Final Results

Legal Entity Identifier: 213800N1B1HCQG2W4V90

TR EUROPEAN GROWTH TRUST PLC

Financial results for the year ended 30 June 2020

This announcement contains regulated information

Investment Objective

The Company seeks capital growth by investing in smaller and medium sized companies which are quoted, domiciled, listed or have operations in Europe (ex UK).

Highlights

· Net Asset Value total return1 of 3.0% compared to a total return from the benchmark of 0.3%

· Total dividend2 of 22.00p for the year

Financial highlights

1. Net Asset Value (NAV) total return (including dividends reinvested)

2. Includes the interim dividend paid on 17 April 2020 and final dividend recommended to shareholders for approval

3. Euromoney European Smaller Companies (ex UK) Index total return and expressed in Sterling

4. The sector is the AIC European Smaller Companies sector

5. Share price total return including dividends reinvested and using mid-market price

6. Calculated using the methodology prescribed by the Association of Investment Companies

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

Chairman's Statement

When I last wrote to you in the half-year update, the economic outlook for the second half of the Company's financial year was by no means certain. The first half had been marked by increasing volatility driven by a slow-down in global growth, Sino-American trade wars and Brexit. All this paled in comparison with what was to come when cases of Covid-19 infections were confirmed outside of China.

During March 2020 global stocks saw a downturn of at least 25%, and 30% in most G20 nations. The pandemic is inflicting rising human costs worldwide and the necessary protection measures are severely impacting economic activity. Global growth is projected at minus 4.9%1 in 2020, signalling the worst recession since the Great Depression.

In a climate of rapid economic decline, dividend cuts and financial regulators requesting companies to postpone the payment of dividends, it is worth taking stock of the Company's position:

· we have £24.0m in revenue reserves, equating to 2.2 times dividend cover excluding the proposed final dividend, and can make further distributions of £349.7m from the capital reserve;

· our closed end nature means our Fund Manager can, and has been, making long-term investment decisions; and

· our investment objective of capital growth, eliminates the constraints of chasing income.

The Fund Manager's report sets out in more detail the composition of the Company's portfolio and how it is positioned to weather the current economic conditions.

Performance

The NAV total return performance for the year to 30 June 2020 was 3.0%, 2.7% ahead of the benchmark and 0.1% ahead of the AIC sector average for the same period. On an annualised basis and in testament to the long term and active management approach of the Company's investment proposition, the NAV total return performance is 12.2% over ten years, 1.5% ahead of the benchmark and 3.8% ahead of the AIC sector average.

Our Fund Manager's guiding principle of what a company is fundamentally worth, helped them outperform through the worst of the lockdown measures in Europe, when a focus on short term momentum would have proved to have been very costly. The diversity in holdings, with a mixture of early stage companies that benefited from the acceleration in structural trends in areas such as online retailing, more than offsetting any cyclical bias in the portfolio.

Discount

For most of the Company's financial year, the discount to net asset value maintained a range between 10.0%-15.0%. March proved very volatile with the discount narrowing to 7.6% before widening dramatically to 22.5%, reflecting market conditions as Covid-19 took hold in Europe and the US. It briefly returned within the former range before widening again towards the end of May and finishing the financial year at 19.2%. We anticipate that the discount will narrow as the European economy recovers from the worst of the Covid-19 pandemic and the better performance of the portfolio is recognised. Even in the current environment the fund management team and Manager's sales and marketing personnel are working hard to get the Company's investment proposition to investors who are receptive to the narrative.

The discount, in part, reflects the nature of the asset class together with the perceived risk associated with it.

Dividend

The Board is proposing a final dividend of 14.20p to shareholders at the 2020 Annual General Meeting. Together with the interim dividend of 7.80p this brings the total dividend for the year to 22.00p, keeping the dividend in line with last year. This is no small feat given the cuts to dividends which many companies are making.

