Annual Financial Report

FIDELITY EUROPEAN TRUST PLC

Final Results for the year ended 31 December 2023

Financial Highlights:

• The Board of Fidelity European Trust PLC (the “Company”) recommends a final dividend of 4.99 pence which together with the interim dividend payment of 3.26 pence per share (totalling 8.25 pence) represents an increase of 7.1% over the total dividend of 7.70 pence paid in the prior year.

• During the year ended 31 December 2023, the Company reported a net asset value (NAV) total return of +17.5% while the Benchmark Index, the FTSE World Europe ex UK Index, rose by +15.7%.

• Over the same period, the ordinary share price total return was +15.3%.

• The Portfolio Managers remain focused on identifying attractively valued companies which will deliver consistent dividend growth cycle on cycle.

Contacts

For further information, please contact:

Smita Amin

Company Secretary

01737 836347

FIL Investments International

Chairman’s Statement

The year under review began as the previous one ended, with interest rates and inflation continuing to ratchet upwards in Europe, as they did in the US and UK. While early expectations had been that the end of China’s ‘zero-Covid’ policy would lead to a swift normalisation of economic activity and foreign travel, the reality was much more muted, and this has had negative implications for Europe, a region for which Chinese companies and consumers are a major source of business. These headwinds led the International Monetary Fund to revise down its expectations for economic growth in the Euro area twice during the course of the year, with the October World Economic Outlook predicting GDP growth of just 0.7% for 2023. With no European Central Bank rate increases since September 2023, however, more moderate inflation numbers and increased hopes of a rapid resumption of monetary easing on both sides of the Atlantic, markets rallied in the fourth quarter of the year.

While consumers have continued to face a cost-of-living crisis, many companies have managed to maintain their margins, even amid higher costs, a theme that has played out favourably in the Company’s portfolio given our Portfolio Managers’ focus on well financed businesses with good pricing power. While Sam Morse and Marcel Stötzel seek to invest across a broad spread of countries and sectors in Europe, they are fundamentally bottom-up stock pickers. Their focus is on finding attractively valued dividend growers with strong business franchises and balance sheets, which are not overly at risk from exogenous factors such as geopolitics or the macroeconomic backdrop. This constitutes the core of their long-term investment philosophy.

Performance
The Company performed well in the year under review, delivering a net asset value total return of +17.5% and comfortably beating the +15.7% total return of the Benchmark Index, the FTSE World Europe ex UK Index. The share price total return of +15.3% marginally lagged the Benchmark Index as the discount to NAV widened, rising from 5.4% to 7.3% at the year end. This reflected a general trend of widening investment trust discounts, although your Company’s discount at the year end was substantially narrower than the 13.3% average for the investment companies’ universe as a whole and remained tighter than the average of its peers in the AIC Europe sector. The longer-term performance record is also strong, with NAV and share price total returns ahead of the Benchmark Index over three, five and ten years to the end of December 2023. These are encouraging results for the Company and help to make up for negative absolute returns in the previous financial year.

Dividends
As part of their investment process, your Portfolio Managers focus on companies that are capable of growing their dividends over time. The Board does not impose any income objective in any particular year, recognising that both capital and income growth are components of performance, as reflected in the investment objective of the Company. We do, however, have a policy whereby we seek to deliver a progressive dividend in normal circumstances, paid twice yearly in order to smooth dividend payments for the reporting year. Unlike open-ended funds such as OEICs, investment trusts can hold back some of the income they receive in good years, thereby building up revenue reserves that can then be used to supplement dividends during challenging times.

The Company’s revenue return for the year to 31 December 2023 was 9.32 pence per ordinary share (2022: 9.00 pence), and an interim dividend of 3.26 pence per ordinary share was paid on 27 October 2023 (2022: 3.08 pence). The Board is pleased to recommend a final dividend of 4.99 pence for the year ended 31 December 2023 (2022: 4.62 pence) for approval by shareholders at the Annual General Meeting (“AGM”) on 8 May 2024. The interim and final dividends (total of 8.25 pence) represent an increase of 0.55 pence (7.1%) over the 7.70 pence paid for the year ended 31 December 2022.

The final dividend will be payable on 14 May 2024 to shareholders on the register at close of business on 2 April 2024 (ex-dividend date 28 March 2024). Shareholders may choose to reinvest their dividends for additional shares in the Company.

Outlook
Last year, I sounded a cautious note on the outlook for the portfolio, given the risk of a global recession at some stage in 2023. While this has not yet come to pass – and indeed, there was a degree of euphoria in markets towards the end of the reporting year under review – it would be unwise to buy too fully into the idea that ‘normalising’ interest and inflation rates will ensure a rosy picture in 2024. As Sam points out in the Portfolio Managers’ Review below, a return to target inflation rates of 2% could be seen as quite restrictive in a historical context. If this is achieved only because of a flatlining global economy, then the market could take fright over the prospects for corporate earnings and dividends, particularly if interest rate reductions are seen to be delayed. Other reasons to be cautious include the possibilities arising from many elections this year, the Chinese economy and the property market – which appear to have deeper-seated problems than anyone expected, the ongoing conflagration in Ukraine, and the conflict in the Middle East, which has been affecting energy prices given concerns over security of shipping in the Red Sea.

