FEV Fidelity European Trust Plc

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.

Top 5 Stock Contributors (on a relative basis)	%
3i Group	+1.5
Partners Group	+1.1
Novo Nordisk	+0.7
ASML	+0.6
L’Oréal	+0.5
	=========

 

Top 5 Stock Dectractors (on a relative basis)	%
Sampo	-0.6
Nestlé	-0.6
MTU Aero Engines	-0.5
Roche	-0.5
DKSH Holding	-0.4
	=========

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.

Principal Risks	Description and Risk Mitigation
Geopolitical, Economic and Market Risks	The Company and its assets may be impacted by geopolitical, economic and market related risks, in particular concerns over global economic growth, inflation and financial distress. The Company is exposed to a number of geopolitical risks. The fast-changing global geopolitical landscape is largely shaped by the ongoing war effects, deglobalisation trends and significant supply disruption, as well as fears of global recession amid inflationary pressures and financial distress. Russia and Ukraine are both significant net exporters of oil, natural gas and a variety of soft commodities and supply limitations have fuelled global inflation and economic instability, specifically within Western nations. The conflict in the Middle East has added to geopolitical risk and economic instability, including social unrest across Europe. More recently, the conflict in the Red Sea has disrupted shipping routes and the supply and cost of goods, thereby affecting the global economy and trade. Globally, geopolitical uncertainty is significantly impacted by deglobalisation trends driven by the prioritisation of the resiliency of supply chains as well as from political pressure. The ramifications of onshoring include regulatory protectionism across regions, heightening geopolitical tensions on the continent and overseas. US-China tensions over trade and technology rivalry increase the concerns of China-Taiwan relations potentially escalating to military conflict as well as increasing tensions over trade and economic issues due to competing territorial claims. As the year progresses, political risks are also set to increase heading towards the US elections in November, and coupled with ongoing geopolitical conflicts, could lead to higher volatility for broader markets and oil in particular. China, following its reopening post the pandemic, is seeing tentative signs of stabilisation, but its growth story remains challenging. The Company may be affected by market and economic risks. The principal market related risks are market downturn, interest rate movements, inflation and market shocks, such as the post pandemic global economic recovery, volatility from the war in Ukraine and more recently conflict in the Middle East and conflicts in the Red Sea. The Company may also be impacted by concerns over global economic growth and major political events affecting markets and economies and the consequences of this. Although inflation is starting to stabilise across most economies, risks remain driven by a combination of continued increased demand following the pandemic restrictions being lifted, global labour shortages in some sectors and supply chain shortages, including energy and food security. Inflation and economic instability continue to add to a prolonged cost-of-living crisis and potentially impacting investors’ risk appetite. The Company’s portfolio is made up mainly of listed securities. The Portfolio Managers success or failure to protect and increase the Company’s value against the above background is core to the Company’s continued success. The investment philosophy of stock-picking and investing in attractively valued companies should outperform the Benchmark Index over time. The risk from the likely effects of unforeseen economic and market events is somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon. The Board reviews market, economic and political risks and legislative changes at each Board meeting. The Portfolio Managers provide an investment review at each meeting which includes a review of the economic and political environment and any risks and challenges faced by the Company. The Company has no direct investments in Russia and Ukraine or the Middle East. Whilst the companies in the portfolio are exposed to these risks, most of these companies are global businesses and, therefore, exposed to global economic trends. The Chairman’s Statement and the Portfolio Managers’ Review above provide more detail. Risks to which the Company is exposed to in the market risk category are included in Note 17 to the Financial Statements below together with summaries of the policies for managing these risks.
Investment Performance Risk (including the use of derivatives and gearing)	The achievement of the Company’s investment performance objective relative to the market requires the taking of risk such as investment strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the Benchmark Index and/or peer group companies. The Board relies on the Portfolio Managers’ skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company’s Benchmark Index and its competitors and also considers the outlook for the market with the Portfolio Managers at each Board meeting. The emphasis is on long-term investment performance as there is a risk for the Company of volatility of performance in the shorter-term. Derivative instruments are used to protect and enhance investment conviction and returns. There is a risk that the use of derivatives may lead to higher volatility in the NAV and the share price due to leverage effect than might otherwise be the case. The Board has put in place policies and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board. Further detail on derivative instruments risk is included in Note 17 to the Financial Statements below. The Company gears through the use of long CFDs which provide greater flexibility and are generally cheaper than bank loans as a form of financing. The principal risk is that the Portfolio Manager fails to use gearing effectively, resulting in a failure to outperform in a rising market or increasing underperformance in a falling market. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate.
Regulatory Risk	The Company may be impacted by changes in legislation, taxation, regulation or other external influence that require changes to the nature of the Company’s business. More recently, there have been increased concerns around investment cost disclosures and its impact in the industry. Regulatory changes for investment companies are monitored regularly by the Board and managed through active engagement with regulators and trade bodies by the Manager.