The ability to maintain the dividend demonstrates one of the many benefits of the Company's business model, being its revenue reserve. This is investment income which the Board has set aside each year, after distributing at least 85% of the income generated during the period to shareholders, with a view to using these funds to smooth dividend payments in extreme market conditions. In making the decision to use the revenue reserve, the Board has considered the Company's financial position and the outlook for the economic recovery over the coming few years. We believe this is an appropriate course of action at this point in time and will continue to rigorously evaluate the use of the revenue reserve when making future dividend recommendations.

Succession planning

Two new directors were welcomed to the Board during the year; Ann Grevelius and Dan Burgess, and we said goodbye to Audley Twiston-Davies, who had been Chairman of the Board for many years. The changes formed part of the Board's ongoing succession planning.

As part of these plans, Andrew Martin Smith was due to retire from the Board by the time of the 2020 Annual General Meeting. Given the severity of the economic conditions resulting from the Covid-19 pandemic and taking account of Andrew's experience of the closed end sector, I have, with the unanimous support of the directors, asked Andrew to remain on the Board for one more year as markets, central banks and governments navigate their way through the worst of the economic effects of the pandemic.  

We will be evaluating the further steps in our succession planning in the first half of 2021 and I look forward to reporting to you in this respect in due course.

Annual General Meeting

The Company's annual general meeting will be held at 12.30 pm on Monday 23 November 2020. As restrictions on public gatherings remain in place and with the safety of our attendees foremost in our minds, we invite shareholders to attend the meeting via Zoom webinar. The Fund Manager will present his usual review of the year and provide an update on the positioning of the portfolio. He and your directors will be available to answer your questions as usual. Details of the meeting and how to attend are set out in the Notice of Meeting, which is enclosed with this document.

I urge all shareholders to complete and return their proxy form, or get in touch with their share dealing platform to instruct them to vote your shares, as votes will be taken on a poll rather than a show of hands as we have done in the past.

Outlook

The Company has performed well in very volatile stock market conditions during the second half of the financial year. Our Fund Manager's investment process, with its emphasis on a mix of growth and self-help stocks, overlaid with valuation discipline, has been beneficial in these unprecedented times. The expansionary monetary and fiscal policies being embraced worldwide, and noticeably in Europe for the first time since the global financial crisis of 2008, suggest that in years to come inflation could play a bigger role in the economy than has been the case for a few decades. This may well drive a change from the growth led stock market of recent years and the Board is reassured that the diversity of the Company's portfolio should provide scope for investment performance in such circumstances. European smaller companies continue to be an attractive area of global markets and we believe our fund management team have ample opportunity for finding good investments in which to deploy your capital.

Christopher Casey

Chairman

7 October 2020

1. imf World Economic Update, June 2020

FUND MANAGER'S REPORT

Introduction

The financial year ending June 2020 was a reasonable period for the Company, with strong performance compared to the benchmark despite a particularly volatile and unusual set of circumstances. The Company's portfolio generated a positive return of 2.3% compared to the benchmark which contracted by 4.4%. Trade wars, Brexit and European politics paled in significance compared to the ravages of Covid-19 which shut down the global economy as the virus swept from China, through Europe and on to the US in the second half of the financial year.

We have often shared our disappointment in the behaviour of monetary and fiscal policymakers but in this particular crisis, their rapid reaction of monetary and fiscal loosening combined with constructive policy choices hugely cushioned the global economy and avoided serious damage to the financial system. Healthcare policy responses have perhaps not been as uniformly praiseworthy and a distressing number of people have died.

Thanks to the rapid economic response to the virus, the initially savage drop in the stock market was promptly followed by a dramatic bounce from mid-March onwards. We maintained our valuation discipline in the market dislocation and took the opportunity to buy some great businesses at good prices and some good businesses at great prices. As a result, the Company delivered very strong performance in the market recovery.

The portfolio

We aim to balance a mix of early stage growth businesses, sensibly-priced structural growth stocks, mis-priced value names and self-help turn around stories in the portfolio. Despite valuation having been out of vogue as a stock market discipline for the last decade, we remain keenly valuation aware. We very much care what price we pay when we deploy investors' capital. Our aim is to use the balance within the portfolio to capture a range of different drivers of performance, rather than focusing on just capturing one factor such as momentum or growth.

