JANUS HENDERSON FUND MANAGEMENT UK LIMITED

HENDERSON EUROTRUST PLC

LEGAL ENTITY IDENTIFIER:  213800DAFFNXRBWOEF12

22 March 2023

HENDERSON EUROTRUST PLC

Unaudited results for the half year ended 31 January 2023

This announcement contains regulated information.

Performance

Total return performance to 31 January 2023

1.   Calculated using the mid-market closing price

2.   Net asset value ("NAV") per ordinary share total return (including dividends reinvested)

3.   FTSE World Europe (ex UK) Index in Sterling

4.   Share price total return (including dividends reinvested)

5.   Association of Investment Companies ("AIC") Europe sector (based on cumulative fair net asset value returns)

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

Interim Management Report

Chairman's Statement

European stock markets have been in the vanguard of stock market performance in the six months to 31 January 2023, and the Company's net asset value and share price are ahead of a rising market.

Performance

In the period from our year end on 31 July 2022 to 31 January 2023, the Company's NAV total return was 12.5% compared to the Company's benchmark, the FTSE World Europe (ex UK) Index, which rose by 11.1%, whilst the peer group, the AIC Europe sector, returned 9.0%. The share price was up 13.9%; the discount to NAV remains high but narrowed slightly to 14.4% from 15.2%.

Over the 12 months to 31 January 2023, the NAV total return was 4.0% and the share price total return -1.7%. Both the NAV and share price total returns were below the benchmark index total return of 4.7%; however the NAV total return of 4.0% was ahead of the of the peer group, where the average was 1.4%.

It is of course heartening that after three years of lacklustre returns in absolute terms and underperformance versus the index, performance has been much stronger in recent months. However, the war in Ukraine continues, inflation is not yet under control, and interest rates appear set to rise further; so, why the recovery?

A simple answer is that stock markets are forward looking; despite continued concerns over recession in 2023, investors are anticipating a peak in interest rates, perhaps before the end of 2023. Another reason, as explained more fully in the Fund Manager's Report, is that there are a great many regional and international companies within Europe which now look like surprisingly good value. More generally, whilst the rise in interest rates has put pressure on the share prices of highly rated companies, the dramatic swing from "growth" companies to more cyclical or "value" companies has begun to broaden out to encompass a more nuanced approach focusing on the merits of individual companies. This has been a much better environment for the Company's portfolio.

Gearing

In a highly volatile environment, gearing has been maintained at a marginally positive level of between 1% and 2%. This has helped to ensure that there has been no cash drag on performance over the period. The net impact of gearing, net of costs, was 0.01%. At 31 January 2023 the portfolio had net cash of 0.1%.  The decision to use gearing is taken by the Fund Manager and is driven by his views on the individual holdings rather than a judgement on the short-term direction of the market.

Dividend

The Board is pleased to declare a maintained interim dividend of 0.8p per ordinary share payable on 28 April 2023 to shareholders on the Register of Members on 11 April 2023; the shares will be quoted ex-dividend on 6 April 2023.

Environmental, Social and Governance ("ESG") Policy

The Board and the Fund Manager believe that an investment focus on long term growth should give a portfolio a bias towards sustainability. A key focus for us is ensuring we meet our commitments under Article 8 "Light Green" of the Sustainable Financial Disclosure Regulation ("SFDR"), which includes a commitment to holding at least 5% of the portfolio in investments aligned with the UN Sustainable Development Goal of "Good Health & Wellbeing", and not holding any securities in the lowest 5% of companies in the index when ranked by carbon intensity.

During the period our Manager switched to MSCI as its third-party source of information for ESG data. The portfolio has no exposure to ESG "Laggards" as defined by MSCI. However, we are acutely aware of the shortcomings of data provision on sustainability and ESG factors. Whilst we believe that having a focused portfolio of approximately 40 stocks enables our Fund Manager to make an assessment of corporate claims and the MSCI ratings, we are also aware of the need to maintain a healthy scepticism regarding scoring metrics and corporate claims.

Board matters

As previously announced, Stephen White was appointed as Director of the Company last December. Stephen brings a wealth of investment management and European equities expertise to the Board.

