Annual Financial Report

HENDERSON EUROPEAN FOCUS TRUST PLC

Annual Financial Report for the year ended 30 September 2020

This announcement constitutes regulated information.

Investment Objective

The Company seeks to maximise total return (a combination of income and capital growth) from a portfolio of stocks listed in Europe.

Performance

· Net asset value1 ("NAV") per ordinary share total return was 5.9% (2019: 4.3%), above the benchmark2 figure of

0.4% (2019: 6.4%) and above the OEIC Europe sector average of 3.2%

· Ordinary share price total return3 was 3.7% (2019: 3.1%)

· NAV per ordinary share total return for the five years ended 30 September 2020 was 65.0%, ahead of the total

return from the benchmark of 61.9%

· Proposed annual dividend: interim and final dividends of 9.60p and 21.70p per ordinary share respectively, making

a total of 31.30p (2019: 31.30p)

· The ordinary shares were trading at a discount to NAV of 12.6% (2019: 10.5%) as at 30 September 2020

Financial highlights

1. Net asset value ("NAV") per ordinary share (including dividends reinvested and excluding transaction costs)

2. FTSE World Europe ex UK index in sterling terms

3. Share price using mid-market closing prices

4. Simple average NAV for the AIC Europe sector which comprises eight investment trusts

5. Investment Association Europe ex UK sector

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

CHAIR'S STATEMENT

These past twelve months have been unprecedented as we all know: the emergence of the Covid-19 pandemic; governments' responses to the unfolding health, economic and social crisis and the ensuing impact on our daily lives. With this has come huge uncertainty - both for us as individuals but also for governments, and corporate management teams who are trying to operate and forecast in a highly unpredictable environment. Stock markets do not deal well with uncertainty and we have seen huge volatility during the financial year - to give you an idea, our benchmark index of Continental European companies, the FTSE World Europe ex UK Index, fell by 27.6% from the highest point (on 20 February 2020) to trough (16 March 2020) and then showed such a strong recovery that the financial year as a whole finished in positive territory.

As you will see from the performance section below, your fund management team led by John Bennett has navigated this with aplomb, and their investment philosophy of buying companies with sound balance sheets and solid cash flow potential, integrating environmental, social and governance considerations into their assessment of the management team and then constructing the portfolio with conviction at both the stock and sector level has served them well. This is truly active management - it does not seek to represent an index but to provide shareholders with substantial outperformance compared to an index basket over the long term. Indeed, it is noteworthy that in a period when companies with overt growth profiles have been highly sought after, virtually to the exclusion of all else, a well-diversified portfolio of hand-picked companies with these characteristics has delivered positive absolute returns and is well ahead of its benchmark index. The chart on page 2 of the Annual Report highlights this over a number of time periods and as a Board we look to the longer term to ensure we are adding value for shareholders.

For our part, the AGM in January 2020 was the last opportunity that the Board had to come together in person. Since then we have met virtually, both for our routine board meetings, ad hoc calls and strategy session, but also during early April and mid-May at additional meetings convened to assure ourselves that the business continuity planning by Janus Henderson and our other service providers was working appropriately. It was reassuring to learn that working from home was not proving problematic from an operational perspective. Importantly it was also an opportunity for us to have more frequent contact with John Bennett and his co-manager Tom O'Hara as to their thinking - both in terms of how risk in the portfolio was being considered as well as being alert to the potential opportunities that could arise. I shall leave it to John but he goes into detail in his report as to his thinking behind some of the changes over the year as well as his prospective view on the markets and the economic and social environment in which we now find ourselves.

Performance1

In the financial year to 30 September 2020, the Company's net asset value ("NAV") total return per share rose by 5.9% (2019: 4.3%), considerably ahead of the Company's benchmark index, the FTSE World Europe ex UK Index, which increased by 0.4% (2019: 6.4%). Over the longer term, the NAV total return per share is ahead of this benchmark index on three, five, seven and ten year periods to 30 September 2020.

The share price total return was slightly lower at 3.7% (2019: 3.1%) as the discount at which the shares traded to NAV widened marginally over the period. I comment further on this below. Over the past 10 years, the share price has returned 182.2%, compared to the benchmark index of 111.9%. This is outperformance of 70.3% for our shareholders.

Another yardstick the Board look at regularly is the NAV performance relative to other investment companies as well as their open-ended company counterparts in the Investment Association Europe sector ("OEICs"): over the past year the average return for companies in the AIC Europe sector average return has been 6.7% (comprising 8 companies) whilst the average OEIC has returned 3.2%.2

The reduction in our number of holdings to a range of 35-45 was approved by shareholders at the last annual general meeting ("AGM"). The purpose of this further concentration in the portfolio was to offer investors an even clearer proposition. In other words, the Company has sought to evolve, building on its credentials as an actively managed portfolio, fashioned by research and conviction. It is encouraging that this approach has delivered substantial outperformance in the year under review, enabling the Company to strengthen its long-term track record of delivering to shareholders.