Additions to our early stage growth names include video conferencing software designer Pexip. The Norwegian-listed business offers the only product that can operate between all the main competing video conferencing platforms and has shown rapid top-line growth. Additions to sensibly-priced structural growth names include Swiss-listed Interroll, a company that provides material handling solutions that underpin the shift to an eCommerce-driven economy. We have supplemented these names with stocks in more mature sectors such as Swiss-listed glass bottle manufacturer Vetropack. As Europe shifts away from using plastic, there is a big opportunity for glass packaging and we believe that well invested, well located players like Vetropack have the potential to thrive. We also have invested in turnaround names such as eDreams. The Spanish online travel company has been hit hard by the global slowdown unleashed by Covid-19, but we believe it is in a position to take advantage of the global recovery thanks to a strong management team, a high variable cost base and good market position.

Performance attribution

In the year ending June 2020 the Company benefited from its exposure to early stage growth stocks that are maturing into structural growth names. Food delivery platform HelloFresh was the top contributing name that benefited from consumers shifting to home delivery of groceries, a trend accelerated by the global lockdowns that have occurred. Swiss online pharmacy company Zur Rose was another benefactor of this trend and was given an additional boost by liberalisation of the pharmaceutical prescription process in Germany. The Company further benefited from owning German specialty pharmaceutical wholesaler Medios, a company that had been cheap and neglected by the stock market, but whose terrific attributes were revealed with the oxygen of increasing sell side coverage over the course of the year.

Detractors from performance were typically in unfashionable and more cyclical sectors such as industrials and banks, or the rare holding suffering from stretched balance sheets. Dutch private bank Van Lanschot Kempen struggled as interest rate cuts hit net interest income and regulators prevented the bank from distributing dividends despite a rock solid balance sheet. We view the shares as very cheap and the dividend as delayed rather than dead. French flooring manufacturer Tarkett suffered from raw material headwinds that abated into the severe slow down caused by Covid-19, which, combined with a large but not unmanageable debt burden, has left the stock largely ignored by investors. We see value and a clear path to balance sheet repair so have maintained our holding. Spanish media conglomerate Promotora de Informaciones also suffered after the anticipated disposal of Media Capital fell through leaving the balance sheet stretched as Covid-19 hurt revenues. The business has adequate liquidity and is at a substantial discount to the underlying sum of the parts so we maintain our holding.

Geographical and sector distribution

Our investment process is fundamentally one of bottom-up stock picking, rather than allocating capital to specific sectors or geographies, although we keep a keen eye on the overall portfolio structure in order to avoid risky concentrations. We do not use the benchmark as a guide to structure and are content to run the portfolio with substantial divergence from the benchmark.

At a geographical level, the Company remains overweight in Germany and the Netherlands, and has built a reasonably large overweight position in France. We remain underweight in Spain and Austria, where we have struggled to find attractively valued opportunities for a few years. In Germany we initiated a position in Software AG where the transition to a subscription model and a renewed emphasis on growth is beginning to deliver benefits. In the German space we also added connection technology company Norma, as we feel that the market has valued shares purely on the company's automotive exposure despite a very resilient water management component; we like the optionality associated with an automotive recovery and what we perceive to be the market's under-valuation of the shares. In the Netherlands we added semiconductor equipment manufacturer ASM International as we see its Atomic Layer Deposition technology as a strategic asset in the ongoing improvement in semiconductor performance. In France we have added smart safety systems provider Groupe Gorge as we believe this family company is undervalued and well positioned to win more orders in robotics and mine detection, with interesting optionality on 3D printing technology, as being well exposed to structural growth areas.

At a sector level, we remain overweight technology, consumer discretionary and industrials. Additions to technology names include German semiconductor equipment manufacturer Aixtron where we think the company is well exposed to potential growth areas such as opto-electronics and OLED (organic light emitting diode) screens. In consumer discretionary we have added Italian-listed Piaggio, the owner of the Vespa brand. We believe the company is well placed to benefit from regulations surrounding new engine standards and we expect the impact of Covid-19 to drive sales in the coming years. In the industrials space we added Swedish wire mesh safety solution firm Troax. We took the opportunity to purchase the stock at a sensible price in the March market rout and we value its dominant market position. Since March, the stock rallied very strongly and we have subsequently sold the position.

