Henderson EuroTrust — Searching for mispriced quality

The IMF forecasts that global GDP growth will slow from 3.2% to 2.7% in 2023 with Europe (ex-UK) forecast to grow at 0.5% in 2023. As ever, there is significant divergence at the country level, with Germany and Italy forecast to contract into negative growth, while Spain and France are expected to deliver above average growth for the region. The risks to economic growth are numerous and include an escalation of the war in Ukraine, consumer weakness, trade friction between China and the West and central bank policy errors. The war in Ukraine has affected investor sentiment towards Europe as a result of to the greater impact of higher energy costs.

As an asset class, European equities remain unloved with persistent fund outflows over the last two years (Exhibit 2). In addition, sentiment surveys such as the Bank of America’s fund manager survey show investor pessimism towards European equities. On previous occasions, such signals have been a contrarian buy indicator for the region. As with many equity markets, growth investing has had a tough time in 2022 as rising inflation and interest rates have had an impact on the valuation of longer-duration growth assets (Exhibit 1).

The investment process focuses on identifying underpriced and underappreciated growth and quality and is founded on stock-specific merits. However, the portfolio is not constructed in a vacuum and macroeconomic factors are taken into account when analysing individual stocks. Ross explains that over the last 12 months, the principal driver of market returns has been monetary tightening and increasing inflation expectations that have driven the outperformance of value stocks. However, day-to-day volatility in performance between value and growth stocks has been high and increasingly pronounced, which suggests the arguments for and against value and growth are becoming more balanced. There are elements of value exposure in the trust; however, it has been defensive value in the market that has been robust, rather than the cyclical value more prevalent within the portfolio. Given the economic environment, Ross has positioned the portfolio with a more balanced profile through 2022, giving the portfolio a more defensive tilt.

Where the picture is brighter is the valuation support for European equities, which are undervalued relative to their history, with current valuations last seen during the eurozone debt crises in 2012/13 and versus other equity markets, especially versus US equities (Exhibit 3). Despite the near-universal pessimism around the prospects for global and regional economic growth, Ross is cautiously upbeat on the global economic outlook and especially on the portfolio’s resilience in the face of these challenges.

Ross manages this portfolio from a purely bottom-up basis, with stock, sector and country weightings being an end product of where he is finding opportunities rather than being targeted. The portfolio is overweight France and the Netherlands, with key positions in TotalEnergies, a French energy company, and Dutch health, nutrition and bioscience firm Royal DSM. The portfolio has a geographic bias to more internationally focused northern European countries like France, Switzerland, Germany and the Netherlands, with around 77% invested in these areas. There are fewer positions in southern Europe where companies can often be more domestically focused.

The top 10 holdings at the end of December 2022 (Exhibit 5) share a fair amount of similarity with those of a year previously. New holdings TotalEnergies, Sanofi and ASML are new top 10 positions, with idiosyncratic investment theses, and were all initiated into the portfolio in the last 12 months.

In general, HNE has a bias to quality growth companies. These can be found in a variety of industries and so the overall portfolio is diversified at sector level. According to Morningstar data, HNE has around 30% in both cyclicals (those industries where prospects are historically materially affected by the direction and magnitude of economic growth) and sensitive industries (those industries affected by economic cycles to a lesser degree than cyclicals), with a further 40% in defensives (those industries that are traditionally relatively unaffected by economic cycles). It has had a recent bias to cyclicals compared with peers and the benchmark, but is now paring this back (Exhibit 6), with an increasing allocation to companies in both sensitives (Exhibit 7) and defensives (Exhibit 8).

Cyclical industries include basic materials, consumer cyclicals (or discretionary), financial services and real estate and there are examples of these types of company within the portfolio including Royal DSM, Munich Re and BAWAG Group. Sensitive companies in the portfolio include TotalEnergies, ASML and Airbus.

Despite defensive stocks being an area where valuations can be stretched in times of economic uncertainty and weakness, there are many examples of these types of companies in the portfolio including Nestlé, Novo Nordisk and Enel.