With all that said, however, your Company performed well in 2023, aided by stock-specific opportunities in areas such as private equity, where 3i Group and Partners Group were the two biggest winners in the portfolio. There was also a positive impact from gearing, maintained throughout the year and used to take advantage of the fact that markets tend to rise over the long-term. The Portfolio Managers’ focus is unchanged and continues to be on finding attractively valued companies with good prospects for cash generation and dividend growth over the longer-term, with positioning driven by opportunities at the individual stock level rather than macro developments.

Fees
It is the practice of the Board to review fees paid to the Manager every third year, and this was done early in 2024. It has been agreed that the fee rate should remain unchanged for the forthcoming three years beginning on 1 April 2024. The Directors believe that the fees continue to represent good value for shareholders.

OTHER MATTERS
Cybersecurity
Fidelity takes the threat of cybercrime very seriously and is active in ensuring that its own and customers’ data remains secure, with risks regularly re-assessed and communicated to the Board. Such risks – which have increased due to the Russia/Ukraine conflict and the trend to more working from home – primarily relate to phishing, remote access threats, extortion and denial-of-services attacks. Fidelity has established a dedicated cybersecurity team which provides regular awareness updates and best practice guidance. The Manager’s technology team has also developed a number of initiatives and controls in order to provide enhanced mitigating protection from this ever-increasing threat. Actions in place include control strengthening, geo-blocking, and phishing mitigants, combined with enhanced resilience and recovery options. The Company’s third-party service providers also have similar measures in place. There are more details below.

Environmental, Social and Governance (“ESG”) Investment
While your Company is not a ‘green’ or ‘ethical’ fund, ESG factors remain an important part of the work of both the Board and the Portfolio Managers, as continuing deterioration in the climate and other social and governance concerns present a potential investment risk to your portfolio. Businesses are under pressure to ensure that their activities are not harmful in these respects, and although there is progress on a wide range of issues – from deforestation to clean energy transition – more still needs to be done. Fidelity International (“Fidelity”) has a sustainable investing approach, including engagement and voting principles and guidelines, as well as having developed its own proprietary forward-looking ESG ratings. These ratings bring together both Fidelity’s internal research and interactions with issuers, with analysts quantifying the direction of change in companies’ ESG performance and assigning a score from A to E to each company on Environmental (E), Social (S) and Governance (G) factors. The ratings of the companies in the portfolio are ahead of the broader market and continue to improve. Details of ESG engagements by the management team in the year under review are included in the Portfolio Managers’ Review below, and an explanation of how Fidelity has embedded ESG factors in its investment decision-making can be found in the Annual Report.

Discount Management and Treasury Shares
The Board has an active discount management policy, the primary purpose of which is to reduce discount volatility. It seeks to maintain the discount in single digits in normal market conditions. Buying in shares at a discount also results in an enhancement to the NAV per ordinary share.

In order to assist in managing the discount, the Board has shareholder approval to hold ordinary shares repurchased by the Company in Treasury, rather than cancelling them. Shares in Treasury are then available to be re-issued at NAV per ordinary share or at a premium to NAV per ordinary share, facilitating the management of and enhancing liquidity in the Company’s shares. The Board is seeking shareholder approval to renew this authority at the AGM on 8 May 2024.

The discount remained in single digits throughout the year under review, and no shares were repurchased or issued.

Gearing
The Company continues to gear through the use of derivative instruments, primarily contracts for difference (“CFDs”), and the Portfolio Manager has flexibility to gear within the parameters set by the Board. As at 31 December 2023, the Company’s gross gearing was 13.1% (2022: 11.7%), with net gearing of 11.5% (2022: 11.7%) owing to a small number of short derivative positions in the portfolio. In the reporting year, gearing was maintained between the limits set by the Board and made a positive contribution to both absolute and relative NAV performance, as can be seen from the attribution analysis table in the Annual Report. This is a good reminder of the benefit of gearing in a rising market.

The Board monitors the level of gearing and the use of derivative instruments carefully and has defined a risk control framework for this purpose which is reviewed at each Board meeting. It should be stressed that all gearing is subject to the Portfolio Managers’ confidence in identifying attractive investment opportunities, and to their remaining attractive.

Board of Directors
We continue to review Board composition and Directors’ succession on a regular basis to ensure that we have a Board with a mix of tenures and one which provides diversity of perspective together with the range of appropriate skills and experience for your Company. In accordance with the UK Corporate Governance Code for Directors of FTSE 350 Companies, all Directors will be subject to annual re-election at the AGM on 8 May 2024. The Directors’ biographies can be found in the Annual Report and between them they have a wide range of appropriate skills and experience to form a balanced Board for the Company.

While there have been no changes to the Board in the year under review, I will have completed nine years’ service in December 2024, and in accordance with best practice, I intend to step down at the conclusion of the AGM in 2025. An exercise to identify my successor, led by Senior Independent Director, Paul Yates, will take place in Autumn 2024.

