a proper
indication of where its activities predominate.
Of the ten largest portfolio investments as at 30 September 2012 the valuations
at the previous year end, 30 September 2011, were Ryanair £6,323,000; Sanofi
£7,281,000; Gerresheimer £5,608,000; Belgacom £5,697,000; Vivendi £6,412,000;
Swedbank £6,320,000; DCC £6,756,000; D'Ieteren £4,757,000 and CAF £6,946,000.
Wirecard was a new purchase made during the year ended 30 September 2012.
Distribution of Investments
as at 30 September 2012 (% of net assets)
Sector distribution
Sector %
Industrials 28.1
Consumer Services 21.2
Consumer Goods 11.1
Health Care 8.6
Financials 8.2
Oil & Gas 7.8
Basic Materials 4.5
Telecommunications 3.1
Technology 2.8
Cash and other net 4.6
assets
100.0
Geographical distribution
Country %
France 17.9
Germany 16.3
Switzerland 10.2
Italy 9.6
Netherlands 9.5
Spain 9.5
Ireland 6.4
Belgium 6.0
Sweden 2.9
Russia 2.7
Norway 2.5
Denmark 1.9
Cash and other net 4.6
assets
100.0
The geographic distribution is based on each investment's principal stock
exchange listing, except in instances where this would not give a proper
indication of where its activities predominate.
DIRECTORS
All of the Directors are non-executive and independent of the Investment
Manager.
Douglas C P McDougall OBE (Chairman)
William D Eason
Ralph Kanza
Michael B Moule (Senior Independent Director)
EXTRACTS FROM THE DIRECTORS' REPORT
The Chairman's Statement above and the Corporate Governance Statement in the
full Annual Report and Financial Statements form part of the Directors' Report.
The Directors present their Annual Report and Audited Financial Statements for
the year to 30 September 2012.
BUSINESS REVIEW
Financial reporting requirements direct that the Company is required to provide
a business review within the Directors' Report. The business review must
contain a review of the Company's business, the principal risks and
uncertainties it faces, an analysis of its performance during the financial
year, the position at the year end and the future business plans of the
Company. It must also provide information about the Company's environmental,
social and ethical policy and about persons with whom the Company has
contractual or other arrangements essential to the business of the Company. To
aid understanding of these areas the Board is required to include analysis
using appropriate Key Performance Indicators.
Forward looking statements
This business review 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:
• Continental European economic conditions and equity market performance and
prices.
• Changes in Continental European Government policies and monetary and interest
rate policies.
• Changes to regulations and taxes, both in the UK and Continental Europe.
• Changes to consumer spending or saving habits and the impact of inflation and
deflation.
• European currency exchange rates.
• The Company's success in managing its assets and business to manage the above
factors and use of gearing.
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.
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 Companies Act 2006. The Company
has received approval from HM Revenue & Customs ("HMRC") as an investment trust
under Sections 1158 and 1159 of the Corporation Tax Act 2010 ("CTA") for the
year ended 30 September 2011. This approval is subject to there being no
subsequent enquiry under corporation tax self-assessment. The Company has been
approved as an investment trust for all previous years. In the opinion of the
Directors, the Company has subsequently directed its affairs so as to enable it
to continue to qualify for such approval.
New regulations for obtaining and retaining investment trust status apply to
the Company with effect from 1 October 2012. One of the principal changes under
the new investment trust tax regime is to remove the restriction that no single
investment can represent more than 15% of gross assets at the time of its
acquisition, and to replace this with a risk diversification approach. An
application for approval as an investment trust under the new regime must be
made not later than 90 days after 30 September 2013. If the application is
accepted, the Company will be treated as an investment trust company for that
period and for each subsequent accounting period, subject to there being no
subsequent serious breaches of the regulations.
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 on the New Zealand Stock
Exchange.
The Company is a member of the AIC, a trade body intended to promote investment
companies which also develops best practice for all its members.
A review of the Company's activities during the year is given in the Chairman's
Statement and in the Investment Manager's Report and Portfolio Analysis.