Key Person	The loss of the Portfolio Manager or key operational individuals could lead to potential performance, operational or regulatory issues. The Portfolio Manager’s style is intrinsically linked with the Company’s investment philosophy and strategy and, therefore, the Company has a key person dependency on him. Fidelity has succession plans in place for its portfolio managers which have been discussed with the Board and provides some assurance in this regard. There is a Co-Portfolio Manager who works alongside the Portfolio Manager and has extensive experience in European markets and companies and shares a common investment approach and complementary investment experience with the Portfolio Manager. This helps strengthen the investment process by introducing greater challenge and also increases the ability to be able to meet more companies. The Manager identifies key dependencies which are then addressed through succession plans, particularly for portfolio managers.
Environmental, Social and Governance (“ESG”) Risk	There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including climate change risk, such as the risk of extreme weather events that may impact global supply chains for companies and customers. ESG risks include investor expectations and how the Company is positioned from a marketing perspective and whether it is compliant with its ESG disclosure requirements. Fidelity has embedded ESG factors in its investment decision-making process. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through Fidelity’s Proprietary Sustainability Rating which is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities based on sector-specific key performance indicators across 127 individual and unique sub-sectors. The Portfolio Managers are also active in analysing the effects of ESG when making investment decisions. The Board continues to monitor developments in this area and the positioning of the Company’s portfolio considering ESG factors. Further detail on ESG considerations in the investment process and sustainable investing is in the Annual Report. ESG ratings of the companies within the Company’s portfolio compared to MSCI ratings are provided in the Annual Report.
Cybercrime and Information Security Risks	The operational risk and business impact from heightened external levels of cybercrime and the risk of data loss is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The Manager’s technology and risk teams have developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat, and also potentially addressing the risks of artificial intelligence (AI). The risk is regularly re-assessed by Fidelity’s information security teams and risk frameworks are continually enhanced. This has resulted in the implementation of additional tools and processes, including improvements to existing ones. Fidelity has a dedicated cybersecurity team which provides continuous oversight, regular awareness updates and best practice guidance. Risks also remain due to the Russia/Ukraine conflict and the trend to more working from home following the pandemic. These primarily relate to phishing, ransomware, remote access threats, extortion and denial of services attacks. The Manager has dedicated detect and respond resources specifically to monitor the cyber threats associated within the workplace and there are a number of mitigating actions in place including, control strengthening, geo-blocking and phishing mitigants, combined with enhanced resilience and recovery options. The Company’s third-party service providers are also subject to regular oversight and provide assurances and have similar control measures in place to detect and respond to cyber threats and activity.
Discount Control Risk	Due to the nature of investment companies, the price of the Company’s shares and its discount to NAV are factors which are not totally within the Company’s control. The Board has an active discount management policy in place, the primary purpose of which is to reduce discount volatility and maintain the Company’s discount in single digits in normal market conditions. Some short-term influence over the discount may be exercised by the use of share repurchases at acceptable prices and within the parameters set by the Board. The demand for shares can be influenced through good performance and an active investor relations program. The Company’s share price, NAV and discount volatility are monitored daily by the Manager with the Company’s Broker and considered by the Board at each of its meetings.
Business Continuity Risk	There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The top risks globally are cybersecurity, geopolitical events and natural disasters. There are also ongoing risks from the Russia/Ukraine war, specifically regarding cyberattacks and the potential loss of power and/or broadband services. Variants of Covid continue to evolve and some risks remain. The Manager continues to take all reasonable steps to meet its regulatory obligations, assess its ability to continue operating and the steps it needs to take to support its clients, including the Board, and has an appropriate control environment in place. The Manager has provided the Board with assurance that the Company has appropriate operational resilience and business continuity plans and the provision of services has continued to be supplied without interruption. Specific risks posed by the pandemic continue to ease with increasing levels of staff returning to routine office-based working, albeit under hybrid working arrangements which allows greater flexibility on remote working as part of the new operating model. The Company relies on a number of third-party service providers, principally the Registrar, Custodian and Depositary. They are all subject to a risk-based programme of risk oversight and internal audits by the Manager and their own internal controls reports are received by the Board on an annual basis and any concerns are investigated. The third-party service providers have also confirmed the implementation of appropriate measures to ensure no business disruption. Risks associated with these services are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company. These are mitigated through operational resilience frameworks.

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

		Year ended 31 December 2023			Year ended 31 December 2022
	Notes	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
Gains/(losses) on investments	10	–	165,905	165,905	–	(63,812)	(63,812)
Gains/(losses) on derivative instruments	11	–	50,441	50,441	–	(22,034)	(22,034)
Income	3	47,221	–	47,221	43,042	–	43,042
Investment management fees	4	(2,625)	(7,877)	(10,502)	(2,362)	(7,087)	(9,449)
Other expenses	5	(967)	–	(967)	(919)	–	(919)
Foreign exchange losses		–	(1,464)	(1,464)	–	(372)	(372)
		---------------	---------------	---------------	---------------	---------------	---------------
Net return/(loss) on ordinary activities before finance costs and taxation		43,629	207,005	250,634	39,761	(93,305)	(53,544)
Finance costs	6	(2,138)	(6,414)	(8,552)	(196)	(586)	(782)
		---------------	---------------	---------------	---------------	---------------	---------------
Net return/(loss) on ordinary activities before taxation		41,491	200,591	242,082	39,565	(93,891)	(54,326)
Taxation on return/(loss) on ordinary activities	7	(3,390)	–	(3,390)	(2,641)	–	(2,641)
		---------------	---------------	---------------	---------------	---------------	---------------
Net return/(loss) on ordinary activities after taxation for the year		38,101	200,591	238,692	36,924	(93,891)	(56,967)
		=========	=========	=========	=========	=========	=========
Return/(loss) per ordinary share	8	9.32p	49.08p	58.40p	9.00p	(22.88p)	(13.88p)
		=========	=========	=========	=========	=========	=========

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

	Notes	Share  capital  £’000	Share  premium  account  £’000	Capital  redemption  reserve  £’000	Capital  reserve  £’000	Revenue  reserve  £’000	Total  shareholders’  funds  £’000
Total shareholders’ funds at 31 December 2022		10,411	58,615	5,414	1,271,996	34,559	1,380,995
Net return on ordinary activities after taxation for the year		–	–	–	200,591	38,101	238,692
Dividends paid to shareholders	9	–	–	–	–	(32,208)	(32,208)
		---------------	---------------	---------------	---------------	---------------	---------------
Total shareholders’ funds at 31 December 2023		10,411	58,615	5,414	1,472,587	40,452	1,587,479
		=========	=========	=========	=========	=========	=========
Total shareholders’ funds at 31 December 2021		10,411	58,615	5,414	1,372,360	27,433	1,474,233
Net (loss)/return on ordinary activities after taxation for the year		–	–	–	(93,891)	36,924	(56,967)
Repurchase of ordinary shares	14	–	–	–	(6,473)	–	(6,473)
Dividends paid to shareholders	9	–	–	–	–	(29,798)	(29,798)
		---------------	---------------	---------------	---------------	---------------	---------------
Total shareholders’ funds at 31 December 2022		10,411	58,615	5,414	1,271,996	34,559	1,380,995
		=========	=========	=========	=========	=========	=========

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

BALANCE SHEET AS AT 31 DECEMBER 2023
Company Number 2638812

	Notes	2023  £’000	2022  £’000
Fixed assets
Investments	10	1,518,875	1,325,389
		---------------	---------------
Current assets
Derivative instruments	11	886	521
Debtors	12	11,449	8,128
Amounts held at futures clearing houses and brokers		8,384	12,891
Cash and cash equivalents		52,804	44,884
		---------------	---------------
		73,523	66,424
		=========	=========
Current liabilities
Derivative instruments	11	(3,521)	(9,633)
Other creditors	13	(1,398)	(1,185)
		---------------	---------------
		(4,919)	(10,818)
		=========	=========
Net current assets		68,604	55,606
		=========	=========
Net assets		1,587,479	1,380,995
		=========	=========
Capital and reserves
Share capital	14	10,411	10,411
Share premium account	15	58,615	58,615
Capital redemption reserve	15	5,414	5,414
Capital reserve	15	1,472,587	1,271,996
Revenue reserve	15	40,452	34,559
		---------------	---------------
Total shareholders’ funds		1,587,479	1,380,995
		=========	=========
Net asset value per ordinary share	16	388.39p	337.87p
		=========	=========

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

	Year ended  31.12.23  £’000	Year ended  31.12.22  £’000
Investment income
Overseas dividends	37,484	35,333
Overseas scrip dividends	957	1,052
UK dividends	1,679	1,910
	---------------	---------------
	40,120	38,295
	=========	=========
Derivative income
Income recognised from futures contracts	2,392	1,208
Dividends received on long CFDs	3,570	3,025
Interest received on CFDs1	333	422
	---------------	---------------
	6,295	4,655
	=========	=========
Investment and derivative income	46,415	42,950
	=========	=========
Other interest
Interest received on collateral, bank deposits and money market funds	798	88
Interest received on tax reclaims	8	4
	---------------	---------------
	806	92
	=========	=========
Total income	47,221	43,042
	=========	=========

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

	Year ended 31 December 2023			Year ended 31 December 2022
	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
Investment management fees	2,625	7,877	10,502	2,362	7,087	9,449
	=========	=========	=========	=========	=========	=========

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

	Year ended  31.12.23  £’000	Year ended  31.12.22  £’000
AIC fees	21	21
Custody fees	81	123
Depositary fees	54	61
Directors’ fees1	169	174
Legal and professional fees	94	60
Marketing expenses	260	209
Printing and publication expenses	127	132
Registrars’ fees	86	75
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements	48	45
Other expenses	27	19
	---------------	---------------
	967	919
	=========	=========

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

6 FINANCE COSTS

	Year ended 31 December 2023			Year ended 31 December 2022
	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
Interest paid on collateral and bank deposits1	–	–	–	28	82	110
Interest paid on CFDs2	1,601	4,803	6,404	168	504	672
Costs recognised from futures contracts	537	1,611	2,148	–	–	–
	---------------	---------------	---------------	---------------	---------------	---------------
	2,138	6,414	8,552	196	586	782
	=========	=========	=========	=========	=========	=========

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

	Year ended 31 December 2023			Year ended 31 December 2022
	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
a) Analysis of the taxation charge for the year
Overseas taxation	3,390	–	3,390	2,641	–	2,641
	---------------	---------------	---------------	---------------	---------------	---------------
Taxation charge for the year (see Note 7b)	3,390	–	3,390	2,641	–	2,641
	=========	=========	=========	=========	=========	=========

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:

	Year ended 31 December 2023			Year ended 31 December 2022
	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
Net return/(loss) on ordinary activities before taxation	41,491	200,591	242,082	39,565	(93,891)	(54,326)
	---------------	---------------	---------------	---------------	---------------	---------------
Net return/(loss) on ordinary activities before taxation multiplied by the blended rate of UK corporation tax of 23.52% (2022: 19.00%)	9,758	47,179	56,937	7,517	(17,839)	(10,322)
Effects of:
Capital (gains)/losses not taxable1	–	(50,540)	(50,540)	–	16,381	16,381
Income not taxable	(9,436)	–	(9,436)	(7,276)	–	(7,276)
Expenses not deductible	–	1,509	1,509	–	111	111
Excess management expenses	(322)	1,852	1,530	(241)	1,347	1,106
Overseas taxation	3,390	–	3,390	2,641	–	2,641
	---------------	---------------	---------------	---------------	---------------	---------------
Total taxation charge for the year (see Note 7a)	3,390	–	3,390	2,641	–	2,641
	=========	=========	=========	=========	=========	=========

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

	Year ended  31.12.23	Year ended  31.12.22
Revenue return per ordinary share	9.32p	9.00p
Capital return/(loss) per ordinary share	49.08p	(22.88p)
	---------------	---------------
Total return/(loss) per ordinary share	58.40p	(13.88p)
	=========	=========

 

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:

	£’000	£’000
Net revenue return on ordinary activities after taxation	38,101	36,924
Net capital return/(loss) on ordinary activities after taxation	200,591	(93,891)
	---------------	---------------
Total return/(loss) on ordinary activities after taxation	238,692	(56,967)
	=========	=========

 

	Number	Number
Weighted average number of ordinary shares held outside Treasury	408,730,523	410,346,447
	==========	==========

 

9 DIVIDENDS PAID TO SHAREHOLDERS

	Year ended  31.12.23  £’000	Year ended  31.12.22  £’000
Dividends paid
Interim dividend of 3.26 pence per ordinary share paid for the year ended 31 December 2023	13,325	–
Final dividend of 4.62 pence per ordinary share paid for the year ended 31 December 2022	18,883	–
Interim dividend of 3.08 pence per ordinary share paid for the year ended 31 December 2022	–	12,618
Final dividend of 4.18 pence per ordinary share paid for the year ended 31 December 2021	–	17,180
	---------------	---------------
	32,208	29,798
	=========	=========
Dividends proposed
Final dividend of 4.99 pence per ordinary share proposed for the year ended 31 December 2023	20,396	–
Final dividend of 4.62 pence per ordinary share proposed for the year ended 31 December 2022	–	18,883
	---------------	---------------
	20,396	18,883
	=========	=========

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

	2023  £’000	2022  £’000
Investments held at fair value	1,518,875	1,325,389
	---------------	---------------
Opening book cost	872,694	862,576
Opening investment holding gains	452,695	585,421
	---------------	---------------
Opening fair value	1,325,389	1,447,997
Movements in the year
Purchases at cost	275,931	136,091
Sales – proceeds	(248,350)	(194,887)
Gains/(losses) on investments	165,905	(63,812)
	---------------	---------------
Closing fair value	1,518,875	1,325,389
	=========	=========
Closing book cost	943,460	872,694
Closing investment holding gains	575,415	452,695
	---------------	---------------
Closing fair value	1,518,875	1,325,389
	=========	=========

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:

	Year ended  31.12.23  £’000	Year ended  31.12.22  £’000
Purchases transaction costs	286	164
Sales transaction costs	121	57
	---------------	---------------
	407	221
	=========	=========

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

	Year ended  31.12.23  £’000	Year ended  31.12.22  £’000
Gains/(losses) on derivative instruments
Gains/(losses) on long CFD positions closed	32,223	(4,300)
Gains on short CFD positions closed	2,257	–
Gains/(losses) on futures contracts closed	9,484	(4,612)
Movement in investment holding gains/(losses) on long CFDs	4,229	(9,718)
Movement in investment holding gains on short CFDs	142	–
Movement in investment holding gains/(losses) on futures	2,106	(3,404)
	---------------	---------------
	50,441	(22,034)
	=========	=========

 

	2023  Fair value  £’000	2022  Fair value  £’000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets	886	521
Derivative instrument liabilities	(3,521)	(9,633)
	---------------	---------------
	(2,635)	(9,112)
	=========	=========

 

	Fair value  £’000	2023  Asset  exposure  £’000	Fair value  £’000	2022  Asset  exposure  £’000
At the year end the Company held the following derivative instruments
Long CFDs	(2,429)	199,945	(6,658)	152,446
Short CFDs	142	12,736	–	–
Long futures	(348)	64,492	(2,454)	65,056
	---------------	---------------	---------------	---------------
	(2,635)	277,173	(9,112)	217,502
	=========	=========	=========	=========

12 DEBTORS

	2023  £’000	2022  £’000
Accrued income	933	784
Taxation recoverable	10,393	7,232
Other debtors and prepayments	123	112
	---------------	---------------
	11,449	8,128
	=========	=========

13 OTHER CREDITORS

	2023  £’000	2022  £’000
Creditors and accruals	1,398	1,185
	=========	=========

14 SHARE CAPITAL

	2023		2022
	Number of  shares	Nominal  value  £’000	Number of  shares	Nominal  value  £’000
Issued, allotted and fully paid
Ordinary shares of 2.5 pence each held outside of Treasury
Beginning of the year	408,730,523	10,218	411,016,049	10,275
Ordinary shares repurchased into Treasury	–	–	(2,285,526)	(57)
	-----------------	-----------------	-----------------	-----------------
End of the year	408,730,523	10,218	408,730,523	10,218
	==========	==========	==========	==========
Ordinary shares of 2.5 pence each held in Treasury1
Beginning of the year	7,717,387	193	5,431,861	136
Ordinary shares repurchased into Treasury	–	–	2,285,526	57
	-----------------	-----------------	-----------------	-----------------
End of the year	7,717,387	193	7,717,387	193
	==========	==========	==========	==========
Total share capital		10,411		10,411
		==========		==========

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

	Share  capital  £’000	Share  premium  account  £’000	Capital  redemption  reserve  £’000	Capital  reserve  £’000	Revenue  reserve  £’000	Total  shareholders’  funds  £’000
At 1 January 2023	10,411	58,615	5,414	1,271,996	34,559	1,380,995
Gains on investments (see Note 10)	–	–	–	165,905	–	165,905
Gains on derivative instruments (see Note 11)	–	–	–	50,441	–	50,441
Foreign exchange losses	–	–	–	(1,464)	–	(1,464)
Investment management fees (see Note 4)	–	–	–	(7,877)	–	(7,877)
Finance costs (see Note 6)	–	–	–	(6,414)	–	(6,414)
Repurchase of ordinary shares (see Note 14)	–	–	–	–	–	–
Revenue return on ordinary activities after taxation for the year	–	–	–	–	38,101	38,101
Dividends paid to shareholders (see Note 9)	–	–	–	–	(32,208)	(32,208)
	-----------------	-----------------	-----------------	-----------------	-----------------	-----------------
At 31 December 2023	10,411	58,615	5,414	1,472,587	40,452	1,587,479
	==========	==========	==========	==========	==========	==========
At 1 January 2022	10,411	58,615	5,414	1,372,360	27,433	1,474,233
Losses on investments (see Note 10)	–	–	–	(63,812)	–	(63,812)
Losses on derivative instruments (see Note 11)	–	–	–	(22,034)	–	(22,034)
Foreign exchange losses	–	–	–	(372)	–	(372)
Investment management fees (see Note 4)	–	–	–	(7,087)	–	(7,087)
Finance costs (see Note 6)	–	–	–	(586)	–	(586)
Repurchase of ordinary shares (see Note 14)	–	–	–	(6,473)	–	(6,473)
Revenue return on ordinary activities after taxation for the year	–	–	–	–	36,924	36,924
Dividends paid to shareholders (see Note 9)	–	–	–	–	(29,798)	(29,798)
	-----------------	-----------------	-----------------	-----------------	-----------------	-----------------
At 31 December 2022	10,411	58,615	5,414	1,271,996	34,559	1,380,995
	==========	==========	==========	==========	==========	==========

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.

	2023	2022
Total shareholders’ funds	£1,587,479,000	£1,380,995,000
Ordinary shares held outside of Treasury at year end	408,730,523	408,730,523
Net asset value per ordinary share	388.39p	337.87p
	============	============

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:

	2023  £’000	2022  £’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value	202,374	159,104
	-----------------	-----------------
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value	12,878	–
Amounts held at futures clearing houses and brokers	8,384	12,891
Cash and cash equivalents	52,804	44,884
	-----------------	-----------------
	74,066	57,775
	==========	==========
Net exposure to financial instruments that bear interest	128,308	101,329
	==========	==========

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:

					2023
Currency	Investments  held at  fair value  £’000	Long  exposure  to derivative  instruments  £’000	Debtors1  £’000	Cash and  cash  equivalents2  £’000	Total  £’000
Euro	877,629	228,019	6,389	52,691	1,164,728
Swiss franc	357,739	–	3,947	–	361,686
Danish krone	96,102	–	465	–	96,567
Swedish krona	93,135	–	–	–	93,135
US dollar	–	36,418	–	113	36,531
Norwegian krone	25,052	–	–	–	25,052
UK sterling	69,218	–	9,032	–	78,250
	-----------------	-----------------	-----------------	-----------------	-----------------
	1,518,875	264,437	19,833	52,804	1,855,949
	==========	==========	==========	==========	==========

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.

					2022
Currency	Investments  held at  fair value  £’000	Long  exposure  to derivative  instruments  £’000	Debtors1  £’000	Cash and  cash  equivalents2  £’000	Total  £’000
Euro	788,014	217,502	5,086	17,473	1,028,075
Swiss franc	323,257	–	1,798	3,724	328,779
Danish krone	83,544	–	414	1,548	85,506
Swedish krona	39,892	–	–	19,362	59,254
Norwegian krone	31,369	–	–	378	31,747
UK sterling	59,313	–	13,721	2,399	75,433
	-----------------	-----------------	-----------------	-----------------	-----------------
	1,325,389	217,502	21,019	44,884	1,608,794
	==========	==========	==========	==========	==========

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:

Currency	Short  exposure  to derivative  instruments  £’000	Other  creditors  £’000	2023      Total  £’000
Euro	12,736	245	12,981
US dollar	–	48	48
UK sterling	–	1,105	1,105
	-----------------	-----------------	-----------------
	12,736	1,398	14,134
	==========	==========	==========

 

Currency	Short  exposure  to derivative  instruments  £’000	Other  creditors  £’000	2022      Total  £’000
Euro	–	126	126
UK sterling	–	1,059	1,059
	-----------------	-----------------	-----------------
	–	1,185	1,185
	==========	==========	==========

 

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:

Currency	2023  £’000	2022  £’000
Euro	104,704	93,450
Swiss franc	32,881	29,889
Danish krone	8,779	7,773
Swedish krona	8,467	5,387
US dollar	3,317	–
Norwegian krone	2,277	2,886
	-----------------	-----------------
	160,425	139,385
	==========	==========

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

Currency	2023  £’000	2022  £’000
Euro	127,972	114,216
Swiss franc	40,187	36,531
Danish krone	10,730	9,501
Swedish krona	10,348	6,584
US dollar	4,054	–
Norwegian krone	2,784	3,527
	-----------------	-----------------
	196,075	170,359
	==========	==========

Other price risk – exposure to investments sensitivity analysis
Based on the investments held and share prices at 31 December 2023, an increase of 10% in share prices, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £151,888,000 (2022: decreased the net loss and increased the net assets by £132,539,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Other price risk – net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 December 2023, an increase of 10% in the share prices underlying the derivative instruments, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £25,170,000 (2022: decreased the net loss and increased the net assets by £21,750,000). A decrease of 10% in share prices of the investments underlying the derivative instruments would have had an equal and opposite effect.

Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Notes 2 (k) and (l), investments and derivative instruments are shown at fair value. In the case of cash and cash equivalents, book value approximates to fair value due to the short maturity of the instruments.

Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Classification	Input
Level 1	Valued using quoted prices in active markets for identical assets
Level 2	Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
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 Notes 2 (k) and (l). The table below sets out the Company’s fair value hierarchy:

Financial assets at fair value through profit or loss	Level 1  £’000	Level 2  £’000	Level 3  £’000	2023  Total  £’000
Investments	1,518,875	–	–	1,518,875
Derivative instrument assets	–	886	–	886
	-----------------	-----------------	-----------------	-----------------
	1,518,875	886	–	1,519,761
	==========	==========	==========	==========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities	(348)	(3,173)	–	(3,521)
	==========	==========	==========	==========

 

Financial assets at fair value through profit or loss	Level 1  £’000	Level 2  £’000	Level 3  £’000	2022  Total  £’000
Investments	1,325,389	–	–	1,325,389
Derivative instrument assets	–	521	–	521
	-----------------	-----------------	-----------------	-----------------
	1,325,389	521	–	1,325,910
	==========	==========	==========	==========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities	(2,454)	(7,179)	–	(9,633)
	==========	==========	==========	==========

18 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital and reserves, as disclosed in the Balance Sheet above, and any gearing, which is managed by the use of derivative instruments. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed in the Strategic Report and in Note 17 above.

The Company’s gross gearing and net gearing at the year end is set out below:

	2023
	Gross gearing		Net gearing
	Asset  exposure  £’000	%1	Asset  exposure  £’000	%1
Investments	1,518,875	95.6	1,518,875	95.6
Long CFDs	199,945	12.6	199,945	12.6
Long futures	64,492	4.1	64,492	4.1
	-----------------	-----------------	-----------------	-----------------
Total long exposures	1,783,312	112.3	1,783,312	112.3
Short CFDs	12,736	0.8	(12,736)	(0.8)
	-----------------	-----------------	-----------------	-----------------
Gross asset exposure/net market exposure	1,796,048	113.1	1,770,576	111.5
	-----------------	-----------------	-----------------	-----------------
Shareholders’ funds	1,587,479		1,587,479
	==========		==========
Gearing2		13.1		11.5
		==========		==========

1 Asset exposure to the market expressed as a percentage of shareholders’ funds.

2 Gearing is the amount by which gross asset exposure/net market exposure exceeds shareholders’ funds expressed as a percentage of shareholders’ funds.

	2022
	Gross gearing		Net gearing
	Asset  exposure  £’000	%1	Asset  exposure  £’000	%1
Investments	1,325,389	96.0	1,325,389	96.0
Long CFDs	152,446	11.0	152,446	11.0
Long futures	65,056	4.7	65,056	4.7
	-----------------	-----------------	-----------------	-----------------
Total long exposures	1,542,891	111.7	1,542,891	111.7
	==========	==========	==========	==========
Short CFDs	–	–	–	–
	-----------------	-----------------	-----------------	-----------------
Gross asset exposure/net market exposure	1,542,891	111.7	1,542,891	111.7
	-----------------	-----------------	-----------------	-----------------
Shareholders’ funds	1,380,995		1,380,995
	==========		==========
Gearing2		11.7		11.7
		==========		==========

1 Asset exposure to the market expressed as a percentage of shareholders’ funds.

2 Gearing is the amount by which gross asset exposure/net market exposure exceeds shareholders’ funds expressed as a percentage of shareholders’ funds.

19 TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies.

Details of the current fee arrangements are given in the Directors’ Report in the Annual Report and in Note 4. During the year, fees for portfolio management services of £10,502,000 (2022: £9,449,000) were payable to FII. At the Balance Sheet date, fees for portfolio management services of £925,000 (2022: £832,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £260,000 (2022: £209,000). At the Balance Sheet date, marketing services of £14,000 (2022: £nil) were accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Directors’ fees and taxable expenses relating to reasonable travel expenses paid to the Directors are given in the Directors’ Remuneration Report in the Annual Report. In addition to the fees and taxable expenses disclosed in the Directors’ Remuneration Report, £17,000 (2022: £18,000) of Employers’ National Insurance Contributions was also paid by the Company. As at 31 December 2023, Directors’ fees of £14,000 (2022: £14,000) were accrued and payable.

ALTERNATIVE PERFORMANCE MEASURES

DISCOUNT/PREMIUM
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the Net Asset Value (“NAV”) per ordinary share of the Company and the ordinary share price and is expressed as a percentage of the NAV per ordinary share. Details of the Company’s discount are on the Financial Highlights page in the Annual Report and are both defined in the Glossary of Terms in the Annual Report.

GEARING
Gearing (both gross and net) is considered to be an Alternative Performance Measure. See Note 18 above for details of the Company’s gearing. Gearing is defined in the Glossary of Terms in the Annual Report.

NET ASSET VALUE (“NAV”) PER ORDINARY SHARE
The NAV per ordinary share is considered to be an Alternative Performance Measure. See the Balance Sheet and Note 16 above for further details.

ONGOING CHARGES RATIO
The ongoing charges ratio is considered to be an Alternative Performance Measure. It has been calculated in accordance with guidance issued by the AIC as the total of management fees and other expenses expressed as a percentage of the average net assets throughout the year.

	2023	2022
Investment management fees (£’000)	10,502	9,449
Other expenses (£’000)	967	919
	-----------------	-----------------
Ongoing charges (£’000)	11,469	10,368
Average net assets (£’000)	1,493,277	1,330,434
	-----------------	-----------------
Ongoing charges ratio	0.77%	0.78%
	==========	==========

REVENUE, CAPITAL AND TOTAL RETURNS PER SHARE
Revenue, capital and total returns per ordinary share are considered to be Alternative Performance Measures. See the Income Statement and Note 8 above for further details.

TOTAL RETURN PERFORMANCE
Total return performance is considered to be an Alternative Performance Measure. The NAV per ordinary share total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. The ordinary share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.

The tables below provide information relating to the NAV per ordinary share and the ordinary share price of the Company, the impact of the dividend reinvestments and the total returns for the years ended 31 December 2023 and 31 December 2022.

2023	Net asset  value per  ordinary  share	Ordinary  share  price
31 December 2022	337.87p	319.50p
31 December 2023	388.39p	360.00p
Change in year	+15.0%	+12.7%
Impact of dividend reinvestments	+2.5%	+2.6%
	-----------------	-----------------
Total return for the year	+17.5%	+15.3%
	==========	==========

 

2022	Net asset  value per  ordinary  share	Ordinary  share  price
31 December 2021	358.68p	340.50p
31 December 2022	337.87p	319.50p
Change in year	-5.8%	-6.2%
Impact of dividend reinvestments	+2.2%	+2.4%
	-----------------	-----------------
Total return for the year	-3.6%	-3.8%
	==========	==========

 

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 December 2023 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2022 and 2023 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2022 is derived from the statutory accounts for 2022 which have been delivered to the Registrar of Companies. The 2023 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelity.co.uk/europe where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

ENDS