Dividends

The Board is recommending a final dividend of 21.7p per share which, subject to shareholder approval at the AGM, will be paid on 5 February 2021. When added to the interim payment of 9.6p (2019: 9.6p) this brings the full year dividend to 31.3p and represents a maintained distribution level. With the shares at 1,260.0p at the year end, this represents a yield to investors of 2.5%.

Whilst the Company's investments are managed to generate superior total returns rather than to have an income focus, the Board is mindful that one of the benefits of the closed-ended structure is to have the opportunity in bad times to dip into revenue reserves that might have accrued historically. We are fortunate to have a healthy level of reserves and with the recommendation of the final dividend, propose to utilise some of these to smooth the level of dividend we can pay out until the Covid-related impact has ceased.

Borrowings and gearing

Despite the problems of unpredictable lockdowns and new outbreaks of Covid-19, our Fund Managers continue to identify opportunities in new holdings. However, with some of those opportunities in the more economically cyclical areas, they have been careful not to add financial leverage at the portfolio level, not least during this period of heightened uncertainty. Hence gearing ended the financial year at 0.6% (2019: 4.6%) having stayed under 5% for most of the year (see chart on page 8 of the Annual Report). Borrowings are in the form of a multi-currency overdraft facility with HSBC and more details can be found on page 20 of the Annual Report.

Share rating and buybacks

Whilst the NAV return is determined by the performance of the Fund Managers' stock selection decisions, shareholders own shares and therefore the share price and the level at which the shares trade relative to the NAV - the discount or premium - is obviously a key measure. Despite good investment performance, the Company's shares have continued to trade at a discount to NAV over the past year, ending the year at 12.6% compared with 10.5% at the end of the prior year. Frustratingly this is more a reflection of the general widening of investment company discounts over the period as well as the fact that Europe has been considered unattractive as a region for investment. The discount averaged 10.8% over this period (2019: 8.9%). Your Board believes that when that sentiment changes and investment in Continental Europe increases, this discount should once again narrow.

The Board considers all options in respect of managing the discount in a manner that is beneficial to the long-term interests of shareholders. As well as ensuring that promotion of the Company is appropriately supported (through regular and informative content on a variety of websites and Fund Manager meetings with investors and media), it is also within the Company's powers to buy back its own shares. Over the course of the financial year under review the Company bought back 115,683 shares, representing 0.5% of the total number of shares outstanding at the start of the year and enhancing the NAV by 0.1%. These shares will be held in treasury and are available to reissue at a time when the Company's shares are trading at a premium to NAV. Shareholders may recall that the Company issued new stock as recently as 2017.

Governance, shareholder engagement and annual general meeting ("AGM")

The Annual Report is our opportunity to report to you on the Company's performance, provide audited financial statements and engage with you on broader issues. You will note that the Annual Report is a few pages longer than in the past. We hope that you will find the additional content, which describes our broader stakeholder engagement and the Company's culture, purpose and values, interesting and informative. However, as we know, much can change in a year, so we are pleased that our Fund Managers are increasingly looking to use virtual media to bring you video updates and afford opportunities for virtual meetings. As always, if you have questions for either the Board or the Fund Management team please don't hesitate to get in touch (contact details can be found on page 78 of the Annual Report) and on behalf of the Board I hope you are encouraged by what you read. Do use the sign-up function on our website at www.janushenderson.com/en-gb/investor/subscriptions/ to receive regular information.

The Company's AGM will be held at 2.30 pm on Thursday, 28 January 2021 and we very much hope as many shareholders as possible will join us. In view of the ongoing restrictions on public gatherings, we will be inviting shareholders to attend the AGM via a Zoom webinar, and ask shareholders to submit proxy forms via their voting agent/platform to ensure their vote counts, as there will be no live voting. Your Fund Managers will present their review of the year and thoughts on the future during the webinar, and will be available to answer your questions, as will I and my fellow directors. Further information on AGM arrangements are included in the Notice of AGM sent with this Annual Report and on our website at www.hendersoneuropeanfocus.com. If you have questions but can't attend on the day please do send them in advance to the company secretary at [email protected], and we will do our best to answer them.

We look forward to being able to resume holding physical meetings in the future, but will also be responsive to your views as to whether these should be of a hybrid nature to allow a greater number of shareholders to join and ask questions. One of the resolutions we are putting to shareholders concerns amendments to our Articles of Association, the main change being to equip us with the flexibility to hold a combination of virtual and physical shareholder meetings in the future, in case of any further crises like the Covid-19 lockdown. We commit to holding physical meetings when this is legally allowed and can be safely accomplished, as these offer full and open 'face-to-face' debate with the Board and Fund Managers.