Other purchases

Swedish listed computer game companies Embracer and Stillfront were added to the portfolio as we like the structural growth characteristics of both companies as well as their exposure to millennial media consumption. We also added GVS, Italian manufacturer of specialist filtration products, where we have seen a strongly growing consumable business that near term will likely benefit from its production of disposable masks.

Other disposals

We took profits in Irish healthcare services company UDG after a dramatic rerating in the company's valuation multiple. We exited our position in Norwegian-listed Salmon farmer Salmar due to reservations about demand for salmon with so many of the globe's restaurants closed. Lastly, we sold out of Austrian textile manufacturer Lenzing as we became increasingly uncertain about the management's attitude to capital allocation.

Currency

The Company is denominated in Sterling, while investing in largely Euro-denominated assets. We do not hedge this currency exposure.

Outlook

It is clear that the global economy is likely to have its worst year in living memory in 2020. Beyond Covid-19, a bipartisan consensus seems to be building in the US that a trade war with China will continue in some shape or form no matter who wins the US presidential election in November. The trade relationship of the UK with the EU has yet to be settled and could be a further economic shock as the continent begins to recover. Covid-19 may as yet come back with a vengeance in the Autumn.

It is also our view that, as more time passes, the higher the risk becomes to bet against human ingenuity. So many resources are being thrown at testing, treatment and vaccine development capabilities that we are optimistic that good news on the medical front will prevail. If a working vaccine is successfully developed ahead of expectations it is our view that the value/cyclical stocks will perform better.

The policy environment is as constructive for equities as it has been for some time. Relatively loose monetary policy and expansionary fiscal policy is enormously helpful for assisting recovery in Europe. The EU Recovery Fund is a hugely significant initiative; for the first time the EU will issue mutualised debt and could emerge from this crisis increasingly unified. Arguably this could not have occurred without Brexit. The EU is leading the world with its green agenda. The Company is very well placed to benefit from trends such as energy transition, electric vehicles, building efficiency and clean air.

There is scope for a more inflationary environment if the deflationary impact of the Chinese introduction into the global economy abates with US trade action, companies start to invest and European fiscal policy becomes constructive for the first time in over a decade. Furthermore, while online business models have thrived in lockdown, many have found themselves to be capacity constrained, suggesting a capex cycle is required. This may well result in a shift in market vogue from 'growth at any price' to a more value-orientated environment. Overall this should be a favourable situation for smaller companies and even more so for the value end of the sector.

The portfolio is not a value portfolio but has a healthy mix of cheaper stocks and strong valuation disciplines around the price paid for growth. We continue to find exciting opportunities in this neglected area of the market and believe that it can offer superior investment returns over the medium term, as we have found in the past.

Ollie Beckett, Rory Stokes and Julia Scheufler

7 October 2020

Geographic exposure at 30 June 2020 (% of portfolio excluding cash)

Sector exposure at 30 June 2020 (% of portfolio excluding cash)

Principal risks

The Board, with the assistance of the Manager, carries out a robust assessment of the principal and emerging risks and uncertainties facing the Company which could threaten the business model and future performance, solvency and liquidity of the portfolio. A matrix of these risks, along with the steps taken to mitigate them, is maintained and is kept under regular review. The assessment includes consideration of the possibility of severe market disruption, which this year focused on the impact of the Covid-19 pandemic, and the continuing uncertainty arising from the United Kingdom's negotiations with the European Union on its future partnership and trade agreement.

The Board has met frequently throughout the Covid-19 pandemic to monitor the effects on the portfolio. It is an event which the Board considers will have an ongoing impact on global economies which in turn could affect the performance of the Company's portfolio. The pandemic has triggered a sharp fall in global markets and created uncertainty around future investment income. The outcome of the ongoing partnership and trade negotiations with the European Union may create further uncertainties in respect of the value of Sterling (the Company invests in Euros or other European currencies, but retains Sterling as its base currency) and could alter the dividend withholding tax rates currently in place. Both events may have an impact on the value of the Company's portfolio.