Continuation Vote
In accordance with the Company’s Articles of Association, the Company is subject to a continuation vote every two years. The most recent such vote was at last year’s AGM on 10 May 2023, and I was pleased to see strong evidence of shareholder support in the 99.86% of votes cast in favour of continuation. The next continuation vote will take place in 2025.

Annual General Meeting
The Company’s AGM is at 12 noon on Wednesday, 8 May 2024, and the Board and I hope to see as many shareholders as possible. Details of the AGM are below.

VIVIAN BAZALGETTE
Chairman
19 March 2024

ANNUAL GENERAL MEETING – WEDNESDAY, 8 MAY 2024 AT 12 NOON
The AGM of the Company will be held at 12 noon on Wednesday, 8 May 2024 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.

For those shareholders who would prefer not to attend in person, we will live-stream the formal business and presentations of the meeting online.

Sam Morse, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He, the Co-Portfolio Manager, Marcel Stötzel, and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at investmenttrusts@fil.com or in writing to the Company Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.

Properly registered shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Managers and we will answer as many of these as possible at an appropriate juncture during the meeting.

Further information and links to the Lumi platform may be found on the Company’s website at www.fidelity.co.uk/europe. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.

Please note that investors on platforms, such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome online participation as a guest. Once you have accessed https://web.lumiagm.com from your web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 125-205-035. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.

Portfolio Managers’ Review

Question
How has the Company performed in the year to 31 December 2023?

Answer
Sam: We know that what really matters to shareholders is how the share price performs. In that regard, 2023 has been a good year in absolute terms, with the share price up by 15.3% (total return in Sterling). That is pleasantly surprising given that we entered the year with such gloomy prospects and many predicting recession given the cost-of-living crisis and rising interest rates. However, with the Benchmark Index rising by 15.7%, the share price just about kept up with the market. The NAV did better than the Benchmark, rising by 17.5%, however the share price discount to NAV widened during the year thereby offsetting this outperformance. The Company’s gearing which was maintained through the year at a low double-digit level, was the main reason that the NAV outperformed. This is a good reminder of the benefit of gearing in a rising market, and one of the key advantages of investment trusts relative to other investment vehicles.

Question
What stocks have been the main drivers of performance in 2023?

Answer
Sam: After a strong year in 2022, stock-picking was more mixed in 2023 making only a marginally positive contribution to the Company’s outperformance in NAV terms. There were two big winners, both from the financials sector and participants in the private equity industry. 3i Group’s shares rose following another very strong year of growth from its main investment, Action, which is a continental European discount retailer. Investors feared that the cost-of-living crisis would limit the spending of Action’s existing customers, but it appears to have driven greater footfall as the squeeze on disposable income encouraged new customers to seek the bargains on offer.

Partners Group enjoyed a big re-rating as investors’ worst fears regarding the economy and a knock-on impact on private equity valuations, receded and were replaced by a recognition of the resilience of the group, in terms of both valuations and fund-raising, given it is spread across different private asset classes and different customer groups respectively.

In contrast, there was a tail of more lacklustre performers. Sampo, the Nordic insurance company, was perhaps the most notable example. It suffered some weak underwriting results, largely weather-related, and shareholders were also disappointed by the company’s conservative distribution policy. We still expect the stock to be a steady compounder, from an attractive level of dividend yield, especially now that it has refocused on its core business of non-life insurance in the Nordic markets, which enjoy higher returns than most insurance markets in continental Europe.

Below are the top five stock contributors and detractors to NAV performance in the Company’s reporting year.

Question
Give an example of how your bottom-up stock selection process has added value to the Company this year?

Answer
Marcel: The two private equity names that were our big winners were both great examples of where we benefited from focusing on bottom-up stock picking rather than top-down macro forecasts. Both 3i Group and Partners Group had big macro clouds hanging over them - from worries about the impact higher interest rates/lower stock market levels would have on private equity to concerns that portfolio companies would be hit by the cost-of-living squeeze and looming recession. Additionally, there were concerns that the funding/fund raising environment would dry up just at the time that private equity players were unable to exit past investments. We shared these concerns, but looking at a bottom-up stock picking basis, we felt strongly that the long-term impact of the above was overstated. Instead, we felt that the key drivers of the stocks over the long-term were still intact and would remain so in the event of any short-term wobbles. For example, for 3i what really mattered was the sales performance from its main investment Action. While this might be impacted in the short-term, this would not have been enough to change the strong long-term outlook (and in the end the short-term held up well too). For Partners, what mattered the most was their fund-raising ability as their earnings are heavily skewed towards management fees. While this has been impacted in the short-term (although less than feared) we do not feel that this changes the excellent long-term fundraising potential of the company. Credit must also go to our Diversified Financials analyst who did some great value-add analysis (including hosting a “Private Equity Day” where we met leading industry CEOs) and consistently kept us focused on the key longer-term drivers of the companies’ profits.

Question
How are you managing geopolitical risk within the portfolio?