Outlook

A year ago, I said that for a long-term investor, it was generally preferable to remain invested even in highly uncertain times, despite warning of elevated "event risk" and an expectation that valuations would come under pressure.  Valuations did indeed come under pressure and, having started at 120.5p on 31 July 2022 the share price has been as low as 106p (on 13 October 2022). However, the share price ended the interim period at 133.8p, its high for the twelve months, as markets began to look through the current interest rate cycle.

Over the six months to 31 January 2023 European markets were leading global markets, with the strongest performance of all the major geographical regions. This outperformance confounds the perhaps comfortable assumption we sometimes hear that there is no real need to own European stocks at all. Our view is that the recent outperformance of European markets is not simply a brief blip based on favourable short-term earnings projections, but also a response to a changing environment. Investors are, for example, re-thinking globalisation - in respect of geo-politics, supply chains and portfolio weightings. This may result in a greater willingness to invest in a region with attractive valuations, above average standards of regulation/governance and a wealth of interesting companies. We believe that investing in European stock markets, with a portfolio seeking to focus on high quality companies, is a worthwhile endeavour.

In mid-March markets were digesting the events in the banking sector, where in Europe Credit Suisse had to be absorbed by UBS Group AG orchestrated by the Swiss government after investors lost confidence in this scandal-prone bank. This removed a major, years-long overhang for Europe's banking industry which remains strong in terms of its aggregate capital and liquidity position, as do our portfolio companies.

Nicola Ralston

Chairman

Fund Manager's Report

European markets recovered strongly over the period. Concerns over potential earnings downgrades seemed to be outweighed by increasingly attractive equity valuations. "Value" outperformed "growth" and cyclicality trumped defensiveness. I am pleased that we have managed to perform well in what should have been a difficult environment for us given our long-standing bias to quality growth. Our outperformance can be attributed to stock specific factors outweighing stylistic headwinds. As tends to be typical in a recovery environment, European equities outperformed US equities meaningfully.   Our reference benchmark, the FTSE World Europe (ex-UK) Index in Sterling, rose 11.1% in total return terms. We fared better than this, with our net asset value rising by 12.5% over the same period.

Our best performing positions were either Financials (UniCredit, Munich Re, Bawag), Cyclicals (Metso Outotec, Hermès, Safran) or Energy-related (TotalEnergies).

Our Financials have been boosted by the general macro environment, where inflation expectations remain elevated and monetary policy is being tightened, as well as having stock-specific factors working in their favour. We had held on to our large position in UniCredit, even through the early months of Russia's invasion of Ukraine when the shares were punished heavily due to the company having some Russian exposure. Our summary thesis is that the bank is very generously capitalised, has a loan book with lower credit risk than has been the case historically, has an opportunity to improve cost efficiency and remains far too cheap. The operational performance of the bank has been very strong for the last few years and the shares are finally starting to rerate. The share price has now doubled since the 2022 lows and during January 2023, UniCredit announced another robust set of results and a further return of capital to shareholders. We believe there is a further equity rerating to go. Munich Re, another long-standing position for us, has rerated meaningfully as industry conditions improve. With the low interest rate years coming to an end, the competitive environment has eased in reinsurance; large, well-established businesses are benefitting from an exodus of competing capital and pricing power is improving. We have reduced our holding in Munich Re on the back of the equity rerating. Bawag has been a huge success story when compared to other European banks. They have been managed consistently well, continue to increase the efficiency of their already best-in-class cost base and have returned substantial amounts of capital to shareholders. It is rare to find a bank that has been able to generate a return on equity consistently higher than their cost of capital; we have held Bawag since 2019 and it has been one of these companies.

Our cyclicals have also clearly benefited from improving macro sentiment. Metso Outotec is currently seeing strong order trends as the mining capex cycle remains robust. We particularly like the company's exposure to energy- and water-efficient products. Their mining customers increasingly care about these things, led by changing investor perceptions and associated cost benefits. Hermès is a company that we have owned for around 9 years; we continue to see them as best-in-class brand stewards; a company that continuously prioritises long-term brand health over considerations of short-term profitability. At the moment, investors are starting to price in the likely powerful impact of the return of the Chinese customer after a period of Covid-related disruption. Safran is a high-quality company, a large player in the airplane engine production and maintenance business. The business has several attractions, most notably in its "razor/razor-blade" business model. Although our investment case is based around the long-term value creation that we believe the company should deliver, in the short term the environment is certainly improving, with flying hours on a steady post-Covid recovery trend. 