Within our mailing of the Annual Report and AGM Notice, we are also taking the opportunity to offer shareholders the option to receive documents from us electronically and also to place proxy votes electronically in future years. A resolution to this effect is included in our AGM Notice. Electronic communication should reduce unnecessary usage of paper, and also support us in communicating with our stakeholders in the most convenient and accessible manner for each. Do advise us of your preference by returning the enclosed form. Please be aware that if you do not return your form to us by 31 January 2021, we will assume you have agreed to us making shareholder information available to you through the Company's website, and you'll receive hard copy notification whenever annual reports, half-year reports and shareholder meeting notices are published.

Finally, I would like to draw your attention to the announcement we made in September that Robert Jeens was resigning as a director and Chairman of the Board for personal reasons. We are all very grateful to Robert for his contribution during his tenure. As Senior Independent Director, the Board has appointed me as Interim Chair. Though for now we are a small Board, we are confident that we have the necessary breadth and depth of skills and experience to carry out our duties fully, although we do expect to make further appointments in 2021 and the Company will announce progress on that in due course.

Full details of the Board's background, skills and experience can be found in the Annual Report.

Outlook

These are certainly unusual times, but for stock market participants the uncertainty is extreme. Funded by government-driven quantitative easing to repair economies after the financial crash of 2009-2010, we have witnessed an elongated bull market for equity markets, resulting in valuation levels that are generally higher than many are comfortable with, especially for those companies who exhibit growth criteria. They are priced as though low inflation will continue indefinitely and yet one of the consequences of Covid-19 looks likely to be that governments will continue to keep the taps turned 'on' to support economies and we should expect government borrowing to rise dramatically.

The recent positive news on a vaccine development and a sooner 'return to normal' will only have increased this likelihood. Your Fund Managers' Report explains the investment implications of this and also how the team's investment thinking determines the shape of the portfolio and the choice of individual companies. If nothing else, reminding oneself to "be ready to be wrong" has served John well over the last ten years at the helm of the Company with substantial added value for shareholders. Your Board is confident that this pragmatism will continue to stand shareholders in good stead for whatever may lie ahead over the next ten years.

Vicky Hastings

Chair of the Board

10 December 2020

1. The performance figures referenced in this section are net of fees, with dividends reinvested and in sterling.

2. Comprising 121 funds when including the maximum number of funds in the peer group during the year.

FUND MANAGERS' REPORT

It seems only right that we begin our report with reference to the unique challenge of Covid-19. This is a challenge which has, of course, thudded into our lives, both personal and professional.

Often, an investment manager will be presented with situations which induce the reflexive response of "I've seen this before". Good examples would be the perennial imposters of euphoria and despair, sentiments which might, today, fit growth and value investors respectively. "I've seen this before" cannot be applied to the challenges presented by the Covid-19 pandemic. And yet, our response was somewhat reflexive: it did display muscle memory. I've always maintained that a portfolio of stocks should reflect the investment DNA of its manager. This Company is, for sure, an example of that.

The key strands of this investment team's "DNA" include the following:

1. Follow the cash

2. Avoid excessive leverage

3. Believe in change

4. Believe in cycles

5. Give yourself time (clients willing)

6. Be ready to be wrong

This is not an exhaustive list. Crucially, as indicated by number six, it is not tantamount to a religion. As a team, we often say: "investing must never be a religion". This is merely a health (and wealth) warning to self: in investing, it is crucial not to box oneself in: never to become so wedded to a position that it "must work". Those who know us will know this is why we resolutely refuse to become ardent, inflexible "style" managers: particularly apposite in the current growth versus value predicament: a situation some might describe as the humiliation of value by growth. To us, it is never as binary as that.

Back to those DNA strands: at times deemed old fashioned, strands one and two are, probably, our most vital. A focus on cash-generative businesses, combined with ample, but not excessive, balance sheet leverage has, over time, served us and our investors well. As a trainee fund manager I recall being told "don't layer financial leverage upon operational leverage". Yes, it may have been preached from a dusty drawing-room-turned-office in a Georgian Edinburgh townhouse but, like most lessons worth learning, it has never left me (a Glaswegian).

Such focus came into its own at the onset of this pandemic. It is a focus that naturally makes us wary of businesses and industries hobbled by overcapacity, weak balance sheets or poor cash conversion. Examples include airlines, banks, retail and the hospitality and leisure sectors. Thus, our initial response to the pandemic was to change very little. We felt that our portfolio companies were inherently resilient and that we were not particularly exposed to the most vulnerable sectors. Our priority was to engage with our investee companies. We sought to quiz the management teams of those companies on how they were running their business in response to the situation. It quickly became clear that each and every management team we engaged with had the priorities right: businesses were being run for cash; DNA strand one - follow the cash.