Objective
The objective of The European Investment Trust plc is to achieve long-term
capital growth through a diversified portfolio of Continental European
securities.
Investment policy
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.
Investment strategy
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 earning
prospects over a five-year time horizon. The portfolio will normally consist of
40 to 50 investments.
Portfolio analysis
A detailed review of how the Company's assets have been invested is contained
in the Investment Manager's Report and Portfolio Analysis. 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 39
investments, excluding cash and other net assets, as at 30 September 2012, with
the largest representing 3.5% 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.
Principal risks and uncertainties
The Board considers that the following are the principal risks associated with
investing in the Company: investment and strategy risk, discount volatility
risk, market risk (comprising interest rate risk, currency risk and other 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 18 of the Financial Statements.
In addition, the Board also considers the following as principal risks:
Regulatory risk
Relevant legislation and regulations which apply to the Company include the
Companies Act 2006, the CTA and the FSA Listing Rules. 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
might result in censure by the FSA 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.
Operational risk
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 and custody. The main risk is that the
third parties may fail to ensure that statutory requirements, such as
compliance with the Companies Act and FSA Listing Rules, are met.
The Board regularly receives and reviews management information from third
parties which the 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 each year.
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 Investment Manager employs independent administrators to prepare all
Financial Statements and the Audit and Management Engagement Committee meets
with the Independent Auditors at least once a year to discuss all financial
matters including appropriate accounting policies.
The Board undertakes an annual assessment and review of all the risks stated
above and in note 18 of the Financial Statements, 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.
Corporate governance
The Company has considered the recommendations of the UK Corporate Governance
Code, the AIC Code of Corporate Governance ("AIC Code") and the relevant AIC
Corporate Governance Guide for Investment Companies. Its statement of
compliance with the AIC Code appears in the full Annual Report and Financial
Statements.
Performance
Net asset value
The net asset value per ordinary share ("NAV") at 30 September 2012 was 610.24p
(2011: 559.78p).
Results
The results for the year are set out in the Income Statement and the
Reconciliation of Movements in Shareholders' Funds below.
Dividends
The Directors recommend a final dividend of 12.0p per ordinary share and a
special dividend of 4.0p per ordinary share (2011: final dividend of 12.0p and
special dividend of 4.0p), making a total dividend of 16.0p per ordinary share
(2011: 16.0p). If approved by shareholders, these dividends will be payable on
31 January 2013 to shareholders on the register at the close of business on 11
January 2013. The ex-dividend date will be 9 January 2013.
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 per ordinary share total return compared to the FTSE
All-World Europe ex UK Total Return Index adjusted to sterling.
• Share price premium/discount to net asset value per share.
• Ongoing charges.
The records of the key performance indicators are shown in the Financial
Summary above and 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.
Share capital
During the year ended 30 September 2012 the Company purchased 331,377 ordinary
shares (with a nominal value of £82,844) for cancellation, representing 0.8% of
the issued share capital at 30 September 2011, for an aggregate amount of
£1,677,000. The shares were acquired in line with the Board's policy to purchase
shares at below net asset value per share and when in the interests of
shareholders.
The Company made no share issues during the year ended 30 September 2012. As at
30 September 2012 and as at the date of this report, the Company had 42,069,371
ordinary shares of 25p each in issue.
At general meetings of the Company, on a poll one vote is attached to each
ordinary share in issue.
Current and future developments
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
and Portfolio Analysis 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.
In addition, the Board pays due regard to the promotion of the Company
including communication with shareholders and other external parties. The Board
is regularly updated on wider investment trust industry issues. Detailed papers
are presented to the Board which lead to extensive discussion on development
and strategy.
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 applicable regulatory and
legislative requirements in the UK, 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 and social and environmental issues.
The Company itself has no employees and all the Directors are non-executive.
The day-to-day management of the Company's business has been delegated to the
Company's Investment Manager, Edinburgh Partners, who have an Environmental,
SRI and Corporate Governance ("ESG") policy in place, which can be found on
their website www.edinburghpartners.com.