Answer
Sam: We are unable to predict outcomes in this respect. We do, however, try to make sure that in the event of any outcome, we are not overly exposed relative to the Benchmark. We try to achieve this by maintaining a balance in the portfolio on sector weightings and by running “what if” scenarios related to geopolitical tensions such as those between China and Taiwan or North and South Korea. An adverse geopolitical event, such as the invasion of Ukraine by Russia, will impact the market negatively and we are not able to escape the general downdraft, but the underlying portfolio tends to be relatively defensive, partly given our focus on balance sheet strength, such that typically it falls by less than the market. We realise that will only be a small consolation at the time but, over the long-term, companies grow dividends and markets do rise despite endless negative headlines regarding geopolitical threats and events.

Question
With inflation looking like it will normalise, what effect will this have on markets and in particular your portfolio?

Answer
Sam: Two things to consider in answering this question: what is normal inflation and how will we get there? Central banks in the US and Europe are targeting inflation of less than two percent, and assuming that is the yardstick in terms of normal, then the hope is that this normality is achieved without a recession. Such a result would be celebrated by investors and result in a market rerating in anticipation of monetary easing and better times ahead. If, however, the inflation target is reached because the global economy stalls, then the market is likely to take fright about the prospects for corporate earnings and dividends, even if interest rates are falling. In terms of the Company’s portfolio, we try to focus on businesses with strong pricing power. The corporate sector has, in general, surprised investors in its ability to maintain margins through higher pricing while inflation has been at these high levels. Some have called it “greedflation”. As inflation eases, this phenomenon may prove unsustainable and only those companies with genuine pricing power will be able to maintain margins.

Answer
Marcel: I agree with Sam’s views and would add that inflation normalising will also have an important knock-on effect on the ability of central banks to cut interest rates. This is important as a number of investments use the “risk free rate” as the rate of return they need to exceed in order to be attractive to investors. As such the lowering of interest rates has (all else being equal) a direct impact on making other investments more attractive. Additionally, a number of European companies are sitting on fixed rate debt that was taken out during the depths of the pandemic. This debt has an average interest rate well below current market interest rates which means that if central banks are unable to meaningfully lower rates by the time this debt becomes due (late 2024/2025), then a number of companies could see a large interest expense hit. At an aggregate level, this interest rate shock could also have a negative impact on economies.

Question
How have you incorporated ESG into the management of the portfolio this year?

Answer
Sam: At Fidelity, the bulk of our ESG analysis is done by our fundamental equity analysts alongside their work on building an investment thesis. As well as rating a company a ‘buy’ or a ‘sell’ they also assign a sustainability rating on a scale of A-E. As long-term investors, we believe that over time companies with good ESG practices will also be those that have sustainable business models that display the quality characteristics we look for in our investee companies. Our equity analysts are supported by Fidelity’s Sustainable Investing analysts who offer expertise and allow us to conduct larger thematic pieces of work.

Our wider team engaged with 28 holdings in the Company during the year through approximately 40 different interactions on ESG topics, including 13 in-person meetings or conference calls with investee companies. Executive remuneration was the most prominent engagement topic followed by governance and biodiversity.

Answer
Marcel: Using ESG analysis as an additional layer of “risk evaluation” allows us to make sure that we are considering the full set of company risks. These were not the only reasons for some of the sales we carried out last year, but they were nonetheless a key input into our decision to sell the likes of Prosus (Social concerns) and Schindler (Governance concerns).

Question
Looking forward into 2024 and beyond, which sectors and regions are you particularly excited about?

Answer
Sam: We do not really do excitement! As investors, there is always the danger that we get overexcited by potential rewards and overlook downside risks. A fast-growing region, for example, may also have unattractive corporate governance or poor industry structures. Academic studies, in particular those by Dimson, Marsh and Staunton from the London Business School, have shown that there is little correlation between the economic growth of a country and the performance of its stock market. Encouragingly, given our investment process, they also argue that real dividend growth is a much more reliable indicator of likely returns. So, we take an active approach to stay balanced by the large sector groupings (e.g., energy, healthcare, financials etc.) and by regions, such that it is the stock-picking that drives the performance of the Company’s portfolio. In terms of stock-picking, Marcel and I are very focused on identifying attractively valued companies which will deliver consistent dividend growth cycle on cycle. We believe focusing on consistent dividend growers will deliver better returns in the long run, rather than chasing “exciting” regions or sectors.

Question
Sam you are coming up to 13 years of managing the Company’s portfolio, with fantastic comparative performance versus the Benchmark Index, both in capital growth and dividend growth. What has been the key to success over the longer-term?

Answer
Sam: I am wary of this. Thirteen is an unlucky number and disclaimers correctly warn that good past performance is no guarantee of future success! We will, of course, always have good years and bad years, but Marcel and I remain confident that if we continue to identify consistent dividend growers that are attractively valued, we will continue to deliver some outperformance compared to the Benchmark over time. Gearing will, of course, also enhance that outperformance over the long-term as markets rise. The magic of the compounding of consistent outperformance over time, coupled with a very sharp focus on assessing potential downside to avoid banana skins, is what has allowed the Company’s relative performance to pull ahead from its Benchmark over time.

