THE EUROPEAN INVESTMENT TRUST PLC: 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.
- 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.
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.
The Company is a member of the Association of Investment Companies ("AIC").
Edinburgh Partners Limited ("Edinburgh Partners").
Investment management fee
0.55% per annum of the Company's market capitalisation payable quarterly in arrears.
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
Capital return per ordinary 50.62p (94.35)p
Total return per ordinary share* 66.00p (77.38)p
Final dividend per ordinary 12.00p 12.00p
Special dividend per ordinary 4.00p 4.00p
Total dividend per ordinary 16.00p 16.00p
* 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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
Edinburgh Partners Limited
26 November 2012
PORTFOLIO OF INVESTMENTS
as at 30 September 2012
% of % of
Net Rank Rank Company Sector Country Valuation Assets Assets 2012 2011 £'000 2012
1 11 Ryanair Consumer Services Ireland 8,912 3.5
2 3 Sanofi Health Care France 8,315 3.2
3 21 Gerresheimer Health Care Germany 8,092 3.2
4 20 Belgacom Telecommunications Belgium 7,906 3.1
5 8 Vivendi Consumer Services France 7,649 3.0
6 12 Swedbank Financials Sweden 7,572 2.9
7 6 DCC Industrials Ireland 7,496 2.9
8 37 D'Ieteren Consumer Services Belgium 7,436 2.9
9 4 CAF Industrials Spain 7,202 2.8
10 - Wirecard Industrials Germany 7,200 2.8
11 35 Swatch Consumer Goods Switzerland 7,151 2.8
12 16 SAP Technology Germany 7,115 2.8
13 19 GEA Industrials Germany 7,108 2.8
14 24 Kabel Consumer Services Germany 7,057 2.7
15 13 ENI Oil & Gas Italy 7,001 2.7
16 17 Gazprom Oil & Gas Russia 6,973 2.7
17 14 Intesa Financials Italy 6,788 2.6
18 38 Michelin Consumer Goods France 6,633 2.6
19 - Mediaset Consumer Services Spain 6,583 2.6
20 - Orkla Industrials Norway 6,491 2.5
21 2 Royal Imtech Industrials Netherlands 6,315 2.5
22 7 Total Oil & Gas France 6,156 2.4
23 18 ABB Industrials Switzerland 6,098 2.4
24 28 Prysmian Industrials Italy 6,038 2.4
25 - Safran Industrials France 6,029 2.3
26 1 Ahold Consumer Services Netherlands 5,921 2.3
27 39 Syngenta Basic Materials Switzerland 5,877 2.3
28 - Ipsos Consumer Services France 5,738 2.2
29 27 Novartis Health Care Switzerland 5,655 2.2
30 - Arcelormittal Basic Materials France 5,616 2.2
31 30 BBVA Financials Spain 5,607 2.2
32 22 Heineken Consumer Goods Netherlands 5,259 2.0
33 - Metro Consumer Services Germany 5,074 2.0
34 41 Amadeus Industrials Spain 4,938 1.9
35 - Piaggio Consumer Goods Italy 4,895 1.9
36 - A.P. Industrials Denmark 4,828 1.9
37 9 Unilever Consumer Goods Netherlands 4,637 1.8
38 - Randstad Industrials Netherlands 2,399 0.9
39 36 Julius Baer Financials Switzerland 1,163 0.5
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
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)
Consumer Services 21.2
Consumer Goods 11.1
Health Care 8.6
Oil & Gas 7.8
Basic Materials 4.5
Cash and other net 4.6 assets
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
26 November 2012
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.
for the year ended 30 September 2012
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
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
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
Debtors 11 665 1,454
Cash at bank and short-term deposits 12,651 5,294
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
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
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
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
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)
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)
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
Income from investments:
Overseas dividends 9,045 9,734
Total income 9,045 9,734
3. Investment management fee
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
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
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
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%)
- 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
£'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.
Level 1 Valued using quoted prices in active markets for identical
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
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
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
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
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
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
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:
No flow No
interest interest interest interest
rate rate risk rate rate risk
Total exposure exposure Total exposure exposure
£'000 £'000 £'000 £'000 £'000 £'000
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
Euro 12,568 - 12,568 4,934 - 4,934
Sterling 83 - 83 360 -
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; ● 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
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.
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.
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