The full Annual Report contains 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 THE FINANCIAL STATEMENTS
Management report
Listed companies are required by the FSA's Disclosure 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 included in the Chairman's Statement, the Investment
Manager's Report and Portfolio Analysis and the Business Review contained in
the Directors' Report. Therefore no separate management report has been
included.
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report, the Directors'
Remuneration 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 and applicable law) ("UK GAAP").
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 have been followed,
subject to any material departures disclosed and explained in the Financial
Statements respectively; 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 and the Directors'
Remuneration Report comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
Each of the Directors, whose names are listed in the Directors' Report,
confirms that, to the best of his knowledge:
* the Financial Statements, which have been prepared in accordance with UK
GAAP, give a true and fair view of the assets, liabilities, financial
position and net return of the Company; and
* the Chairman's Statement, the Investment Manager's Report and Portfolio
Analysis 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 Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website. The work
carried out by the Auditors does not include consideration of these matters
and, accordingly, the Auditors accept no responsibility for any changes that
may have occurred to the Financial Statements since they were initially
presented on the website. Legislation in the UK governing the preparation and
dissemination of Financial Statements may differ from legislation in other
jurisdictions.
On behalf of the Board
Douglas McDougall
Chairman
26 November 2012
NON-STATUTORY ACCOUNTS
The financial information set out below does not constitute the Company's
statutory Financial Statements for the year ended 30 September 2012 but is
derived from those Financial Statements. Statutory Financial Statements for the
year ended 30 September 2012 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 Edinburgh Partners' website at
www.edinburghpartners.com.
INCOME STATEMENT
for the year ended 30 September 2012
2012 2011
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on 9 - 21,758 21,758 - (40,182) (40,182)
investments at fair
value
Foreign exchange (67) (410) (477) (7) 158 151
(losses)/gains
Income 2 9,045 - 9,045 9,734 - 9,734
Investment management 3 (1,157) - (1,157) (1,311) - (1,311)
fee
Other expenses 4 (396) - (396) (381) - (381)
Net return before 7,425 21,348 28,773 8,035 (40,024) (31,989)
finance costs and
taxation
Finance costs 5 (124) - (124) (31) - (31)
Net return before 7,301 21,348 28,649 8,004 (40,024) (32,020)
taxation
Tax on ordinary 6 (814) - (814) (806) - (806)
activities
Net return attributable 6,487 21,348 27,835 7,198 (40,024) (32,826)
to shareholders
pence pence pence pence pence pence
Return per ordinary 8 15.38 50.62 66.00 16.97 (94.35) (77.38)
share*
* Based on the weighted average number of shares in issue during the year.
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.
A separate Statement of Total Recognised Gains and Losses has not been prepared
as all such gains and losses are included in the Income Statement.
The notes form part of these Financial Statements.
BALANCE SHEET
as at 30 September 2012
2012 2011
Note £'000 £'000
Fixed assets investments:
Investments at fair value through profit or 9 244,923 236,680
loss
Current assets:
Debtors 11 665 1,454
Cash at bank and short-term deposits 12,651 5,294
13,316 6,748
Creditors: amounts falling due within one 12 1,515 6,078
year
Net current assets 11,801 670
Net assets 256,724 237,350
Capital and reserves:
Called up share capital 13 10,517 10,600
Share premium account 123,749 123,749
Capital redemption reserve 8,294 8,211
Capital reserve 103,097 83,426
Revenue reserve 11,067 11,364
Total shareholders' funds 256,724 237,350
pence pence
Net asset value per ordinary share 14 610.24 559.78
These Financial Statements were approved and authorised for issue by the Board
of Directors of The European Investment Trust plc on 26 November 2012 and were
signed on its behalf by:
Douglas McDougall
Chairman
Registered in England and Wales No. 1055384
The notes form part of these Financial Statements.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 30 September 2012
Called Share Capital
up share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Year ended 30
September 2012
At 1 October 2011 10,600 123,749 8,211 83,426 11,364 237,350
Net return after - - - 21,348 6,487 27,835
taxation for the year
Dividends paid 7 - - - - (6,784) (6,784)
Shares purchased and 13 (83) - 83 (1,677) - (1,677)
cancelled
At 30 September 2012 10,517 123,749 8,294 103,097 11,067 256,724
Year ended 30
September 2011
At 1 October 2010 10,675 123,749 8,136 125,185 10,102 277,847
Net return after - - - (40,024) 7,198 (32,826)
taxation for the year
Dividends paid 7 - - - - (5,936) (5,936)
Shares purchased and 13 (75) - 75 (1,735) - (1,735)
cancelled
At 30 September 2011 10,600 123,749 8,211 83,426 11,364 237,350
The notes form part of these Financial Statements.
