2nd Nov 2011 16:28
2 November 2011
GARTMORE EUROPEAN INVESTMENT TRUST p.l.c.
Proposals including amendment of the Company's investment policy
The Company proposes to seek shareholder approval to amend the Company's investment policy and to make certain other associated changes. A document setting out the Proposals in full will be sent to shareholders shortly.
BACKGROUND
John Bennett assumed day-to-day responsibility for the management of the Company's portfolio shortly after Roger Guy, the manager of Gartmore European since 1996, resigned from Gartmore Investment Limited ("Gartmore") in late 2010. At that time the Board reviewed whether it was appropriate for the Company to continue to be managed by Gartmore with John Bennett assuming responsibility for managing Gartmore European's portfolio.
The Board concluded, after consultation with the Company's major shareholders, that they were satisfied with these arrangements. Following the acquisition in early 2011 of Gartmore Group Limited by Henderson Group plc, the Board undertook a further review of the Company's situation, again consulted Gartmore European's major shareholders and decided that the continuity of management was important but that the opportunity should be taken to review the Company's investment objective and policy.
PROPOSED CHANGES
The Board, in conjunction with Henderson Global Investors Limited ("Henderson" or the "Manager"), is proposing the following changes (together referred to as the "Proposals") with the aim of revitalising the Company to give it a more distinctive approach to investment in Continental European equities and to increase potential demand for its shares in the secondary market:
* Changes to the investment objective and investment policyas more fully described below. * Change of name to Henderson European Focus Trust plc, to reflect the recent change of management group and the proposed changes in investment objective and policy; * Change to the basic management fee calculation. The basic management fee is calculated currently on total assets less current liabilities other than borrowings for the purposes of investment. In the future it is to be calculated on net assets, which will constitute a reduction in the potential amount due to the Manager; * Changes to the performance fee calculation. The current performance fee is calculated, without a hurdle and on a capital return basis; outperformance is measured against the FTSE World Europe ex UK Index (capital only) and rewarded on a tiered basis up to a cap of 0.5% of net assets. The proposed performance fee will have a hurdle of 1% over a new benchmark of the FTSE World Europe ex UK Index (Sterling total return) with 15% of outperformance, over the hurdle being payable, subject to a carry forward of under or outperformance from previous periods. * Change to the aggregate fee cap. The maximum that can be earned in any one year from the basic fee and the performance fee will be 1.75% of net assets compared to the previous cap of 1.25% of total assets less current liabilities other than borrowings for the purposes of investment; and * Change to buyback policy. In future, the Board intends to amend the Company's discount control policy and to adopt a more flexible approach to buying back shares. The Board will seek to ensure the Company's shares trade at a better than average sector rating.
Whilst formal shareholder approval is only required for the change to the Company's investment policy, the Board believes that in light of the number of changes being proposed, they should all be approved by shareholders in the single ordinary resolution to be considered at the Meeting.
The Proposals are designed as a package, seeking to improve the Company's standing and to give potential for outperformance through investing in Continental European equities. If the resolution is not approved none of the changes outlined above will be implemented
INVESTMENT OBJECTIVE AND POLICY
In practical terms, the new approach will create a greater investment focus within the portfolio. There will continue to be no yield bias, although the Company's new benchmark is calculated on a total return basis. In the past, the Company has invested in a portfolio of up to 100 stocks, constructed around its benchmark. If the Proposals are approved, in the future the Company would expect to invest in a more concentrated portfolio of approximately half that number of stocks, unconstrained by its new benchmark and, therefore, with greater capacity to invest across a range of market capitalisations of listed stocks, rather than being predominately invested in Continental European large cap stocks, as is currently the case.
The new policy will be subject to controls such as the maximum single investment not exceeding 10% of net asset value at the time of investment, stocks weighted at 5% or more will not exceed 40% of net asset value and the minimum stock weight will be 1% of net asset value at the time of investment.
Although permitted to do so, the Company has typically not utilised gearing in the past. There is no present intention to introduce gearing, however, where appropriate, the Board may permit tactical gearing up to a maximum of 20% of net assets. The Company will also be able to use derivatives for up to 10% of net assets for investment purposes.
As result of this new approach, the Company will amend its investment objective to the maximisation of return from a focused portfolio of listed Continental European stocks.
The Board and Manager both believe that the proposed new approach as expressed in the revised investment objective and policy, should make the Company more relevant to existing shareholders and new investors. While the portfolio will contain fewer stocks than is currently the case, the portfolio will remain diversified amongst sectors and countries within Continental Europe. The Board recognises that volatility in performance may be accentuated by a more concentrated approach to portfolio stock selection and less observance of weightings within the Company's benchmark. The Board believes that this risk is justified given the prospect of Gartmore European being able to distinguish itself from its European peer group and therefore attract a wider investor base.
CHANGES TO MANAGEMENT FEES
The proposed changes reduce the amount of basic management fee that the Manager can earn by altering the basis on which the fee is calculated from total assets less current liabilities other than borrowings for the purposes of investment to net assets. The basic management fee remains inclusive of company secretarial and administration services. The performance fee will be simplified to provide that 15% of returns in excess of 1% above the performance of the benchmark will be payable to the Manager. The annual cap on the aggregate fees will be raised from 1.25% of total assets less current liabilities other than borrowings for the purposes of investment to 1.75% of net assets. The payment of a performance fee will no longer be subject to the net asset value per share at the end of the Company's financial year being higher than at the start. In relation to any performance element of the aggregate fee, previous underperformance must be made up before future performance fees can be paid. Outperformance in excess of the cap may be used to offset underperformance in future periods, but not to earn or enhance a performance fee payment.
In the Board's opinion, the changes to management fees reflect the changes to the Company's objective and are designed to incentivise outperformance and minimise costs in periods of underperformance. The Board believes the basis upon which the basic fee will be charged reflects best practice through the inclusion of a performance hurdle, and does not incentivise the Manager to employ gearing where it is not appropriate to do so. Furthermore, while unrewarded outperformance above the cap may be carried forward to offset against future underperformance, it may not be used to create or enhance a performance fee and any underperformance must be made good, in full, before any further performance fee can be earned.
Changes to management fee arrangements are related party transactions under the listing rules issued by the UK Listing Authority (the `Listing Rules). In accordance with Listing Rule 11.1.10, the proposed changes to the Company's management fee arrangements are a smaller related party transaction and do not require shareholder approval. However, as set out earlier, the Proposals are designed as a package and shareholders are therefore being asked to approve the changes to the Company's management arrangements.
BUYBACK POLICY
Since introducing discount protection at a 3.5% discount to net asset value in 2007, the Company has bought back a substantial proportion of its share capital and has also conducted a 40% tender offer. While this policy has been relaxed in more recent periods to containing the discount below 10%, the Company was finding itself being used as a short-term trading opportunity due to its discount protection policy being tighter than other members of its peer group. Consequently, the Company has repurchased over 36% of its share capital (excluding the tender offer) since 2004 (when it commenced buying back shares).
The proposed change to a more conviction based portfolio does not lend itself to a prescriptive discount protection policy as liquidity in the portfolio will be reduced. Consequently, the Board intends to introduce a more flexible share buyback policy which will aim to maintain the Shares on a rating better than the European sector peer group average, as well as eliminating stock overhang and providing additional liquidity in the secondary market.
For further information please contact:
James de Sausmarez
Head of Investment Trusts, Henderson Global Investors
020 7818 3349James Moseley/Jane LewisWinterflood Investment Trusts020 3100 0250/ 0295 - ENDS -
XLONRelated Shares:
HEFT.LHGG.L