Once this had been established, we, as a team, mulled over what shape the recovery might look like. Opinion poll fearing, media fed and led politicians, advised by highly questionable "scientists" have made the task all the more challenging. It is clear that no economy can withstand lockdown for any lengthy period. The "macro" conclusion that we came to was that, as with the virus itself, economic recovery would spread from East to West. This has largely been the case. Underwriting such recovery was the extraordinary monetary and fiscal response by governments worldwide. Further stimulus came in the form of something less talked about at the time: in following the cash, companies flushed their inventory channels. Thus, the scene was set for inevitable demand recovery to meet the dry tinder of lean inventories. This is one reason why industrial companies and economies have fared better than those with heavy exposure to services. It is also reason to remind those who may have given up on Europe of the wealth of industrial champions and outstanding management teams the so-called Old Continent offers the investor.

Thus, we used the early summer months to buy into selected industrial names, giving the portfolio a more cyclical - some might say value - tilt. Notwithstanding the continuing triumph of "growth" investing over the "value" style, anticipating the recovery shape and our subsequent stock selections have been key factors in the portfolio's outperformance. As the Chair has highlighted in her report, this, in turn, has meant that the Company has been able to strengthen its long-term record of outperformance.

Europe - a leader in "The Green Recovery"?

Much has been made of Europe's laggard status when it comes to the technology sector. A wistful glance at the NASDAQ and its stark contrast with the once mighty Ericsson and Nokia, Europe's erstwhile tech poster children, might induce a pang and a pine at what might have been. We would simply say: that race may have been lost but we mustn't be blinded to the success and enduring merits of European technology champions such as ASML, Infineon and STMicroelectronics, all portfolio holdings.

It is a new race that intrigues us and one that is still in its early stages: the ESG race. Amidst the sound and fury surrounding the whole subject of climate change, the "business" of ESG investing is serious. It is no exaggeration to talk of a state-sponsored ESG investment world: in the past year we have seen EU governments agree on the 'Next Generation EU' green recovery fund, and, perhaps more surprisingly, President Xi Jinping, announce that China aims to hit peak emissions before 2030 and achieve carbon neutrality by 2060. The timeline may lag that of the EU and the UK, which have targeted zero emissions by 2050, but the scale of the transition is that much larger, China being the world's biggest producer of greenhouse gases ("GHG"). Indeed, China accounts for roughly 25% of global GHG, which is almost triple that produced by the EU and almost double that of the United States.

Europe is in an excellent position to lead in this world of sustainability. For example, as its governments and central banks sponsor and "underwrite" the dash for sustainable energy, it may well be that prime beneficiaries, at least in the early years, are European utilities' shareholders. In an era of paltry to negative sovereign government bond yields, the hunt for yield underpins the new phenomenon of green bonds, lowering the cost of capital to those utilities, to the benefit of their equity owners. This train of thought led us, at the turn of calendar 19/20 to enter the sector. Here was an industry not exactly known for its growth prospects, yet it was big and liquid enough to attract those ESG funds. To do so, the companies had to change and it is no surprise to see them shed their "brown" assets for "green": to move their asset base from carbon producing energy sources to sustainable sources. Forgive the pun but the wind has only been strengthened by European governments.

If European utilities represent an obvious play in the era of ESG investing, some less obvious candidates have also become important holdings in our portfolio. Forever stalked by the career risk of not running with the pack, the professional investor must deal with a perennial challenge: to avoid being swept up in a bandwagon. This, in turn, requires iron discipline, so as not to deploy our investors' capital in the wrong places or at the wrong prices. Financial markets are nothing if not prone to fashion. At times, therefore, discipline can feel quaint. Nevertheless, as already noted, one strand of our team's DNA is the discipline of cash flow. In a nutshell, we prefer our investee companies to self-fund their growth.

Another of our strands is applicable to sustainable investing: believe in change. This is vitally important in the context of the ESG challenge. There is no shortage of rating agencies and consultants prepared to "rank" companies based upon their ESG credentials. We would call these "spot credentials"; they apply today, here and now. But what of the future? Armed with such rankings, it is all too easy to apply a "scorecard" approach to sustainable investing. In other words, to hunt for today's most optically virtuous companies and concentrate our efforts and our shareholders' funds there. This, in our opinion, has two major flaws:

1. If something "scores highly" it is more likely to be fully valued

2. A "spot" approach to investing risks ignoring that things can change

If we combine the two points above, we allow ourselves the freedom, the openness and flexibility of mind to identify those companies which might not be today's highest achievers, according to often subjective ESG scorecards. What is important is that they are embracing the era of sustainability and often at an under-appreciated pace. In other words, by believing in change, we can identify a delta, a rate of change. This strand has always informed our thinking. We have typically applied it to the financial metrics of a company and will continue to do so. Today, with equal rigour, we apply the same strand to how companies approach the challenges and opportunities presented by the age of sustainability.