CASH FLOW STATEMENT
for the year ended 30 September 2012
2012 2011
Note £'000 £'000
Operating activities:
Investment income received 8,979 10,522
Investment management fees paid (1,166) (1,317)
Other cash payments (422) (348)
Net cash inflow from operating activities 15 7,391 8,857
Servicing of finance:
Interest paid (124) (31)
Taxation:
Irrecoverable overseas tax paid (814) (1,292)
Recoverable overseas tax (paid)/received (68) 372
Total taxation paid (882) (920)
Capital expenditure and financial
investment:
Purchases of investments (93,093) (121,735)
Sales of investments 102,936 116,848
Exchange (losses)/gains on settlement (225) 425
Net cash inflow/(outflow) from capital and 9,618 (4,462)
financial investment
Equity dividends paid 7 (6,784) (5,936)
Net cash inflow/(outflow) before financing 9,219 (2,492)
Financing:
Payment for own shares purchased and (1,677) (1,735)
cancelled
Increase/(decrease) in cash 16 7,542 (4,227)
The notes form part of these Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
at 30 September 2012
1. Accounting policies
Basis of accounting
The Financial Statements are prepared on a going concern basis, under the
historical cost convention (modified to include fixed assets investments at
fair value), in accordance with the Companies Act 2006, UK Generally Accepted
Accounting Practice ("UK GAAP") and with the AIC Statement of Recommended
Practice issued in January 2009 relating to the Financial Statements of
Investment Trust Companies and Venture Capital Trusts. The Financial Statements
have been prepared in accordance with the applicable accounting standards. The
principal accounting policies detailed below have been applied consistently
throughout the period.
Income recognition
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 in accordance with Financial Reporting Standard 16:
"Current Taxation" 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.
Borrowings
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 investment 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 Investment Manager.
Investments
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, investment may be
carried at cost less any provision for impairment.
Cash at bank and short-term deposits
Cash at bank and short-term deposits comprises cash in hand and demand
deposits. The carrying value of cash at bank and short-term deposits is equal
to its fair value.
Foreign currency
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.
Taxation
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 Financial
Reporting Standard 19: "Deferred Tax". 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.
Capital reserve
Capital reserve - arising on investments sold
The following are accounted for in this reserve:
* gains and losses on the realisation of investments;
* realised 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.
Capital reserve - arising on investments held
The following are accounted for in this reserve:
* increases and decreases in the valuation of investments held at the year
end; and
* unrealised foreign exchange differences of a capital nature.
Dividends payable to shareholders
Under Financial Reporting Standard 21: "Events after the Balance Sheet Date",
final and special dividends are recognised as a liability in the year in which
they have been approved by shareholders in a general meeting.
2. Income
2012 2011
£'000 £'000
Income from investments:
Overseas dividends 9,045 9,734
Total income 9,045 9,734
3. Investment management fee
2012 2011
£'000 £'000
Investment management fee 1,157 1,311
Edinburgh Partners Limited was appointed to provide investment management,
marketing and general administrative services to the Company with effect from 1
February 2010. Under the agreement, Edinburgh Partners Limited is entitled to a
fee paid quarterly in arrears, at the rate of 0.55% per annum of the market
capitalisation of the Company. No performance fee will be paid.