SAM MORSE
Portfolio Manager
19 March 2024

MARCEL STÖTZEL
Co-Portfolio Manager
19 March 2024

VOTING CASE STUDIES: ESSILORLUXOTTICA AND PUMA
BACKGROUND
Fidelity International (“Fidelity”) has long encouraged European investee companies to adopt long-term incentive plans (“LTIPs”) for senior management with a minimum share release period of five years. This is intended to focus management’s attention beyond the quarterly reporting cycle by linking a substantial portion of their remuneration with shareholders over a five year time horizon. Fidelity will generally vote against agenda items related to executive remuneration at European investee companies if their long-term incentive plan does not have a share exposure or sales restriction period of at least five years from grant, measured on a weighted-average basis.

In addition to this, we periodically engage with companies to influence their behaviour in setting remuneration levels for senior employees. We wrote to companies in November and asked them to be mindful of granting significant executive pay rises in the current environment. We have taken the view that in order to support a large pay increase that is misaligned with the broader workforce, the rationale would need to be exceptionally convincing, and the boards of such companies would need to demonstrate that it had also considered how best to support lower paid workers during the cost-of-living crisis.

These policies informed our decision to vote against PUMA’s remuneration policy at the 2023 AGM because their long-term incentive awards do not have a five year restriction period. We also decided to vote against EssilorLuxottica’s remuneration policies for the Chairman/CEO for the reasons outlined below.

ANALYSIS ON OUR VOTING DECISIONS AND COMPANY ENGAGEMENT
Fidelity wrote to the chairs of holdings in major European indices to highlight the importance of responsible corporate responses to the challenges posed by the cost-of-living crisis. This initiative formed part of our ongoing engagement with boards and management teams ahead of their annual general meetings in 2023.

We shared best practices learned from our various engagements, including prioritising lower-paid employees in pay reviews, and providing one-off cost-of-living support payments or providing other forms of non-financial support to lower-paid staff. More broadly, we encouraged responsible corporate responses to the cost-of-living challenges faced by employees and broad alignment between workforce and executive pay outcomes.

On executive remuneration, we encouraged boards to ensure pay decisions reflected the principles of fairness and equitable treatment. When setting executive pay, we asked remuneration committees to consider the broader workforce experience and generally avoid above-workforce base salary increases. We also asked boards to remain mindful of the theoretical potential for windfall LTIP awards.

PUMA: We communicated our voting intentions with the company to explain our position on LTIPs before casting our vote against the remuneration policy.

EssilorLuxottica: We decided to vote against the remuneration policies for the Chairman/CEO, Francesco Milleri. We carried out peer analysis and concluded that the 20% base salary increase given to Milleri did not align his remuneration with peers. We believe that his total compensation package was already competitive compared to European luxury goods peers, especially when taking into account the large quantum of company shares awarded to him. Furthermore, we felt the performance hurdles on the long-term incentive plan and bonus were not best-in-class and were not sufficiently stretching.

We engaged with the company ahead of the AGM and decided that we were unable to vote with management on this proposal.

OUTCOMES
PUMA: In the case of PUMA, other shareholders were aligned with our stance and the remuneration report was voted down at the AGM by a majority of 54% of votes cast.

EssilorLuxottica: In contrast, the result for this vote did not go our way. The proposal was passed with around 30% of votes cast against the resolution.

In both cases, we will continue to monitor the company’s remuneration practices.

HIGH CONVICTION HOLDINGS
PUMA: is well known as the world’s third largest sportswear manufacturer behind Nike and Adidas. There is double digit growth in the sporting goods market annually and, as the lines blur between luxury and ‘athleisure’, PUMA is well placed in the oligopoly-like market structure. PUMA has been through a dramatic brand reinvigoration that has resulted in strong growth and margin improvement over the past few years. The share price weakness at the beginning of 2023 on fears of a consumer slowdown provided an attractive entry point as the long-term thesis is sound. Importantly for us, the company also has a strong balance sheet and cash generation that supports double digit dividend growth.

EssilorLuxottica is a global leader in the design, manufacture and distribution of ophthalmic lenses, frames and sunglasses. Formed by the merger in 2018 of Essilor (founded in 1849) and Luxottica (founded in 1961), the combined company has over 11,000 patents and over 180,000 employees. The result is a vertically integrated business that seeks to provide innovative lenses and frames to improve the lives of its customers. EssilorLuxottica is the global leader in ophthalmic lenses (51% sales), frames (20% sales) and sunglasses (25% sales). Around 70% of the business is related to prescription eye care making it one of the best ways to gain exposure to the structurally growing demand for eye-solutions.

Strategic Report

RISK FRAMEWORK
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal and emerging risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve the Company’s strategic objectives.

Climate change, which refers to a large scale shift in the planet’s weather patterns and average temperatures, continues to be a key emerging as well as a principal risk confronting asset managers and their investors. Globally, climate change effects are already being experienced in the form of changing weather patterns. Extreme weather events can potentially impact the operations of investee companies, their supply chains and their customers. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. Further details are in the Annual Report. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially shareholder returns.

Other emerging risks may continue to evolve from unforeseen geopolitical and economic events, and also from artificial intelligence (AI).

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the risks listed below as the principal risks and uncertainties faced by the Company.

Other risks facing the Company include:

Tax and Regulatory Risks
There is a risk of the Company not complying with tax and regulatory requirements.

A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status, resulting in the Company being subject to tax on capital gains.