In summary, by combining our preference for self-funded growth with the "change" candidates, we believe we optimise the opportunity to apply sustainable investing without the pitfalls of falling for concept stocks or overvalued situations. Perhaps the unlikeliest of examples would be our single biggest investment, LafargeHolcim. Notwithstanding the Covid-19 pandemic, the long-term global trend of urbanisation is intact.

To be simple about it, all those roads, prisons, bridges, schools and hospitals cannot be built without concrete. The challenge is to make that product in a sustainable way. LafargeHolcim already leads the world in exactly that. Moreover, we would confidently predict that the company will, in a few years' time, be less about its past - cement - and more about the future - sustainable building products. In other words, it is changing. It is a change funded by internally generated cash flow and it is a change that is already seeing LafargeHolcim climb the charts of sustainability scorecards. During 2020 Sustainalytics, a leading independent global provider of ESG research and ratings, upgraded LafargeHolcim to such an extent that it now represents the highest score of all 101 construction materials companies covered by that agency. LafargeHolcim thereby becomes the first construction materials company to rank below 20 in the "low risk" category. It also places the company in the top 20% of all companies assessed by Sustainalytics, regardless of sector. Quite something for a so-called cement company and proof positive of believing in change.

Two other portfolio holdings worthy of mention in the context of "less obvious ESG" are UPM-Kymmene and Signify. We would refer the reader of the Annual Report to the section covering our top ten investments on pages 15-16, where brief descriptions of both companies are to be found.

Both companies are fine examples of how we like to invest. Both start from the base of robust balance sheets and strong cash generation, in the hands of proven management teams. It is this foundation of well-established core businesses that generates the cash necessary to fund the growth opportunities presented by the era of sustainability. Contrast that with some of the parvenus, who present investors with a paper chase, as they continually issue new shares to fund a land grab built on a promise. The latter usually fare well in a bull market, but when the wind turns - pun forgiveness request number two - they are often denuded.

Notable stock contributors1

The technology sector has been the star of the show in world stock markets in recent times and the Company's year benefited from our selections in the semiconductor space. STMicroelectronics contributed some 160bps to our NAV outperformance while ASML produced 80bps.

Arguably less obvious stars came in the shape of Dometic (99bps) and Kion (120bps). Dometic is a Swedish company supplying equipment to the outdoor leisure markets in Recreational Vehicles, camping and boating. You could say that it has been the epitome of a V-shaped recovery since its end markets have rebounded extremely strongly since the dark days of Spring 2020. Perhaps this is not too surprising given the much increased appetite for staycations and outdoor activities.

Kion, the German manufacturer of warehouse and materials handling trucks, exemplifies our approach of looking to "secondary" plays, or beneficiaries, of the boom in online shopping. After all, those consumer orders must be stored, handled and fulfilled. Kion's products make that possible. It's no stretch of the imagination to say that the pandemic has changed the way we shop and vacation. If so, Dometic and Kion are in a fine position to capitalise.

No performance attribution would be fair without a look at our portfolio's detractors. Our single biggest negative contributor was our largest portfolio holding, LafargeHolcim (-62bps). Our second largest negative came from German defence and automotive equipment supplier, Rheinmetall (-61bps). It is perhaps instructive that both stocks, notwithstanding excellent management execution, are considered "victims" in the world of ESG investing. Indeed, a number of conversations within and outside our team, including with sell-side analysts and the management of both companies, confirm that the "optics" of being in the cement or defence industries can be sufficient to deter what we would call "ESG scorecard" investors. This presents us with a dilemma: continue to back the management of these businesses to continue to do the right thing, or take our leave, since to resist the ESG tide renders us the apocryphal Canute. Having sold out of our holding in Rheinmetall, it is a dilemma we continue to wrestle with in LafargeHolcim, mindful that we cannot, alas, indulge in indefinite patience.

Risk

While on the subject of investment DNA, we thought it might be useful to share a few words on how we think about risk. This, perhaps, is all the more relevant since shareholders approved, at the 2020 AGM, the reduction in the maximum number of portfolio stocks to 45, from 60. Many people consider a more focused portfolio of holdings to be synonymous with increased risk, notwithstanding studies which demonstrate that ample diversification can be achieved by a portfolio of holdings numbering half that of the Company's. Our sense of risk starts with the fundamental risk inherent in a business. Assuming management of the business is both honest and competent, the key risks then become the market position, cyclicality and, crucially, financial indebtedness of the company. It then behoves us not to overpay. Such factors can be considered as components of DNA strands one to four. As simple as these concepts are, they remain vital, indeed the most important, factors in our assessment of risk.