During the year ended 30 September 2012, the investment management fees payable
to Edinburgh Partners Limited totalled £1,157,000 (2011: £1,311,000). At 30
September 2012 there was £292,000 outstanding payable to Edinburgh Partners
Limited (2011: £301,000) in relation to investment management fees.
In addition to the investment management fee, in the year ended 30 September
2012 the Company paid Edinburgh Partners £19,000 (2011: £nil) for marketing
related services. At 30 September 2012 there was £7,000 outstanding to
Edinburgh Partners (2011: £nil) in relation to marketing related services. This
cost is included in other expenses as detailed in note 4 of these Financial
Statements below.
4. Other expenses
2012 2011
£'000 £'000
Auditors' remuneration for:
Audit services 18 18
Directors' remuneration* 87 78
Other 291 285
396 381
* See the Directors' Remuneration Report in the full Annual Report and
Financial Statements.
5. Finance costs
2012 2011
£'000 £'000
Loan arrangement fee - 26
Loan non-utilisation fee 124 5
124 31
On 19 September 2011, the Company entered into a Euro 30,000,000 secured
multicurrency revolving loan facility agreement with Scotiabank Europe PLC for
the purpose of pursuing its investment objective. The facility is available for
three years and interest will be payable on amounts drawn down at the rate of
1.55% above the British Bankers' Association Interest Settlement Rate.
As at 30 September 2012, this facility had not been utilised. A non-utilisation
fee of 0.5% per annum is payable.
6. Tax on ordinary activities
a) Analysis of charge for
the year 2012 2011
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Current tax:
UK corporation tax - - - - - -
Overseas tax suffered 814 - 814 806 - 806
Total tax charge for the 814 - 814 806 - 806
year
b) The standard rate of corporation tax in the UK was 26% to 31 March 2012 and
24% from 1 April 2012. Accordingly, the Company's profits for this accounting
period are taxed at an effective rate of 25% (2011: 27%). The corporation tax
rate is expected to be reduced to 23% from 1 April 2013 and the effective rate
of corporation tax for the year ending 30 September 2013 is expected to be
23.5%. The corporation tax rate is expected to be reduced to 22% from 1 April
2014. The current taxation charge for the year ended 30 September 2012 is lower
than the effective rate of 25% (2011: 27%). The differences are explained
below:
2012 2011
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before 7,301 21,348 28,649 8,004 (40,024) (32,020)
taxation
Theoretical tax at UK 1,825 5,337 7,162 2,161 (10,806) (8,645)
corporation tax rate of
25% (2011: 27%)
Effects of:
- Foreign dividends that (1,902) - (1,902) (2,195) - (2,195)
are not taxable
- Non-taxable investment - (5,337) (5,337) - 10,806 10,806
gains
- Disallowed expenses 6 - 6 13 - 13
- Unrelieved excess 71 - 71 21 - 21
expenses
- Overseas tax suffered 814 - 814 806 - 806
814 - 814 806 - 806
c) Factors that may affect future tax charges
At 30 September 2012 the Company had unrelieved management expenses of £836,000
(2011: £552,000). It is unlikely that the Company will generate sufficient
taxable income in the future to use these expenses to reduce future tax charges
and therefore no deferred tax asset has been recognised.
In addition, due to the Company's status as an investment trust and the
intention to continue meeting the conditions required to obtain approval in the
foreseeable future, the Company has not provided deferred tax on any capital
gains and losses arising on the revaluation or disposal of investments.