There is a risk that outstanding withholding tax reclaims may not be recoverable from some jurisdictions and may need to be written-off. The Manager’s tax team works closely with the Custodian to keep these under review and the Board is kept updated on the recoverability of the withholding tax reclaims at each Audit Committee meeting.

The Board monitors tax and regulatory changes at each Board meeting and through active engagement with regulators and trade bodies by the Manager.

Continuation Vote
A continuation vote takes place every two years. There is a risk that shareholders do not vote in favour of the continuation of the Company during periods when performance of the Company’s NAV and its share price is poor. At the AGM held on 10 May 2023, 99.86% of the votes cast by shareholders were in favour of the continuation of the Company. The next continuation vote will take place at the AGM in 2025.

Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long-term growth in both capital and income. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment on the viability of the Company, the Board has considered the following:

 The ongoing relevance of the investment objective in prevailing market conditions;

 The Company’s level of gearing;

 The Company’s NAV and share price performance compared to its Benchmark Index;

 The principal and emerging risks and uncertainties facing the Company and their potential impact, as set out above;

 The likely future demand for the Company’s shares;

 The Company’s share price discount to the NAV;

 The liquidity of the Company’s portfolio;

 The level of income generated by the Company; and

 Future income and expenditure forecasts.

The Company’s performance for the five year reporting period to 31 December 2023 was well ahead of the Benchmark Index, with a NAV total return of 89.9% and a share price total return of 99.4% compared to the Benchmark Index total return of 65.3%. The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:

 The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;

 The fact that the portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary;

 The Board’s discount management policy; and

 The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.

In preparing the Financial Statements, the Directors have considered the impact of climate change as detailed above. The Board has also considered the impact of regulatory changes, unforeseen market events, the ongoing implications of the Russia and Ukraine war and conflicts in the Middle East and how this may affect the Company.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which is below.

GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and continue in operational existence for the foreseeable future. The Board has, therefore, concluded that the Company has adequate resources to continue to adopt the going concern basis for the period to 31 March 2025 which is at least twelve months from the date of approval of the Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks from the war in Ukraine, the Middle East conflict and significant market events.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company’s suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the Company.

As an externally managed investment company, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodial, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential shareholders, the externally appointed Manager (FIL Investment Services (UK) Limited) and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.

The Board, with the Portfolio Managers, sets the overall investment strategy and reviews this at an annual strategy day which is separate from the regular cycle of board meetings. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.

The Board places great importance on communication with shareholders. The Annual General Meeting provides the key forum for the Board and the Portfolio Manager to present to the shareholders on the Company’s performance and future plans and the Board encourages all shareholders to attend in person or virtually and raise any questions or concerns. The Chairman and other Board members are available to meet shareholders as appropriate. Shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary at the same address or by email at investmenttrusts@fil.com. The Portfolio Managers meet with major shareholders, potential investors, stock market analysts, journalists and other commentators throughout the year. These communication opportunities help inform the Board in considering how best to promote the success of the company over the long-term.

The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.

Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of Environmental, Social and Governance (“ESG”) issues aligns with the Company’s investment objective to deliver long-term growth in both capital and income, and the Board’s review of the Manager includes an assessment of its ESG approach which is set out in the Annual Report.

In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Board during the reporting year, and up to the date of this report, have included:

 The decision to pay an interim dividend of 3.26 pence per share and a final dividend of 4.99 pence per share (a total of 8.25 pence per share), to maintain the Board’s policy to pay progressive dividends in normal circumstances. The Company has paid an increased dividend for 13 years in a row;

 Carrying out a due diligence trip to Paris and visiting Dassault Systemes and Fidelity’s Paris office and meeting with two of its portfolio managers and discussing the ESG journey in Europe;

 The decision to carry out an external Board evaluation using the services of Lintstock Ltd. in accordance with the UK Corporate Governance Code; and

 The decision to once again hold hybrid AGMs in 2023 and 2024 in order to make the AGM more accessible to those shareholders who are unable to or prefer not to attend in person.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial period. Under that law, the Directors have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). 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 for the reporting period.

In preparing these Financial Statements, the Directors are required to:

 Select suitable accounting policies in accordance with Section 10 of FRS 102 and then apply them consistently;

 Make judgements and estimates that are reasonable and prudent;

 Present information, including accounting policies, in a fair and balanced manner that provides relevant, reliable, comparable and understandable information;

 State whether applicable UK Accounting Standards, including FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements; 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 Company and the Financial Statements 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.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Corporate Governance Statement and a Directors’ Remuneration Report which comply with that law and those regulations.

The Directors have delegated the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelity.co.uk/europe to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their own jurisdictions.

The Directors confirm that to the best of their knowledge:

 The Financial Statements, prepared in accordance with UK Generally Accepted Accounting Practice, including FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company;

 The Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces; and

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

The Statement of Directors’ Responsibilities was approved by the Board on 19 March 2024 and signed on its behalf by:

VIVIAN BAZALGETTE
Chairman

INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2023

The Company does not have any other comprehensive income. Accordingly, the net return/(loss) on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes below form an integral part of these Financial Statements.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2023

The Notes below form an integral part of these Financial Statements.