Then there is portfolio risk. This comes down to shape. The Company's "bandwidth" of 35-45 stocks affords us ample room to assemble a diversified portfolio of businesses across the large and mid-cap spectrum, at all times applying our skill set of stock picking. We do like our portfolios to have a shape. In this context we like continuously to be aware of the beta of our portfolio and its skew - "cyclical", "value", "defensive", "growth", etc. Thus, to take one example, it is not just the stock specific merits of Nestlé that keep it as a top ten holding for the Company. Nestlé offers portfolio ballast. In other words, as a stock, rather than a business, it offers our portfolio a hedge against the continuing threat of deflation in Europe. This is a very valid factor when we consider that our portfolio shape through 2020 has played to a cyclical-led, reflationary environment. It won't, therefore, be lost on the reader that Nestlé is, in part, a representation of DNA strand number six: we do not concentrate a portfolio in "things that must work" - we are ready to be wrong.

Outlook

When asked to offer an outlook, fund managers often feel the pressure to translate it into some form of forecast: of market level or direction and, madly as well as maddeningly, over a short period, such as one year. It's at this point that the fund manager should send a memo to self. It should read: there are two types of forecaster; one who doesn't know and one who doesn't know that he/she doesn't know. In other words forecasting is a mug's game.

It may be the DNA thing again but when we think in terms of outlook, we tend to think of what could challenge, disrupt or derail the prevailing investment consensus. Our report this year has referenced the very real and very durable threats and opportunities presented by Environmental, Social and Governance challenges. For us, ESG is now a given, it is hard wired into how we think, act and invest. It is here to stay.

It's the things that might not be here to stay that challenge, as well as fascinate, us. There is one particular investment challenge which has been prevailing, dominating investors and shaping their portfolios for some decades now. This has meant that it, too, is deemed to be hard wired. It is the lack of inflation. Such has been the dominance of disinflation, globally, that we have a generation of equity fund managers which has only known the supremacy of growth stocks over value stocks. We also have a whole bunch of other assets priced for more of the same: continuing disinflation. Witness Italian versus German government bond yields or the price of Austrian 100-year bonds.

The last of our DNA strands referenced at the beginning of this report is the one we shall therefore end on: be ready to be wrong. Such has been the bonanza in disinflationary beneficiaries that we stand at a time when some of today's most popular holdings in investment portfolios cannot afford to be wrong. In other words, they cannot afford for inflation to return. Your portfolio is managed by a team of stock pickers. The team doesn't seek to make dramatic macroeconomic calls. And yet, we can't help but question the prevailing investment zeitgeist. Humanity is currently battling a pandemic. As the recent vaccine news demonstrates, humanity will win that battle. We suspect that part of the recovery process, in the financial and economic world, may well involve the return of at least some inflation. If this proves to be the case, many a portfolio, having gotten religion, is not ready to be wrong.

John Bennett and Tom O'Hara

Fund Managers

10 December 2020

1. The figures referenced in this section are the contribution in basis points to relative outperformance. 

MANAGING OUR RISKS

The Board, with the assistance of the Manager, regularly carries out a robust assessment of the principal risks facing the Company, including those which would threaten its business model, future performance and liquidity in its shares. The assessment includes consideration of economic and political risks, most of which are outside the Board's direct control.

The Board has drawn up a detailed matrix of risks facing the Company, together with a strategic heat map charting the top ten risks, which it has distilled into six categories of principal risks, as shown in the Annual Report. To assist in mitigating the decision-taking risks as far as practicable, it has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, which it reviews at each board meeting.

The Board considers closely changes to the risk profile of the Company, arising from both internal and external triggers, and examines emerging risks as part of its regular review of the Company's risk profile. The Board defines emerging risks as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. Once the emerging risks become sufficiently clear, they may be treated as specific risks and enter the Company's matrix of risks.

The Board receives regular and detailed reporting on specific and emerging risks from the Manager and other service providers. In addition, the Board receives reports on specialist topics from professional advisors, including lawyers and tax agents. These reports, as well as the directors' own experience, enable effective monitoring of the risk landscape and changes to it. The Board encourages a culture of anticipating and scanning for direct and indirect market events and constructive challenge to identify and manage risk, where it can, including external risks which need a rapid response, as has been the case this year as a result of the Covid-19 pandemic.

The Board has met frequently during the year to monitor and manage risks related to the Covid-19 pandemic and considers it to be a major event with an ongoing impact on the likelihood and severity of the Company's principal risks. Originally identified as an emerging risk early in Q1 2020, the pandemic developed significantly and quickly, triggering sharp falls in global stock markets and resulting in uncertainty about the ongoing impact on markets and companies, and around future dividend income. The risks associated with the pandemic were therefore moved from 'emerging' into three of the 'principal' risks facing the Company. The pandemic is likely to continue to have an impact on both the portfolio and the operations of the Company, as it will on so many aspects of economic and social activity. The Manager takes into account the impact of the pandemic, but the investment process remains unchanged and the operational requirements of the Company have, to date, proven resilient.