The net result of the changes implemented in 2022 to date has been that the quality of the portfolio has improved, with increases in overall return on invested capital (ROIC), gross and operating margins and reduced debt.

The cost of living crisis fuelled by rising input cost inflation has dominated the political and economic landscape in 2022. HNE has exposure to both consumer staples and discretionary holdings. In the consumer discretionary sector, the cost of living crisis is already seeing signs of demand destruction, which is affecting sales and earnings in industries like fashion retailers, home furnishings and improvements. Online fashion companies like ASOS and Zalando, which prospered during the initial months of the COVID pandemic, have seen consumer demand decline. Currently there is limited pure play e-commerce exposure in the portfolio (although there has been more exposure in recent years), little retail and no general retail (food, home, electrical goods, etc). The trust previously held some gaming stocks that were COVID beneficiaries but subsequently performed poorly as China clamped down on gaming activity and the positions were sold. Stocks held in the consumer discretionary area include Adidas, Delivery Hero and HelloFresh.

The portfolio also has luxury consumer exposure in consumer discretionary, which has traditionally been more resilient during downturns or economic stress, despite being the most discretionary of purchases. Arguably, the cost of living crisis has less of an effect on luxury goods as they rely on the ultra-wealthy (a third of their customers provide 80% of revenues), who are less affected by rising costs. The trust holds LVMH and Hermès, which both grew through the COVID crisis and continue to be high-quality businesses, delivering high returns on capital, pricing power and high margins.

Consumer staples traditionally provide defensive characteristics, and the portfolio has had material exposure to the sector previously (Exhibit 11). These companies tend to have pricing power, high margins and defensive growth. They can suffer from downtrading from branded to white label, which can affect earnings. Exposure in the portfolio is via stocks such as Pernod Ricard and Nestlé. There is also relatively modest exposure to self-help/turnaround stories in this area via French dairy-based consumer brands Danone and German personal goods company Beiersdorf, which is akin (albeit on a cheaper rating multiple) to L’Oréal. In both examples, there has been recent changes to the management and business strategy.

The latest European industrials Purchasing Managers’ Index for November was 47.8, a sharp fall from the 58 reading in January 2022, indicating a major decline in confidence. While the outlook for the industrial sector is mixed, the manager has focused on energy efficiency via Swiss company ABB and the Finnish company Metso, which provides exposure to materials used for EV development such as lithium and cobalt; both companies play into the sustainability theme. There is no residential construction exposure as a result of consumer affordability concerns. Globally, infrastructure projects and orders have stalled, and the trust no longer has exposure to this subsector. The trust continues to own Germany-based Kion, which is involved in warehouse automation, and is seeing headwinds from a high raw material cost base, supply chain issues and demand weakness.

Semiconductor companies can be an early indicator of slowing demand. There have been profit warnings this year from the likes of Micron and also a material drop in chip and related tech exports from Taiwan and South Korea. Less consumer demand for smartphones leads to slowing demand for chips that go into handsets. There was very limited exposure at the start of the year, but now there are two small additional positions in semiconductor equipment manufacturer BE Semiconductor Industries and ASM. Despite the current cyclically driven reduction in end market demand, semiconductors remain a long-term structural growth industry with high operating profit margins and return on capital. The recent share price weakness provided an opportunity to buy into this long-term growth on attractive valuations.

Ross has been finding opportunities in financials (Exhibit 10) and he began increasing the weighting in Q220 as he saw the sector as being undervalued and perceived as low quality, but a rising rate environment provides a natural tailwind for margins for the industry, previously absent for so long with the major central banks’ zero interest rate policy. In terms of banks, the portfolio has the Austrian BAWAG and Italian UniCredit. Other financial positions within the portfolio include Munich Re, Swiss private markets group Partners Group, which has had a tough 2022 thus far, and the more recently added Deutsche Börse, a potential beneficiary from market volatility. Overall, the financials weighting has been a positive contributor to recent performance.