7. Dividends
2012 2011
£'000 £'000
Declared and paid Payment date
Final dividend for the year ended 30 September 31 January 2012 5,088 -
2011 of 12.0p
Special dividend for the year ended 30 31 January 2012 1,696 -
September 2011 of 4.0p
Final dividend for the year ended 30 September 31 January 2011 - 4,664
2010 of 11.0p
Special dividend for the year ended 30 31 January 2011 - 1,272
September 2010 of 3.0p
6,784 5,936
The Directors recommend a final dividend in respect of the year ended 30
September 2012 of 12.0p and a special dividend of 4.0p payable on 31 January
2013 to all shareholders on the register at close of business on 11 January
2013, a total of 16.0p (2011: 16.0p). The ex-dividend date will be 9 January
2013. The recommended final dividend and special dividend are subject to
approval by shareholders at the Annual General Meeting to be held on 22 January
2013. Based on 42,069,731 ordinary shares in issue at the date of this report,
the total dividend payment will amount to £6,731,000 as detailed below. In
accordance with Financial Reporting Standard 21: "Events after the Balance
Sheet date", final dividends and special dividends are accounted for in the
period in which they are approved by shareholders. The recommended final
dividend and special dividend have therefore not been included as a liability
in these Financial Statements.
2012 2011
£'000 £'000
Proposed
2012 final dividend of 12.0p (2011: 12.0p) per ordinary share* 5,048 5,088
2012 special dividend of 4.0p (2011: 4.0p) per ordinary share* 1,683 1,696
6,731 6,784
* Based on 42,069,731 shares in issue at 26 November 2012.
8. Return per ordinary share
2012 2011
Net Ordinary Per Net Ordinary Per
return shares* share return Shares* share
£'000 pence £'000 pence
Net revenue return 6,487 42,172,762 15.38 7,198 42,420,474 16.97
after taxation
Net capital return 21,348 42,172,762 50.62 (40,024) 42,420,474 (94.35)
after taxation
Total return 27,835 42,172,762 66.00 (32,826) 42,420,474 (77.38)
* Weighted average number of ordinary shares in issue during the year.
9. Listed investments
2012 2011
£'000 £'000
Analysis of investment portfolio
movements
Opening book cost 268,775 250,224
Opening investment holding (losses)/ (32,095) 18,720
gains
Opening valuation 236,680 268,944
Movements in the year:
Purchases at cost 88,563 122,427
Sales - proceeds (102,078) (114,509)
Sales - realised (losses)/gains on sales (10,773) 10,633
Investment holding gains/(losses) 32,531 (50,815)
Closing valuation 244,923 236,680
Closing book cost 244,487 268,775
Closing investment holding gains/ 436 (32,095)
(losses)
244,923 236,680
2012 2011
£'000 £'000
Analysis of capital gains and losses
(Losses)/gains on sales (10,773) 10,633
Investment holding gains/(losses) 32,531 (50,815)
Gains/(losses) on investments 21,758 (40,182)
Fair value hierarchy
In accordance with Financial Reporting Standard 29: "Financial Instruments:
Disclosures", 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.
Classification Input
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. All of the Company's financial
instruments fall into Level 1, being valued at quoted prices in active markets.
Transaction costs
During the year ended 30 September 2012 the Company incurred transaction costs
of £153,000 (2011: £237,000) and £143,000 (2011: £191,000) 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.
10. Significant holdings
The Company had no holdings of 3% or more of the share capital of any portfolio
companies.
11. Debtors
2012 2011
£'000 £'000
Due from brokers 71 929
Taxation recoverable 569 501
Prepayments and accrued income 25 24
665 1,454
12. Creditors: amounts falling due within one year
2012 2011
£'000 £'000
Due to brokers 1,033 5,563
Other creditors and accruals 190 214
Management fee accrued 292 301
1,515 6,078
13. Called up share capital
2012 2011
£'000 £'000
Allotted, called-up and fully paid:
42,069,371 (2011: 42,400,748) ordinary shares of 25p 10,517 10,600
each
During the year to 30 September 2012, 331,377 ordinary shares were purchased
and cancelled at a cost of £1,677,000 (2011: 300,000 ordinary shares were
purchased and cancelled at a cost of £1,735,000).
Duration of the Company
The Company does not have a termination date or the requirement for any
periodic continuation votes.
14. Net asset value per share
30 September 30 September
2012 2011
Net asset value per ordinary share 610.24p 559.78p
The net asset value per ordinary share is based on net assets of £256,724,000
(2011: £237,350,000) and on 42,069,371 (2011: 42,400,748) ordinary shares,
being the number of ordinary shares in issue at the year end.
15. Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
2012 2011
£'000 £'000
Net return before finance costs and taxation 28,773 (31,989)
Adjust for returns from non-operating activities:
- (Gains)/losses on investments (21,758) 40,182
- Foreign exchange losses/(gains) of a capital nature 410 (158)
Return from operating activities 7,425 8,035
Adjustment for non-cash flow items:
- (Increase)/decrease in debtors and accrued income (1) 795
- (Decrease)/increase in creditors and accruals (33) 27
Net cash inflow from operating activities 7,391 8,857
16. Reconciliation of net cash flows to movement in net cash
2012 2011
£'000 £'000
Movement in net cash resulting from cash flows 7,542 (4,227)
Foreign exchange movements (185) (268)
Movement in net cash 7,357 (4,495)
Net cash brought forward 5,294 9,789
Net cash carried forward 12,651 5,294
Analysis of net cash
Foreign
At Cash exchange At
1 October flows movement 30 September
2011 2012
£'000 £'000 £'000 £'000
Cash at bank 5,294 7,542 (185) 12,651
Foreign
At Cash exchange At
1 October flows movement 30 September
2010 2011
£'000 £'000 £'000 £'000
Cash at bank 9,789 (4,227) (268) 5,294
17. 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:
2012 2011
Cash Cash
No flow No flow
interest interest interest interest
rate rate risk rate rate risk
Total exposure exposure Total exposure exposure
£'000 £'000 £'000 £'000 £'000 £'000
Equity shares
Euro 193,115 193,115 - 177,649 177,649 -
Swiss franc 25,944 25,944 - 46,736 46,736 -
Swedish krona 7,572 7,572 - 6,320 6,320 -
US dollar 6,973 6,973 - 5,975 5,975 -
Danish kroner 4,828 4,828 - - - -
Norwegian krone 6,491 6,491 - - - -
Cash at bank and short-term
deposits
Euro 12,568 - 12,568 4,934 - 4,934
Sterling 83 - 83 360 - 360
Debtors
Euro 373 373 - 1,316 1,316 -
Swiss franc 217 217 - 114 114 -
Norwegian krone 50 50 - - - -
Sterling 18 18 - 24 24 -
NZ dollar 7 7 - - - -
Creditors: amounts falling
due within one year
Euro - - - (2,715) (2,715) -
Swiss franc - - - (1,232) (1,232) -
Danish kroner (1,033) (1,033) - - - -
Sterling (482) (482) - (515) (515) -
US dollar - - - (1,616) (1,616) -
256,724 244,073 12,651 237,350 232,056 5,294
Exchange rates vs sterling 2012 2011
Euro 1.2552 1.1611
Swiss franc 1.5176 1.4150
Swedish krona 10.5876 10.6993
US dollar 1.6148 1.5578
Danish kroner 9.3571 8.6398
Norwegian krone 9.2444 9.1459
NZ dollar 1.9439 2.0379
18. Risk analysis
The Company is an investment company, listed on the London Stock Exchange, and
conducts its affairs so as to qualify in the UK as an investment trust under
the provisions of Sections 1158 and 1159 of the Corporation Tax Act 2010. 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 Investment Manager, is responsible for the Company's risk management, as
set out in detail in the Business Review of the Directors' Report.
The principal risks the Company faces are:
• Investment and strategy risk
• Discount volatility risk
• Market risk (comprising: interest rate risk, currency risk and other price
risk)
• Liquidity risk
• Credit risk
• Gearing risk
The Investment Manager 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 Business Review of the Directors' Report.
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
or ungeared in a rising 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 Extracts from the Directors' 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.
Market Risk
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 2012 are
disclosed in note 17 of these Financial Statements.
The majority of the Company's assets were non-interest bearing as at 30
September 2012. There was limited exposure to interest bearing liabilities
during the year ended 30 September 2012.