BALANCE SHEET AS AT 31 DECEMBER 2023
Company Number 2638812

The Financial Statements above and below were approved by the Board of Directors on 19 March 2024 and were signed on its behalf by:

VIVIAN BAZALGETTE
Chairman

The Notes below form an integral part of these Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

1 PRINCIPAL ACTIVITY
Fidelity European Trust PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2638812, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”) in July 2022. The Company is exempt from presenting a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investments are highly liquid and are carried at market value.

a) Basis of accounting
The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence up to 31 March 2025 which is at least twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed income and expense projections, reviewed the liquidity of the investment portfolio and considered the Company’s ability to meet liabilities as they fall due. This conclusion also takes into account the Director’s assessment of the risks faced by the Company as detailed in the Going Concern Statement above.

In preparing these Financial Statements the Directors have considered the impact of climate change risk as an emerging and a principal risk as set out above, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with FRS 102, investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the balance sheet date and therefore reflect the market participants view of climate change risk on the investments held by the Company.

The Company’s Going Concern Statement above takes account of all events and conditions up to 31 March 2025 which is at least twelve months from the date of approval of these Financial Statements.

b) Significant accounting estimates and judgements
The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The Company’s Financial Statements contain no key sources of estimation or uncertainty.

c) Segmental reporting
The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income Statement
In order to better reflect the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The net revenue return/(loss) after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) Income
Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

Interest received on CFDs, bank deposits, collateral and money market funds is accounted for on an accruals basis and credited to the revenue column of the Income Statement. Interest received on CFDs represent the finance costs calculated by reference to the notional value of the CFDs.

f) Investment management fees and other expenses
Investment management fees and other expenses are accounted for on an accruals basis and are charged as follows:

 The investment management fee is allocated 25% to revenue and 75% to capital in line with the Board’s expected long-term split of revenue and capital return from the Company’s portfolio of investments; and

 All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital events.

g) Functional currency and foreign exchange
The functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

h) Finance costs
Finance costs comprises interest paid on collateral and bank deposits and finance costs paid on CFDs, which are accounted for on an accruals basis. Finance costs are allocated 25% to revenue and 75% to capital in line with the Board’s expected long term split of revenue and capital return from the Company’s portfolio of investments.

i) Taxation
The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

j) Dividend paid
Dividends payable to equity shareholders are recognised when the Company’s obligation to make payment is established.

k) Investments
The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

 Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within gains/(losses) on investments in the capital column of the Income Statement and has disclosed these costs in Note 10 below.

l) Derivative instruments
When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short CFDs and futures. Derivatives are classified as other financial instruments and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

 Long and short CFDs – the difference between the strike price and the value of the underlying shares in the contract; and

 Futures – the difference between the contract price and the quoted trade price.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in net income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included in gains/(losses) on derivative instruments in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within current assets or current liabilities.

m) Debtors
Debtors include accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not, they are presented as non-current assets. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

n) Amounts held at futures clearing houses and brokers
These are amounts held in segregated accounts on behalf of brokers as collateral against open derivative contracts. These are carried at amortised cost.

o) Cash and cash equivalents
Cash and cash equivalents may comprise cash at bank and money market funds which are short term, highly liquid and are readily convertible to a known amount of cash. These are subject to an insignificant risk of changes in value.

p) Other creditors
Other creditors include investment management fees and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

q) Capital reserve
The following are accounted for in the capital reserve:

 Gains and losses on the disposal of investments and derivative instruments;

 Changes in the fair value of investments and derivative instruments held at the year end;

 Foreign exchange gains and losses of a capital nature;

 75% of investment management fees and finance costs;

 Dividends receivable which are capital in nature; and

 Cost of repurchasing shares.

Technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, states that changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of investments listed on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash.

3 INCOME

1 Due to negative interest rates in the prior year, the Company received interest on its long CFDs.

Special dividends of £710,000 (2022: £1,115,000) have been recognised in capital.

4 INVESTMENT MANAGEMENT FEES

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

FII charges investment management fees at an annual rate of 0.85% of net assets up to £400 million and 0.65% of net assets in excess of £400 million. Fees are payable monthly in arrears and are calculated on a daily basis.

Investment management fees have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

5 OTHER EXPENSES

1 Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

6 FINANCE COSTS

1 Due to negative interest rates in the prior year, the Company paid interest on its collateral and bank deposits.

2 The interest paid on CFDs is higher in the current reporting year due to an increase on long CFDs exposures and interest rates. As a result, the Company has been exposed to significantly higher interest charges.

Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES

b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 25.00% (2022: 19.00%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:

1 The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxation
A deferred tax asset of £17,127,000 (2022: £15,501,000), in respect of excess expenses of £63,004,000 (2022: £56,499,000) and excess loan interest of £5,505,000 (2022: £5,505,000), has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023. The rate of 25.00% has been applied to calculate the unrecognised deferred tax asset for the current year (2022: 25.00%).