One area the manager is avoiding is autos. The auto industry is affected by an economic slowdown and the cost of living crisis, and tends to have extremely cyclical margins and demand while having large, fixed cost bases. In addition, supply bottlenecks are easing, which will reduce pricing and impact margins. Twelve months ago, the trust owned one original equipment manufacturer – Stellantis and one auto parts company (Faurecia), and both were sold, in July and March 2022, on concerns over the earnings and margin cycle deteriorating.

In the 12 months to the end of December 2022 the trust has returned -11.1% in NAV terms (debt at fair value, cum income) versus the MSCI Europe ex UK index return of -7.6% and the Morningstar peer group returning -8.7%, while the MSCI Europe ex UK Growth Index returned -14.5% (source: Morningstar; all returns in pounds sterling). The MSCI Growth Index is relevant as HNE has a stylistic bias to growth (Exhibit 12), which has been a headwind for the trust’s recent performance (Exhibit 13).

Since Ross became the sole named manager at the end of February 2019, the trust has returned an annualised 8.8% in NAV terms (debt at fair value, cum income) to the end of December 2022, versus the MSCI Europe ex UK index return of 7.7% and the Morningstar peer group returning 7.6%, while the MSCI Europe ex UK Growth Index returned 9.1% (source: Morningstar; all returns in pounds sterling and annualised).

In the longer term, since Ross has worked on the trust, from end March 2017 to the end of December 2022, the trust has returned an annualised 7.1% in NAV terms (debt at fair value, cum income) versus the MSCI Europe ex UK index return of 5.4% and the Morningstar peer group returning 5.3%, while the MSCI Europe ex UK Growth Index returned 6.9% (source: Morningstar; all returns in pounds sterling and annualised).

Looking at the drivers of performance in CY22 (to the end of December), stock selection was a headwind for relative returns with sector positioning proving to be a fairly modest positive contributor. On a longer-term perspective, in 2020 sector positioning was broadly neutral but stock selection was very strong, eclipsing the value lost via stock selection in 2021 and 2022 and adding significant value. These periods may be quite short, but they identify the main driver of shareholder returns as stock selection rather than sector positioning. By focusing on where the manager can add most value, he is increasing the likelihood of being able to outperform rather than being overly distracted by double guessing macro events.

Through 2022 the portfolio’s overweight positions in Munich Re, TotalEnergies and Novo Nordisk were the primary positive drivers of performance at the stock level. Their favourable impact was more than cancelled out by the adverse influence of the portfolio positions in KION Group, Allfunds and Royal DSM.

The AIC Europe peer group comprises seven trusts, with HNE being the smallest in the peer group (despite which it has the second lowest management fee; Exhibit 18). Five of the peer group sit in the core or core/growth Morningstar style map, with BlackRock Greater Europe (which also selectively includes an element of Emerging Europe) and the European Opportunities Trust having a more pronounced growth bias.

Despite the peer group’s modest size in terms of number of trusts, there are some well-known managers plying their trade here and HNE may fly under the radar in this regard. Jamie Ross is arguably less well known than some of the competitors, however investors can take significant comfort in his appointment to manage the Bankers European equities sleeve in July 2018 under the overall guidance of Alex Crooke, co-head of equities (EMEA and Asia Pacific) at Janus Henderson Investors. This sleeve is a more concentrated version of his HNE portfolio, and, with the exception of the financial year to the end of October 2021, which is the last for which report and accounts are available for Bankers, he has comfortably outperformed the regional benchmark. In addition, HNE has seen a notable continuity of investment style with the trust having only two managers since January 1994. Ross was appointed alongside Tim Stevenson in March 2017, ahead of the latter’s retirement in February 2019.

An additional beneficial feature here is that despite the portfolio having a quality/growth bias at its heart, this does not preclude investors from receiving a helpful dividend. HNE currently yields 2.9%, which is the second highest in the AIC sector behind JPMorgan European Growth & Income, which has an enhanced dividend policy.

HNE has more than enough flexibility via stock selection and portfolio construction to allow the manager to outperform the index and peers, but perhaps not such excessive levels that can result in extreme outliers of performance.

HNE has an active strategy, blending positions predominantly in compounding but also improving quality companies. Compared to some of its AIC peers it has more core characteristics, with a balance of growth and what may be considered more value holdings in the portfolio (Exhibit 21). HNE has an active share of c 70% (active share is the difference between two portfolios, with 0% indicating complete similarity and 100% indicating no overlap). The last available simple average active share in the AIC category is 76%, with JPMorgan European Growth & Income the lowest by some distance (50%) and European Opportunities Trust being the highest (95%). High active share is sometimes considered as a key determinant of outperformance; however, it is a double-edged sword and can equally destroy value in the wrong hands. We feel that 70% active share gives the strategy plenty of potential to outperform without the excessive volatility that a completely unconstrained portfolio can provide for investors.

HNE’s tracking error has historically varied between 2.5% and 5.0% (Exhibit 22), which is lower than the simple weighted average of the AIC peer group. Tracking error measures the divergence in price returns between two portfolios, with higher tracking error indicating more substantial divergence. The relatively consistent and material level of tracking error for the HNE portfolio illustrates the active nature of the portfolio. It has tended to be higher than the Morningstar peer group, but lower than the AIC peer group, which is smaller and has a number of very stylistically divergent trusts.

HNE has an investment objective targeting total returns, rather than having a focus on shareholder distributions. The by-product of investing into good quality, structurally growing companies is that these are cash-generative businesses that, after investment requirements, are able to pay excess cash to shareholders. That said, the board has a distribution policy that seeks to broadly pay out the revenues received and to utilise reserves that had built up prior to 2020 and expend them in the following four years.

In FY21 the board had recourse to use reserves given the effects that COVID-19 had on company dividends. Revenues recovered strongly in 2022 and no reserves were utilised, but the board is maintaining its approach of utilising reserves and revenues to fund the dividend for the next two years, and then intends to use the revenues accrued each year to fund the dividend. For FY22 dividends per share were 3.8p (FY21: 2.5p) on revenues per share of 3.9p (FY21:1.7p). At FY22 revenue and capital reserves were in the region of 4p and 118p per share. With a current yield of 2.9%, HNE offers a competitive yield versus its AIC peers, which average 1.9%, while the index currently yields 3.1%.

The board will seek annual shareholder authorisation to buy back and issue shares, although it has used these facilities sparingly, with no shares issued or bought back within the last five years. Given the size of the trust it is understandable that the board tries to avoid shrinking the trust via buy backs. At the AGM in November 2021, shareholders approved the board’s proposals for a one-to-10 share split to create a smaller denomination share price designed to make it more attractive for smaller investors (and to facilitate easier reinvestment of dividends) thus helping to increase the liquidity in the shares. The share split occurred on 22 November 2021. In the year to 22 November 2021 the daily average number of shares traded in HNE was 207,428 (total: 52,271,950). This compares with the daily average number of shares traded in HNE from 22 November 2021 to 22 November 2022 of 213,641 (total: 53,837,624), which is a modest 3% increase on the previous year.

Despite much to recommend HNE, including a competitive performance against peers over the medium and longer term, low fees and a differentiated and effective investment approach, the trust has consistently traded at a discount to its AIC peers (Exhibit 24). There may be a number of reasons for this, one of which is that the size of the trust potentially prohibits it from making it onto large wealth manager buy lists, although they are present on the share register (Exhibit 29).

Whatever the reason, HNE is the smallest trust in the AIC peer group and is thus among the least traded of the AIC cohort by value (Exhibit 25), although the asset class as a whole has seen less liquidity over the last three years. HNE is however equal third within the peer group in terms of the daily traded percentage of its market cap, indicting a healthy market for its shares. Fundamentally HNE has strong pillars in place for longer-term outperformance, with a differentiated and effective investment approach executed by an established and collegiate team with below average fees. We would expect these positive traits to result in an above peer group performance over time, generating increased investor interest in HNE.

The trust is managed by Jamie Ross with the objective to deliver superior total returns (there is no yield target) for investors from a relatively concentrated (35–55 stocks) all-cap mandate with a bias to large and medium European (excluding the UK) companies. The manager seeks to invest in companies he deems to be high, or significantly improving, quality and where the magnitude and duration of this quality and the associated growth prospects are underappreciated by the wider market and is thus considered mispriced by the manager. Part of the portfolio is focused on improving fundamentals, which may be driven by a catalyst such as a change in management, business strategy or improving ESG characteristics. ESG considerations are formally implemented on both a negative and proactive basis within the investment process. Ordinarily, investors can expect the trust to be fully invested, with liquid investment and gearing limited to 20% and 30%, respectively. There are no formal limits with regard to country, sector or stock versus the benchmark, although no single stock can account for more than 10% of the trust and unlisted holdings are limited to 10% (none currently held).

While we have focused upon some of the trust’s performance characteristics over the past three years coinciding with Ross’s tenure, broadly the same trends are identifiable on a longer 10-year view. The trust has a three-year correlation of 0.96% with the MSCI Europe ex UK Index (peers as calculated by Morningstar have a 0.99% correlation in aggregate). Perhaps somewhat surprisingly the portfolio has a correlation of 0.90% versus the MSCI Growth Index and 0.86% versus the MSCI Europe ex UK Value Index, which supports the assertion that this is a portfolio that is not unduly influenced by growth or value factors.

The trust has a three-year Beta, or sensitivity, to the movement in the MSCI Europe ex UK Index of 0.99, which compares with the Morningstar peer group of 1.06, meaning that market movements are not the main driver of the returns. More pertinently in up markets, the trust participates in 1.01% of the rising markets, but in falling markets only 0.84% of the markets’ (downward) movement. Isolating the reasons for the trust’s performance or relationship to the index is not straightforward. However, it is likely that focus on investing in quality companies lends the strategy a degree of resilience in weaker markets. This was evident in the COVID-19 inspired volatility and equity market weakness seen in February and March 2020. Less convincingly, the trust did underperform in the early stages of the Ukrainian war in Q122.

Despite the relatively concentrated nature of the portfolio, the volatility as evidenced by the 10-year annualised standard deviation of HNE is 13.24, which is only marginally higher than the MSCI Europe ex UK Index of 13.20, and a little lower than the Morningstar Europe ex UK peer group of 13.28 (data to the end of November 2022). The trust has historically made good use of this marginally higher risk, with superior risk adjusted returns when compared against the index or peers.

Fund manager Jamie Ross joined Janus Henderson Investors (JHI) on its graduate scheme in 2007. He moved to the European equities desk in 2009 before being appointed a fund manager on European equity strategies in 2016 alongside the experienced Tim Stevenson. He subsequently became sole portfolio manager on those European strategies when Stevenson retired in February 2019. Ross is part of the 14 strong European equities team, which manages c €12.5bn (at 30 June 2022) via a range of stylistic and market cap mandates within continental Europe.

Aside from HNE, Ross also manages the European sleeve (since July 2018) of the Bankers Investment Trust and has also previously managed the Janus Henderson UK Alpha fund for over five years utilising the same investment process focused upon mispriced quality. He also manages Law Debenture’s European sleeve, as well as the European sleeve of a US mutual fund and a segregated mandate.

JHI is well known for the collegiate approach that it employs to good effect across many of its desks. The European team is no different, with regular formal and informal forums for information sharing facilitating an osmotic exchange of ideas across the team. An interesting additional element here is that the team includes managers who run long/short strategies, which can facilitate an alternative view on an investment case, although often holding periods can be shorter in such strategies.

The fund manager is looking to invest in a relatively high-conviction portfolio of good-quality continental European growth companies able to compound enduring above-trend earnings over the long term into high returning assets, which he believes is the key to outperforming indices over the medium to longer term. That starting point is a universe of c 800 companies with market caps above c €1bn, which is then screened on quality metrics. ROIC and return on equity are the key criteria that the process initially analyses with additional qualitative and quantitative analysis carried out on potentially attractive opportunities. Stocks are then ranked on a number of criteria including valuation, quality (which also incorporates a measure of the stocks’ sustainability merits) and momentum with associated price targets and upside or downside estimations informing position size. Changes to the scores within the ranking framework are a catalyst for a reassessment of the position size. The resultant portfolio has better quality characteristics (higher returns on invested capital, higher margins and lower debt) albeit for a valuation premium over the index. From 2013–16 the portfolio numbered between 50 and 60 stocks; however, from 2017 the number of stocks has gradually become more concentrated and currently stands in the 40–45 range, although the formal allowable range stands at 35–55.

Within the portfolio, Ross blends companies that he characterises as compounders and improvers. Compounders are essentially high-quality companies with high and sustainable returns on equity, high barriers to entry and resilient pricing power. They are ideally able to invest their high levels of free cash flows into high returning assets for longer than the market appreciates or has priced in. Improvers are misunderstood, unloved and mispriced growing companies. There may well be a catalyst for a valuation or earnings re-rating, or perhaps an element of self-help will bring the merits of the company to the wider market’s awareness. In both instances the focus is on investing in quality companies, either those able to maintain their quality characteristics for longer or those able to transition and surprise the market with their burgeoning quality traits.

Of the two categories, the portfolio has a bias towards compounders over improvers. These buckets complement each other and allow the trust to perform in a variety of market conditions without compromising on Ross’s focus on investment in quality companies. There are no formal parameters set for these buckets, but over the last four years the allocation to compounders has varied between 50% and 66% of the portfolio. The lowest weighting was in Q420, with the catalyst of the successful trial of a COVID-19 vaccine, when Ross tilted the portfolio away from compounders and those stocks that had benefited from COVID-19, towards reopening stories. Novo Nordisk (compounder) was reduced and new positions in Total, CNH Industrial and Dialogue Semi, which are all in the improvers category, were initiated; financials were also an area Ross added to at this time. As at September 2022, the compounders had a higher 12 month trailing return on invested capital (20.8%) versus the improvers (8.2%), with similarly sized differentials for margins and other quality metrics. Compounders trade on more elevated valuations of 20.1x, versus 14.4x for improvers (2023 price to earnings). An example of a compounder is Novo Nordisk, which has high ROIC driven by its diabetes and obesity franchise, which Ross believes will not fade as quickly as the consensus believes, supporting higher sales and earnings for longer. Royal DSM is an example of an improver with high ROIC driven through its increasingly important food ingredients business; however, its transition to a consumer ingredients business is still not fully appreciated by investors and it stands at a valuation discount to peers, which provides a good opportunity to buy a structural and sustainable long-term growth story at an attractive valuation.

Taking a closer look at the compounders and improvers adds colour to their respective characteristics. The compounders have a higher correlation with the index of 0.9% while the improvers add diversification with their 0.8% correlation. Compounders are lower Beta than improvers and are especially defensive in down markets when compared with improvers, which is intuitively what one may expect given their more overt quality. Improvers have been more volatile in terms of standard deviation than improvers over 2022 by some 18%, but once combined the overall portfolio is below peers in terms of volatility.

The portfolio is classified as Article 8 within the EU Sustainable Finance Disclosure Regulation and has held the ‘light green’ designation since the start of 2022. This means that the trust seeks to promote and support companies with positive ESG characteristics. It differs from Article 9 funds, which have more overt targets for sustainable goals delivered by the portfolio. The investment process incorporates both ESG factors and negative screening; this forms an important element of assessing the quality of a business. Companies that fail to address ESG issues are unlikely over the longer term to prosper, grow profits and attract investor capital.

The trust will exclude companies that derive more than 5% of their revenues from the production of shale energy, palm oil, artic oil and gas, the production or selling of tobacco as well as from involvement in the adult entertainment sector. The manager will not invest in more than 5% of the assets in companies that are high ESG risk. The trust promotes climate change mitigation via excluding the bottom 5% of companies when ranked by carbon intensity. The trust will invest at least 5% in companies that are aligned with the UN Sustainable Development Goal regarding good health and wellbeing. In addition, the manager will not invest in companies that are non-compliant with the UN Global Compact.