Principal risks

The Company's principal risks and mitigating steps are as follows:

· Market

The Company's absolute performance in terms of net asset value, total return and share price total return is dependent on the performance of the companies and markets in which it invests and is also impacted on by currency and interest rate movements, as well as by political and economic events.

Investment risk is spread by holding a diversified portfolio of companies, typically with strong balance sheets and good growth prospects. The Company does not currently embark on any currency or market movement hedging strategies, though it has the ability to do so.

The Company's investment strategy is reviewed formally by the Board at least annually, and takes into account shareholder views, developments in the marketplace and how the structure of the Company is positioned to meet them.

· Investment performance

The relative performance of the Company against its benchmark and European open and closed-ended peers depends principally on asset allocation and stock selection, which, in turn, require investment skills. In exercising these skills, the Manager is responsible for adhering to the investment policy and investment guideline restrictions set by the Board and amended from time to time.

The Board is responsible for ensuring that the investment policy is met. The day-to-day management of the Company's assets is delegated to the Manager under investment guidelines, with close monitoring of the guidelines being applied.

The Board meets the Manager on a regular basis and keeps investment performance, in terms of both capital and income returns, under close review, as well as having an annual review of the Manager's performance by the Management Engagement Committee. The Board has received frequent updates from the Fund Managers since the Covid-19 pandemic emerged, enabling the directors to monitor and manage risks related to the pandemic. Although the Company is not invested against any income criteria, the net income of the Company and the revenue reserves are monitored against dividend pay outs and anticipated future net income.

Investment performance is monitored over the short, medium and longer term against the Company's benchmark and against a wider peer group of open and closed-ended investment vehicles investing in listed European equities. The Board also reviews the performance attribution analysis against benchmark in detail, to understand the main drivers of performance in reporting periods.

The Fund Managers keep the global political and economic picture under review as part of the investment process.

· Business strategy and market rating

A number of factors, including the setting of an appropriate investment proposition, changing investor demand or investment performance may lead to an increase or decrease in demand for and/or supply of the Company's shares and will impact on how the shares are priced in relation to the Company's underlying net asset value per share.

The Board monitors the Company's ordinary share price relative to net asset value per share and reviews changes in shareholdings in the Company to try and understand short or longer-term trends in demand for and supply of the shares.

The Company is able, when appropriate, to issue or to buy back shares in order to help maintain an orderly secondary market in the Company's shares, but not against any prescribed discount or premium levels, other than avoiding dilution to existing shareholders' interests through share issuance at a discount. The Board also monitors the rating of the Company's shares against other closed-ended investment companies in the sector and continues to deploy tools at its disposal in shareholders' best interests.

The Company is 'evergreen' and does not have a liquidity event, such as periodic tenders or continuation votes.

The liquidity of the portfolio is monitored and is considered sufficient for purposes of a closed-ended fund, including instances whereby the Company buys back its own shares.

· Gearing

The Fund Managers have authority to use gearing in line with the Company's investment policy. In the event of a significant or prolonged fall in equity markets any gearing in place would exacerbate the effect of the falling market on the Company's net asset value and, consequently, its share price. (Gearing would have the opposite effect in the event of a significant or prolonged rise in equity markets in which the Company is invested.)

The Company's investment policy sets a limit on gearing of 20% of net assets and the Board monitors the level of gearing at each meeting. In practice, gearing is of a flexible, short-term nature, and it tends to fluctuate between 0% and 10% of net assets depending on the Fund Managers' views of investment opportunities and views on the direction of European equity markets.

· Operational

The Company is reliant on third-party service providers for all its operational activities, including reliance on Janus Henderson as investment manager, company secretary and administrator to the Company.

The Company depends on the diligence, skill and judgement of the Manager's investment team. Continuity of service of the team and individuals in the team could impact on the future success of the Company.

Failure of third parties' operational or internal control systems could prevent the accurate reporting or monitoring of the Company's financial position. Janus Henderson sub-contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting) to BNP Paribas.

Failure of controls could also impact on the Company meeting its regulatory obligations.

The Management Engagement Committee reviews each service provider at least annually, and, in conjunction with the Audit and Risk Committee, considers reports on internal controls, including any reported breaches, throughout the year, from all the service providers. This reporting covers such matters as continuity planning and cyber security risk as well as matters that are subject to review as part of the annual audit of the Company.

Janus Henderson has a strong European Equities team, which supports the Fund Managers in the management of the Company's portfolio. Constructive challenge, succession and continuity planning are key elements of the management of the team and are reported on to the Board.

The Board reviews the internal control structure and reporting for the Company from all its agents and meets with representatives of all the agents throughout the year to make enquiry on the systems and controls.