If interest rates had reduced by 0.25% (2011: 0.25%) from those obtained as at
30 September 2012 it would have the effect, with all other variables held
constant, of reducing the net revenue return before taxation and therefore
reducing net assets on an annualised basis by £32,000 (2011: £13,000). If there
had been an increase in interest rates of 0.25% (2011: 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 and short-term deposits as at
30 September 2012 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.
Currency risk
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 2012
are disclosed in note 17 of these Financial Statements.
If sterling had strengthened by 10% against all other currencies on 30
September 2012, with all other variables held constant, it would have the
effect of reducing the net capital return before taxation and therefore
reducing net assets by £25,711,000 (2011: £23,750,000). If sterling had
weakened by 10% against all other currencies there would have been an equal and
opposite effect on the net capital return before taxation. This level of change
is considered to be reasonable based on observation of current market
conditions.
Other price risk
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 www.theeuropeaninvestmenttrust.com and on the Edinburgh
Partner's website www.edinburghpartners.com.
Fixed asset investments are valued at their fair value. Details of the
Company's investment portfolio as at 30 September 2012 are disclosed above. In
addition an analysis of the investment portfolio by sector and geographical
distribution is detailed above.
The maximum exposure to other price risk at 30 September 2012 is the fair value
of investments of £244,923,000 (2011: £236,680,000).
If the investment portfolio valuation fell by 20% from the amount detailed in
the Financial Statements as at 30 September 2012 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 £48,985,000 (2011: £47,336,000).
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 other price risk at 30 September 2012 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
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 2012. 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
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 JPMorgan Chase Bank,
NA 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.
The maximum exposure to credit risk as at 30 September 2012 was £258,239,000
(2011: £243,428,000). The calculation is based on the Company's credit risk
exposure as at 30 September 2012 and this may not be representative of the year
as a whole.
Gearing risk
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.
On 19 September 2011, the Company entered into a three-year Euro 30,000,000
loan facility with Scotiabank Europe PLC. As at 30 September 2012 none of this
facility had been utilised and the Company therefore had no gearing at the year
end (2011: £nil). The principal covenants are (a) that the adjusted asset
coverage ratio must be not less than 4.00 to 1.00, and (b) that the net asset
value of the Company must be not less than £120,000,000 at any time.
The Board undertakes an annual assessment and review of all the risks stated
above and in the Extracts from the Directors' 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.
19. 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, which have
been met throughout the year:
◠as a public company, the Company has a minimum share capital of £50,000;
â— in order to be able to pay dividends out of profits available for
distribution, the Company has to be able to meet one of the two capital
restrictions tests imposed on investment companies by company law.
Changes to ordinary share capital are set out in note 13 of these Financial
Statements. Dividend payments are set out in note 7 of these Financial
Statements.
The Company's capital comprises:
2012 2011
£'000 £'000
Called-up share capital 10,517 10,600
Share premium account 123,749 123,749
Capital redemption reserve 8,294 8,211
Capital reserve 103,097 83,426
Revenue reserve 11,067 11,364
Total shareholders' funds 256,724 237,350
The capital reserve consists of realised capital reserves of £102,662,000 and
unrealised capital gains of £435,000 (2011: realised capital reserves of
£115,523,000 and unrealised capital losses of £32,097,000). The unrealised
capital gains consist of investment holding gains of £436,000 (2011: unrealised
investment holding losses of £32,095,000) and unrealised foreign exchange
losses of £1,000 (2011: £2,000).
The Company's objectives for managing capital are the same as the previous year
and have been complied with throughout the year.
20. Transactions with the Investment Manager
Information with respect to transactions with the Investment Manager is
provided in note 3 of these Financial Statements and in the Directors' Report
in the full Annual Report and Financial Statements.
Annual General Meeting
The Company's Annual General Meeting will be held on Tuesday, 22 January 2013
at 11.00 am 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
Edinburgh Partners' website at www.edinburghpartners.com.
Enquiries:
Dale Robertson
Kenneth J Greig
Edinburgh Partners Limited
Telephone: 0131 270 3800
The Company's registered office address is:
Beaufort House
51 New North Road
Exeter
EX4 4EP
26 November 2012
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.
ENDS
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