The trust uses third-party agencies such as MSCI to run the rule over the stocks from an ESG perspective, although Ross adds his own layer of analysis on a company’s ESG factors, which is then open to challenge by the board. Third-party ESG ratings are a relatively new development, and the industry is going through some teething pains in terms of methodology and the use of data. Overall, the portfolio has a better historical sustainability score as calculated by Sustainalytics than the index as well as HNE’s Morningstar global category average (this peer group includes open, closed ended and passive funds). It also has a low carbon designation from Sustainalytics with lower Carbon Risk Score and Fossil Fuel Involvement than its Morningstar global category peers.

Gearing decisions are made at the manager’s discretion (within the overall parameters set by the board) and are driven by the attractiveness of the available opportunities and are structured via an unsecured loan facility of £25m. The formal guidelines allow Ross to hold cash of up to 20% or utilise gearing of up to 30%. Practically the use of gearing has varied between 2% and 6%, while cash has generally been at fairly muted levels.

HNE pays the manager (JHI) 0.65% per annum on net assets up to £300m and 0.55% on net assets above £300m and there are no performance fee arrangements. The board expects most investor returns to be via capital growth rather than from income so 80% of management and borrowing costs are levied against capital with the remainder against revenue. We like the fact that as assets grow investors share in the economies of scale achieved and with current net assets of c £330.5m investors are accessing the cheapest marginal tier of fees. In terms of the AIC peer group, HNE’s fees are competitive with a latest ongoing charge of 0.75%, which compares with the peer group average of 0.88%, despite the fact HNE is the smallest trust in the peer group.

The largest three shareholders (1607 Capital Partners, Allspring Global and City of London) equating to around 30% are US managers with a specialisation in investing in closed ended funds which are standing at anomalous discounts to their net asset values. The bulk of the remaining top 10 shareholders are private client investment managers or execution only retail platforms.

The board meets six times a year. It has five members, with an average tenure of a little under five years. There is a relevant mix of skills across the board, including experience in European corporate finance and advisory services, investment management/consultancy and economics. All members are significant shareholders (with the exception of the newest appointment), which we feel is important as it provides an element of alignment of interest with shareholders.

Ross generally presents to the board on his own, although on occasions David Barker, who works closely with Ross, will attend or present on a stock. The board challenges Ross thoroughly and to a high standard, adding a second level of ongoing due diligence, which is to the benefit of shareholders and another positive for the investment trust structure.

Nicola Ralston has been chair since March 2014, having been originally appointed in September 2013. She has over 40 years of institutional investment experience via senior roles at Schroders and Aon. Aside from her position here, she sits on the Centrica Combined Common Investment fund board. She has stated her intention to stand down from the board at the AGM in November 2023.

Ekaterina Thomson has extensive corporate finance and strategy experience with a range of UK and European blue-chip companies. She also sits on the boards of MIGO Opportunities Trust, AVI Japan Opportunity Trust and Allianz Technology Trust.

Rutger Koopmans has held senior positions at a number of banks including ING and since 2008 has run an independent advisory practice. He sits on various boards of private companies and institutions in the Netherlands.

Stephen King has an economist background, having been chief economist at HSBC for 17 years until 2015, and was previously an economist for HM Treasury and a private secretary to the chief economic adviser and also a specialist adviser to the House of Commons Treasury Committee between 2015 and 2017.

The board appointed Stephen White, who joined on 1 December 2022. White, who has 35 years of investment management experience, is a former portfolio manager and head of European equities at F&C Asset Management. He currently is a director of Brown Advisory US Smaller Companies, Polar Capital Technology and BlackRock Frontiers Investment Trust. The investment experience he brings should compensate for the loss of similar skills and experience when Ralston steps down in November 2023.