8 RETURN/(LOSS) PER ORDINARY SHARE

The return/(loss) per ordinary share is based on the net return/(loss) on ordinary activities after taxation for the year divided by the weighted average number of ordinary shares held outside of Treasury during the year, as shown below:

9 DIVIDENDS PAID TO SHAREHOLDERS

The Directors have proposed the payment of a final dividend for the year ended 31 December 2023 of 4.99 pence per ordinary share which is subject to approval by shareholders at the Annual General Meeting on 8 May 2024 and has not been included as a liability in these Financial Statements. The dividend will be paid on 14 May 2024 to shareholders on the register at the close of business on 2 April 2024 (ex-dividend date 28 March 2024).

10 INVESTMENTS

The Company received £248,350,000 (2022: £194,887,000) from investments sold in the year. The book cost of these investments when they were purchased was £205,165,000 (2022: £125,973,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments, which are included in the gains/(losses) on investments above, were as follows:

The portfolio turnover for the year was 18.1% (2022: 12.7%). The portfolio turnover rate measures the Company’s trading activity. It is calculated by taking the average of the total amount of securities purchased and the total amount of the securities sold in the reporting year divided by the average investment portfolio value of the Company.

11 DERIVATIVE INSTRUMENTS

12 DEBTORS

13 OTHER CREDITORS

14 SHARE CAPITAL

1 Ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

No ordinary shares were repurchased into Treasury during the year (2022: £6,473,000).

15 CAPITAL AND RESERVES

The capital reserve balance at 31 December 2023 includes investment holding gains of £575,415,000 (2022: gains of £452,695,000) as detailed in Note 10. See Note 2 (q) for further details. The revenue and capital reserves are distributable by way of dividends.

16 NET ASSET VALUE PER ORDINARY SHARE
The calculation of the net asset value per ordinary share is based on the total shareholders’ funds divided by the number of ordinary shares held outside of Treasury.

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

17 FINANCIAL INSTRUMENTS
Management of risk
The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are geopolitical, economic and market, investment performance, regulatory, key person and operational support, environmental, social and governance (“ESG”), cybercrime and information security, discount control and business continuity. Other risks identified are tax and regulatory. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown in the Strategic Report above.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

 Equity shares held in accordance with the Company’s investment objective and policies;

 Derivative instruments which comprise CFDs and futures on equity indices; and

 Cash, liquid resources and short term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

Market price risk
Interest rate risk
The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The level of gearing is reviewed by the Board and the Lead Portfolio Manager. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

Foreign currency risk
The Company’s net return/(loss) on ordinary activities after taxation for the year and its net assets can be affected by foreign exchange rate movements because the Company has income, assets and liabilities which are denominated in currencies other than the Company’s functional currency which is UK sterling. The Company can also be subject to short term exposure from exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs.

Three principal areas have been identified where foreign currency risk could impact the Company:

 Movements in exchange rates affecting the value of investments and derivative instruments;

 Movements in exchange rates affecting short term timing differences; and

 Movements in exchange rates affecting income received.

Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown below:

1 Debtors include amounts held at futures clearing houses and brokers.

2 Cash and cash equivalent are made up of £3,900,000 cash at bank and £48,904,000 held in Fidelity Institutional Liquidity Fund.

1 Debtors include amounts held at futures clearing houses and brokers.

2 Cash and cash equivalent are made up of £44,878,000 cash at bank and £6,000 held in Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilities
The currency profile of the Company’s financial liabilities is shown below:

Other price risk
Other 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 Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Managers are responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seek to ensure that individual stocks also meet an acceptable risk/reward profile.

Liquidity risk
Due to the closed-ended nature of the Company, the liquidity risk is limited. Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short term flexibility is achieved by the use of a bank overdraft, if required.

Liquidity risk exposure
At 31 December 2023, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £3,521,000 (2022: £9,633,000) and creditors of £1,398,000 (2022: £1,185,000).

Counterparty risk
Certain derivative instruments in which the Company invests are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over The Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

For derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2023, £60,000 (2022: £nil) was held by the brokers in cash denominated in UK sterling in a segregated collateral account on behalf of the Company to reduce the credit risk exposure of the Company. This collateral comprised: UBS AG £60,000 (2022: £nil). £8,384,000 (2022: £12,891,000), shown as amounts held at futures clearing houses and brokers on the Balance Sheet, was held by the Company in cash denominated in UK sterling in a segregated collateral account on behalf of the brokers, to reduce the credit risk exposure of the brokers. This collateral comprised of: J.P. Morgan Securities plc £2,460,000 (2022: £4,540,000), Goldman Sachs International Ltd £810,000 (2022: £nil) and UBS AG £5,114,000 (2022: £8,351,000) in cash.

Credit risk
Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions and derivative instrument contracts and cash at bank.

Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in a documented Risk Management Process Document. Derivative instruments are used by the Manager for the following purposes:

 to gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial flow of capital; and

 to position short exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Managers believe to be overvalued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 December 2023, an increase of 1.00% in interest rates throughout the year, with all other variables held constant, would have decreased the net return on ordinary activities after taxation for the year and decreased the net assets of the Company by £1,283,000 (2022: increased the net loss and decreased the net assets by £1,013,000). A decrease of 1.00% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at the Balance Sheet date, a 10% strengthening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have decreased the Company’s net return on ordinary activities after taxation for the year and decreased the Company’s net assets (2022: increased the net loss and decreased the net assets) by the following amounts: