HENDERSON INVESTMENT FUNDS LIMITED

HENDERSON EUROTRUST PLC

LEGAL ENTITY IDENTIFIER:  213800DAFFNXRBWOEF12

6 October 2017

HENDERSON EUROTRUST PLC

Annual Financial Results for the year ended 31 July 2017

This announcement contains regulated information

Investment objective

Henderson EuroTrust plc ("the Company") aims to achieve a superior total return from a portfolio of high quality European (excluding the UK) investments.

Performance highlights

•           The net asset value ("NAV") per share total return (including dividends reinvested and excluding transaction costs) was 24.3% compared to a total return from the benchmark index, the FTSE World Europe (ex UK) Index of 24.6%.

•           Increased proposed annual dividend: final dividend 18.0p, (2016: 14.0p) producing a total dividend to be paid from revenue for the year of 25.0p (2016: 20.0p), an increase of 25% on the previous year.

•           As at 31 July 2017 the Company's shares were trading at a discount to NAV of 3.3%, in comparison to trading at a discount of 8.1% at the prior year end.



1 Source: Morningstar for the AIC using cum income fair value NAV for one, three and five years and capital NAV plus income reinvested for 10 years

2 Based on the mid-market share price

3 Size weighted average (shareholders' funds)

Source: Morningstar for the AIC

CHAIRMAN'S STATEMENT

25th Anniversary

I hope that shareholders enjoy our 25th Anniversary booklet, which gives some longer term insights into the markets in which we invest and the approach followed by your Fund Manager, Tim Stevenson. Tim has been the Fund Manager of the Company's portfolio for all but the first two years of the Company's lifespan, and the Board strongly believes that the consistency of approach over more than two decades has been a key factor in the strong performance of the Company.  Since inception the shares have provided a return of 14% per annum to investors, as compared with a return on the benchmark index of 10% per annum. Over 25 years, this means that (with income re-invested, but excluding re-investment costs) an investment of £1,000 in the Company would now be worth more than £26,000; an equivalent investment in the relevant index would be valued at over £10,000. The underlying portfolio has outperformed the benchmark in 20 of the 25 years, of which nine have been in the last decade. I hope shareholders will agree that this is indeed an impressive long term record.

It is worthwhile to look in a little more detail about what it means to take a consistent approach to investment decisions. "Buy and hold" investors, who stick by their decisions through the ups and downs in the market, are often lauded for their refusal to be swayed by market sentiment and their aversion to trading.  But does such an approach really make sense? A portfolio compiled twenty years ago would necessarily omit all of the companies which were not listed at that time. Whilst many of the companies in the Company's portfolio have been in existence for many decades - L'Oréal in France or ING in the Netherlands, for example - others have not; at the end of the latest financial year, the portfolio included at least 15 companies which, in 1995, were not listed companies, such as Deutsche Post or Infineon (spun out of Siemens in 1999) or did not exist at all, such as Partners Group (the private markets investment manager).

The investment approach followed by your Fund Manager, both in the past and today, is to identify companies with sustainable businesses which have the potential to produce consistent dividend growth. We seek to do this on a "live" basis, assessing the investment opportunities of today, not just those of previous years; in addition, we seek to avoid over-concentration in industries, and to ensure that each holding is significant enough to contribute materially to performance.  This means that, whilst the investment focus of the Company is very much on the long term, the Fund Manager is constantly seeking to adapt the portfolio to current opportunities. Two statistics spell out the Company's long-term investment view combined with short-term adaptability. 15 holdings in today's portfolio were first introduced in the 1990's.  Seven positions have been in the portfolio for more than a decade.  However, all but one of these holdings (Inditex) have been sold out of the portfolio at one time or another.

Speaking of active management, we hear much about the failure of the active management industry to outperform relevant benchmark indices, and the consequent shift to passive, or index investment. Some funds, albeit a minority, do outperform over a given period, as the Company has done in the majority of years since inception; however, one of the challenges in knowing how to assess such outperformance is that often the investment approach being followed today has changed beyond recognition, or some or all of the team which produced the performance are no longer in place. As the history in our Anniversary booklet mentions, this happened at the Company, with a change of both mandate and Fund Manager soon after launch. Since 1994, however, shareholders have benefited from consistent management and investment thinking - a steadying fact during periods of great swings in political change. Of course, there is always the risk of hubris in any recognition of investment success; I can assure shareholders that the Board is wholly aware of this, and that we remain focused on assessing and managing all of the risks facing the Company - whether in respect of the markets, the Manager, or the Fund Manager.

Annual performance

Turning to the year under review, whilst the discount narrowed post the sharp increase suffered by all European trusts in the wake of the Brexit vote in June 2016, and hence the share price materially outperformed the benchmark, the underlying portfolio was a little behind the index, with an increase in the NAV of 24.3% compared with 24.6%.  In the first half of the last financial year there was a change in market leadership, as German and other bond yields rose, and political risk increased leading up to the US presidential election and elections in major European countries. More cyclical companies and banks saw quite sharp recoveries, and relative performance of our portfolio suffered for a short period; however, elections in the Netherlands, Austria and France resulted in more continuity than had been feared, the "reflation trade" following the election of Donald Trump largely failed to materialise, and by the year end virtually all of the underperformance had been recouped. The absolute return record is very satisfactory.  The Company has achieved a return (both on the NAV and share price) ahead of the index and the peer group over 3, 5 and 10 years. Over ten years, AIC statistics indicate that the NAV performance of 164.2% was 74.9% ahead of the FTSE World Europe (ex UK) Index, while the share price performance of 180.5% was even better, reflecting a reduction in the discount to NAV over the period. This represents truly substantial value to shareholders, both in absolute terms, and relative to the benchmark index, net of all costs.

Fees

Following a formal review of the management fee arrangements, I am pleased to report that the Board has agreed a revised, and more favourable fee basis with the Manager which has taken effect from 1 August 2017. A tiered basis is being introduced to the base management fee such that the existing fee of 0.65% will only apply to the first £250m of net assets with the balance above that charged at a reduced rate of 0.55%. The performance fee arrangements have been amended such that no performance fee will be payable in respect of a period where either the share price or the net asset value per ordinary share are lower at the end of the period than at the beginning.  In addition, there will be a new cap on the performance fee payable of 0.35% of average net assets over the period meaning the maximum total fees that can be paid in a period will be 1.0% rather than the current 1.3%.  Details of these new fee arrangements are set out in the Annual Report.

Dividends

The Board proposes a final dividend to be paid from revenue of 18.0p, taking the total distribution for the year to 25.0p, an increase of 25% on last year and yet we are still increasing the revenue reserve.  The Board were pleased to be able to increase the level of both the interim and final dividends.  Dividends have been raised every year - by an average annual 8.9% - since 2005 (excluding special dividends).

Share issues and buybacks

No shares were issued or bought back during the year.  In the aftermath of the EU Referendum vote, the Company's shares traded at a discount to NAV of over 10% on several occasions in the early part of the financial year. However, since the start of the calendar year, greater enthusiasm for European equities, coupled with a perceived increase in risk in respect of some other markets, resulted in a significant narrowing of the discount to NAV, which we very much welcome. Your Board continues to monitor the discount/premium actively and will take action to issue, or buyback shares, where it believes it is in the best interests of shareholders to do so.

Gearing

A modest level of gearing was maintained for most of the year under review; this added value.  At the year-end, gearing was materially lower than the average for the year, at a very marginal 0.1% of assets.  We continue to take an active approach to the use of gearing, and to keep the issue of longer term debt under consideration.

Board

As part of the Board's succession plan, John Cornish will be retiring as a Director at the Annual General Meeting. Over his ten year tenure as Director and Chairman of the Audit Committee, John has made a huge contribution to the Company; on a small Board such as ours, every individual's contribution is significant, but John's experience, availability and support have been much appreciated. We shall all miss him. I am, however, pleased to welcome Katya Thomson, who was appointed as a Director on 17 May 2017. With a first class honours degree in Economics and Political Economy, Katya is a Chartered Accountant, and has financial and commercial experience in both the UK and Russia. She is already making a positive contribution to your Board's deliberations; Katya will become Audit Chair following John's retirement at the conclusion of the Annual General Meeting.

I would also like to thank David Marsh CBE, who is Managing Director and Co-Founder of OMFIF (the Official Monetary and Financial Institutions Forum) for contributing his fascinating article on the European scene for our 25th Anniversary booklet. David will also be speaking at our special 25 year AGM in November.

Janus Henderson Investors

A merger between Henderson Group plc and Janus Capital Group, Inc. was announced in October 2016 and completed on 30 May 2017. The European investment team remains in the UK, and is indeed unchanged over the last year. As you would expect, the Board monitors such developments closely, and will continue to do so.

Annual General Meeting ("AGM")

Our meeting will be held on Wednesday 15 November 2017 at 12.00 noon at Janus Henderson Investors' offices at 201 Bishopsgate, London EC2M 3AE.  Full details are set out in the Notice which has been sent to shareholders with this report.  Marking the 25th Anniversary the AGM will be starting earlier than usual; Fund Manager, Tim Stevenson, and Director, David Marsh, will be giving special presentations at the AGM, providing a longer term perspective on the region and the portfolio. I hope as many shareholders as possible will be able to attend to take the opportunity to meet the Board and to hear the presentations. The AGM will be followed by a buffet lunch. Please see important details regarding attendance set out in my letter accompanying the Notice.

The Company's AGM, including the special presentations, will be broadcast live on the internet.  If you are unable to attend in person, you can watch the meeting as it happens by visiting www.janushenderson.com/trustslive.

Outlook

For once, Europe is surprisingly fashionable as a destination for investors.  Some of the political and economic difficulties predicted to beset Europe over the last financial year have failed to materialise, whilst risk is perceived to have risen elsewhere. Whether or not this greater enthusiasm continues, we intend to continue our policy of seeking out reliable growth companies, including those not necessarily in "conventional" growth sectors, and with a blend of some quality economic recovery companies where these meet our criteria. Political risk is higher than in the previous decade.  This makes for a fluctuating environment where long-term judgement and experience will be essential prerequisites for stock-picking. As we enter our second quarter century the Company will face fresh challenges. We believe we are well equipped to meet them.

Nicola Ralston

Chairman

6 October 2017

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. In carrying out this assessment, the Board considered the market uncertainty arising from the result of the UK referendum to leave the European Union.

With the assistance of the Manager, the Board has drawn up a risk map facing the Company and has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The Board policy on risk management has not materially changed from last year. The principal risks which have been identified and the steps taken by the Board to mitigate these are as follows:

·      Investment activity and performance

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may result in underperformance against the Company's benchmark index and the companies in its peer group. The Board monitors investment performance at each Board meeting and regularly reviews the extent of its borrowings.

·      Portfolio and market

Although the Company invests almost entirely in securities that are quoted on recognised markets, share prices may move rapidly.  The companies in which investments are made may operate unsuccessfully, or fail entirely. A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds. The Board reviews the portfolio at each meeting and mitigates risk through diversification of investments in the portfolio.

·      Regulatory

A breach of Section 1158 could lead to a loss of investment trust status, resulting in capital gains realised within the portfolio being subject to corporation tax. A breach of the UKLA Listing Rules could result in suspension of the Company's shares, while a breach of the Companies Act 2006 could lead to criminal proceedings, or financial or reputational damage. The Manager is contracted to provide investment, company secretarial, administration and accounting services through qualified professionals. The Board receives internal controls reports produced by Janus Henderson on a quarterly basis, which confirm regulatory compliance.

·      Operational

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the custodian's records could prevent the accurate reporting and monitoring of the Company's financial position. The Company is also exposed to the operational risk that one or more of its service providers may not provide the required level of service.

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

Borrowings

The Company has in place an unsecured loan facility which allows it to borrow as and when appropriate. £20 million is available under the facility. The maximum amount drawn down in the year under review was £20.0 million (2016: £15.0 million), with borrowing costs for the year totalling £50,000 (2016: £47,000). £2.9 million (2016: £1.3 million) of the facility was in use at the year end. Actual gearing at 31 July 2017 was 0.1% (2016: 0.6%) of net asset value.

Viability Statement

The Company is a long term investor; the Board believes it is appropriate to assess the Company's viability over a five year period in recognition of our long term horizon and what the Board believes to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented in the Strategic Report contained in the Annual Report.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Directors took into account the liquidity of the portfolio and the borrowings in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's borrowing facilities and how a breach of any covenants could impact on the Company's net asset value and share price.

The Directors do not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment. Whilst there is currently uncertainty in the markets due to the UK's negotiations to leave the European Union following last year's referendum result, the Board does not believe that this will have a long term impact on the viability of the Company and its ability to continue in operation.

Based on this assessment, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five year period.

Related Party Transactions

The Company's transactions with related parties in the year were with its Directors, and the Manager. There have been no material transactions between the Company and its Directors during the year and the only amounts paid to them were in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings are disclosed in the Annual Report.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services there have been no material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in the Notes to the Annual Report.

Statement of Directors' Responsibilities

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

(a) the Company's Financial Statements, which have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

(b) the Strategic Report and Financial Statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Nicola Ralston

Chairman

6 October 2017

FUND MANAGER'S REPORT

Overview and performance

It has, once again, been an interesting year for European markets.  From the starting point a year ago characterised by apprehension about potential political turmoil if a "Brexit" snowball swept through Europe, to economic uncertainty as growth remained too sluggish, we have moved to a far more stable political and economic situation in Europe excluding the UK.  Earnings growth has also finally begun to come through, and these factors combined have led to an increase in the index of 24.6%.  Part of this has been the further fall of about 5.5% in Sterling, as the political and economic uncertainty in the UK post Brexit becomes more obvious. The Company has almost kept pace with the market performance and has shown a return of 24.3%.

Performance was marginally behind the index in our first six months as markets enthusiastically pursued economically sensitive names and also banks with potential for recovery, in preference to previous reliable growth companies.  The market has been broader in our second half, and our exposure to some recovering banks such as Crédit Agricole has been increased.  The table included in the Annual Report shows our main contributors and detractors (in terms of absolute contribution to performance). Amundi and ING, both held throughout the year, made a large contribution as did our position in Rubis. On the negative side one of our long standing holdings - BIC - was a laggard as the market expressed disappointment in a slower period of growth, which we believe will be transient.  Nokia and Pandora also detracted from performance, but we see their problems as being more deep seated and we have sold both of these holdings.

Dividend income from our holdings has also been good over the year, rising by 19.3%.  This increase is quite a bit higher than the overall estimated average earnings growth in European markets over the year, and reflects the strong income from some of our financial holdings, the decline in Sterling (adding to the value of the dividends received when translated back to Sterling) and the continuation of a higher pay-out ratio from many of our investments. 

During the year we increased the size of the loan facility from £15m to £20m and have used most of that facility at times (see chart in the Annual Report), and this has enhanced returns.  At the end of July very little of the facility was being used due to a short term concern about market levels.  The total cost of borrowing (excluding the non-utilisation fee) during the year was £50,000 (2016: £47,000).

Portfolio changes and approach

In line with our expectations, bond yields have risen from a negative level to a small positive level (when measured by the German 10 year bond yield) as European economies have extended their recovery and as politics has moved away from the top of the agenda. One implication of this is that Financials should gradually be able to earn a positive interest margin, and this, combined with lower bad debt provisions and more demand for loans, should help banks see a recovery in earnings.  The Company's exposure to Financials has increased from 17.0% at the end of July 2016 to 26.7% this year, mainly by increasing our exposure to existing holdings such as Crédit Agricole, Amundi, ING and UBS.  Remember also that we have a number of investments in "non bank" financials, such as Munich Re., Deutsche Börse, Partners Group and Amundi, and the latter has been increased significantly over the year.  In addition to this all our Bank holdings have appreciated markedly.  After the French Presidential and Parliamentary Elections were completed, and given the increasing evidence of better growth and lower unemployment, it was, and still is, to be expected that the European Central Bank ("ECB") will begin to consider how to move to a more normal positive interest environment in an exceedingly cautious manner.  This will help improve the financial sector earnings further.

During the year we have added eight new positions (Novo-Nordisk (Novo), Legrand, Siemens, Bayer, Vestas Wind Systems (Vestas), Vivendi, Koninklijke DSM and Philips Lighting).

Our focus continues to be on companies which have the ability to adapt to change in the face of what is likely to remain a relatively low growth environment. Novo's growth is driven by innovation and demographics as they remain world leader in Insulin and also have launched an obesity drug (Saxenda), and the shares are now markedly cheaper than they were a few years ago.  Bayer is buying crop protection leader Monsanto and the drive for more efficient food production should enable steady growth. Vestas provides an investment in the world's leading manufacturer of wind power generators and there is an obvious need to reduce carbon emissions worldwide.  We are also looking to make sure that we participate in the move to electric vehicles, and our investment in Infineon made a few years ago gives us access to energy and battery management systems.

Along with Financials mentioned above, we have also increased exposure to those companies which are poised to benefit from the much better economic environment in Europe currently.  With the expectation that quantitative easing will be tapered over the next year or so, we believe it quite likely that European governments will increase expenditure on Infrastructure related projects, particularly those involving more efficient power generation and distribution. Obviously Vestas fits this from a wind generation point of view, but Siemens and Legrand also are likely to play a major role. 

13 positions have been sold, bringing us back to well within our normal range of 50 to 55 holdings.  The sales have been driven by fears of lower growth in the future (notably Nokia and Pandora) or by a feeling that a share was pricing in high expectations (such as Elis, Dufry, Nexity and Sunrise Communications). In selling Valeo and Autoliv we have moved totally away from any direct exposure to car manufacturing, as we feel that expectations here are too high in the short term.  Turnover, as expressed by the lower of purchases or sales as a percentage of average assets, was 48.8% (45.6% and 43.6% in the two previous respective years).

Outlook

European equity markets have been drifting down since the results of the French elections. Once again the old adage of "travel and arrive" has proved true, as markets had perhaps jumped too quickly ahead of political calm and economic improvement. The headwinds in the next few months are likely to be the sharp rebound in the Euro against the US Dollar (Sterling is a sideshow although relevant as the base currency of the Company), as well as exaggerated fears about a tapering of the huge amount of quantitative easing undertaken in recent years by the ECB.  Valuations of European equity markets are not high when seen through the lens of bond market valuations, and while I would not be surprised to see German 10 year bond yields rise towards 0.8%, I would see that as a healthy sign of relative normality rather than anything more ominous. Dividend yields remain very supportive of equities, as does a steady increase of around 10% in earnings predicted for 2017 and 2018 (even if the latter year may see some reduction due to Euro strength).

Overall I continue to feel that we are in a low growth era, and as such we shall continue our focus on reliable growth names, and remain wary of valuation levels which become too high relative to those growth expectations. This steady growth, combined with a reasonable pay-out of earnings to shareholders should enable us to continue the trend of a growing dividend as seen in the last few years. 

Tim Stevenson

Fund Manager

6 October 2017

TWENTY LARGEST INVESTMENTS AS AT 31 JULY 2017

Sector exposure

As a percentage of the investment portfolio excluding cash

Geographic exposure

As a percentage of the investment portfolio excluding cash

Market capitalisation of the portfolio

AUDITED INCOME STATEMENT

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

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

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. 

The Company had no recognised gains or losses other than those disclosed in the Income Statement.

AUDITED STATEMENT OF CHANGES IN EQUITY

AUDITED STATEMENT OF FINANCIAL POSITION

As at 31 July

NOTES TO THE FINANCIAL STATEMENTS

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