The risk of failure of the Manager to manage financial or administrative controls, due to the increased possibility of cyber attacks whilst many employees worked from home, was increased due to the Covid-19 pandemic. The directors report that there has been no change to the level of service provided by the Manager or the Company's other third-party suppliers and the pandemic has served to highlight the resilience and high quality of the services provided.

· Regulatory and reporting

The Company operates in a highly regulated environment which could inter alia affect the listing in the Company's shares and the Company's tax status, as well as how the Company conducts its affairs in the market more generally. The Company also has strict reporting requirements that need to be adhered to both internally and externally to the market.

The Board is apprised regularly of impending regulatory and reporting changes and monitors closely, through its various agents, the Company's adherence to existing requirements, including maintaining investment trust and listed company status.

The Board is also kept apprised of corporate governance guidance and, as far as practical, adheres to corporate governance guidelines that are applicable to an investment company.

The Board is kept informed by the Manager and professional advisors of relevant regulatory and reporting changes arising as a result of the Covid-19 measures and other geopolitical events, including the ongoing trade negotiations following the UK's departure from the European Union.

THE COMPANY'S VIABILITY

The AIC Code of Corporate Governance includes a requirement for the Board to assess the future prospects for the Company, and to report on that assessment within the Annual Report.

The Board considered that certain characteristics of the Company's business model and strategy are relevant to this assessment:

· the Board looks to ensure that the Company seeks to deliver long-term performance;

· the Company's investment objective, strategy and policy, which are subject to regular Board monitoring, mean that the

Company is invested mainly in readily realisable, EU-listed securities and that the level of borrowings is restricted; and

· the Company is a closed ended investment company and therefore does not suffer from the liquidity issues arising

from unexpected redemptions.

Also relevant were a number of aspects of the Company's operational agreements:

· the Company retains title to all assets held by the custodian under the terms of formal agreements with the custodian

and depositary;

· revenue and expenditure forecasts are reviewed by the directors at each board meeting; and

· cash is held with approved banks.

In addition, the directors carried out a robust assessment of the principal risks and uncertainties which could threaten the Company's business model, including future performance, liquidity and solvency, and considered emerging risks that could have a future impact on the Company.

The Board takes into account the liquidity of the portfolio, the gearing and the income stream from the portfolio, and the Company's ability to meet its liabilities as they fall due. This includes consideration of how the forecast income stream, expenditure and levels of reserves could impact on the Company's ability to pay dividends to shareholders over that period. Detailed income and expense forecasts are made over a shorter time frame. However, the nature of the Company's business means that such forecasts are equally valid to be considered over the longer five-year period as a means of assessing whether the Company can continue in operation. The directors assess viability over five-year rolling periods, taking account of foreseeable severe but plausible scenarios. In coming to this conclusion, the directors have considered the impact of the Covid-19 pandemic and the UK's ongoing trade negotiations with the European Union ("Brexit"), in particular the Company's ability to meet its investment objective. The Board does not believe that these factors will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding any short-term uncertainty they have caused in the markets.

In common with investment companies generally, the viability statement does not take into account corporate events which might be initiated by the Company or to which the Company might be subject, and where the Company's circumstances might be dramatically changed. An investment company has relatively liquid assets, compared to industrial or commercial companies, and can, therefore, be subject to major and unexpected strategic change. No such event or change is known or currently in contemplation by the Company.

The directors believe that a rolling five-year period best balances the Company's long-term objective, its financial flexibility and scope with the difficulty in forecasting economic conditions affecting the Company and its shareholders.

Based on their assessment, and in the context of the Company's business model, strategy and operational arrangements set out above, the directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period to September 2025.

For and on behalf of the Board

Vicky Hastings

Chair of the Board

10 December 2020

RELATED-PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with the directors and the Manager. There were no material transactions between the Company and its directors during the year other than amounts paid to them in respect of expenses and remuneration for which there were no outstanding amounts payable at the year end. Directors' shareholdings in the Company are disclosed on page 42 of the Annual Report. In respect of the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there were 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 Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES UNDER DTR 4.1.12

Each of the directors confirms that, to the best of his or her knowledge:

● the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards comprising FRS 102 and applicable law) give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company; and

● 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 that it faces.

For and on behalf of the Board

Vicky Hastings

Chair of the Board

10 December 2020

Top 10 investments as at 30 September 2020

Income Statement

The total columns of this statement represent the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no recognised gains or losses other than those disclosed in the Income Statement.

Statement of Changes in Equity

Statement of Financial Position

Cash flow statement

*Cash inflow from dividends was £6,290,000 (2019: £6,869,000) and cash inflow from interest was £14,000 (2019: £12,000).

NOTES TO THE FINANCIAL STATEMENTS

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