Notwithstanding the current market disruption, the Board considers that the Company's business model remains robust and the closed end nature of the Company allows the Fund Manager to maintain focus on long-term investee companies fundamentals when taking investment decisions.

· 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 and the extent of its borrowings at each meeting.

· Portfolio and market price

The Company invests almost entirely in securities that are listed on recognised markets and share prices may move rapidly. The companies in which investments are made may operate unsuccessfully or fail entirely. Investments in European markets may be impacted by political, market and financial events. A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds.

The Manager is committed to maintaining a diversified portfolio to mitigate against this risk. The Board reviews the portfolio and performance at each meeting. The Board has received regular updates from the Fund Manager on the impact which the Covid-19 pandemic has had on the Company's portfolio.

· Tax and regulatory

A breach of s.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 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 provides investment, company secretarial, administration and accounting services through qualified professionals. The Board receives internal control reports produced by the Manager 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 exposed to the operational risk that one or more of its service providers may not provide the required level of service.

The Board monitors the services provided by its third-party service providers and receives reports on the key elements in place to provide effective internal control and ensure business continuity. The Board has sought assurances from its key third-party service providers of their ability to function effectively during the UK government's lockdown measures. The Company's service providers have operated remotely since the end of March without a decline in service levels and the Board has not experienced any decline in service levels as the country has started to return to work.

Viability Statement

The Board considers the Company's viability over a three-year period. This is considered a reasonable timeframe reflecting the longer-term investment horizon of the Company, as well as that of its investors, but acknowledges the inherent shorter term uncertainties in equity markets.

The Company's viability is considered as part of the continuing programme of risk management. The primary threats to the Company's continuation are poor investment performance over an extended period of time and shareholder dissatisfaction through failure to meet the investment objective. Shareholders have the ability to vote on the Company's continuation every three years.

In carrying out this assessment, the Board takes account of the likely impact of the principal risks facing the Company materialising in severe, but plausible, scenarios. In particular, the Board consideres the investment strategy and gearing applied by the Manager in the market conditions prevailing at the time of the assessment, the nature 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, as well as the liquidity of the portfolio in stressed scenarios. Notwithstanding the uncertainties in global markets caused by the Covid-19 pandemic, and the UK's negotiations with the European Union on a partnership and trade agreement, the Board does not believe that these will have a long-term impact on the viability of the Company and its ability to continue in operation.

Following conclusion of the assessment, and the Board determined that the Company's assets are liquid, its commitments limited and that the business model remains appropriate. No significant changes to the current principal risks and the mitigating controls in place are anticipated, and the Board does not envisage any material change in the investment objective and policy. The Board is not aware of any events that would prevent the Company from continuing to operate in its current capacity.

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 three-year period from the date of this report.

Related party transactions

The Company's transactions with related parties in the year were with the directors, the subsidiary and the Manager, Janus Henderson. There have been no material transactions between the Company and its directors during the year. 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. The Company has paid expenses on behalf of the subsidiary as set out 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 marketing activities, there have been no material transactions affecting the financial position of the Company during the year under review.

Directors' responsibility STATEMENTS

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

· the Group financial statements prepared in accordance with IFRS adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the consolidation taken as a whole; and

· the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Parent Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Dan Burgess

Director

7 October 2020

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Parent Company Statement of Changes in Equity

Consolidated and Parent Company Balance Sheets

As permitted by section 408 of the Act, the Company has not presented its own Statement of Comprehensive Income. The profit after taxation of the Company amounted to £13,525,000 (2019: loss of £42,795,000).

Consolidated and Parent Company Cash Flow Statements

1. In accordance with IAS7.31 cash inflow from dividends was £7,280,000 (2019: £13,447,000) and cash inflow from interest was £1,000 (2019: £1,000).

Notes to the Financial Statements

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.