Energy has performed well over the past 6 months. Our position in TotalEnergies has rallied over 19%, meaningfully outperforming the wider market at a time when the oil price has fallen over 10%. This performance has been driven by a valuation rerating from historically low levels but will likely only be sustainable if the oil price stabilises.

In a period when "value" has outperformed meaningfully, it is unsurprising to note that most of our weakest performing positions have been some of our "growthiest" companies, including DSM, Partners Group and Cellnex. In the case of DSM, there are concerns that the company's supplements business could see a drop in profitability following a period, during Covid-19, when consumers bought far more vitamins and supplements than usual. We have some sympathy with this view, but we remain focused on the long-term attractions of the investment case and have maintained a medium-sized position. Partners Group has derated significantly as interest rates have risen and the environment for the private equity asset class has deteriorated. Ultimately, the company remains a strong play on an asset class that should see robust long-term demand and revenue yields that should remain attractive and resilient when compared to other asset classes. Finally, Cellnex performed poorly over the period before rallying as interest picked up towards the end of the six months. Having been a strong outperformer for a number of years, Cellnex has struggled to perform ever since inflation expectations started to tick up in 2021 (Cellnex delivers very predictable, bond-like returns and so is especially sensitive to changes in inflation expectations). However, a large gap has recently emerged between the valuations of private telco tower transactions (often greater than 20 times earnings before interest, taxes, depreciation, and amortisation) and the equity valuation of Cellnex (less than 15 times). This is creating some debate in the market and during January 2023, press articles began to emerge suggesting that American Tower Corp (AMT), alongside Brookfield, could be working on a takeover bid for Cellnex. We see strong rationale in such a deal, especially given the valuation context, and in any case, the press coverage is a useful reminder of the investment merits of Cellnex's shares. We have retained a full position.

The most notable trades we made during the period were to sell our positions in Enel and CHNi, whilst buying new holdings in ASM International, Brenntag and Euronext.

Enel is an Italian renewable energy company. We have been patient with this position for two and a half years, but we became increasingly frustrated with poor operational performance, government interference and the company's unwillingness/inability to reduce debt levels. With CNHi, the tractor company that we purchased towards the end of 2020, we have made significant money from our investment, and we are becoming increasingly concerned by falling farmer confidence levels in the US - often a leading indicator for tractor demand. Although the business has some structural attractions, it can be very cyclical and we do not want to overstay our welcome in what has been a successful investment.

Our purchase of a small position in ASM International back in August 2022 reflected our desire to increase our exposure to the highest quality semiconductor companies during a period of share price weakness and earnings downgrades. ASM International is a market leader in advanced deposition techniques (an essential stage in creating semi-conductors). They have a greater than 60% market share in their core technology, generate strong margins and returns and should see high levels of growth over the medium term. We now own a full-sized position in ASML and two half-sized positions in ASM International and Besi; we see these three companies as the three highest-quality semi-conductor companies in Europe.

Brenntag is a specialist distributor of chemicals. There is an important business model differential with the big, cyclical chemical producers. Chemical producers are price-takers, and their earnings can be very volatile, driven by supply/demand balances for the chemicals to which they are exposed, even though volume trends tend to be fairly steady, driven by global growth. Chemical distributors are much better businesses; they are not exposed to the volatile activity of chemical production, and they simply act as intermediaries between chemical producers and chemical buyers. They earn a fixed US dollar per unit traded and are thus little impacted by the volatility of chemical pricing. Volume growth tends to be steady, and this is a very fragmented market where there are significant advantages for the larger distributors who are consolidating the industry via natural share gain and frequent bolt-on merger and acquisition. Brenntag is the largest player in the global industry but has only a 5% market share; we expect continued industry growth and further share gains for Brenntag. The timing of our purchase has been driven by two factors. First, Covid caused huge supply disruption for the industry, and this boosted the US dollar price per unit that the distributors were able to charge for their services. This is now unwinding, and the share price has underperformed as a result. However, we feel that the share price unwind has overshot and a very bearish scenario is priced in. The second factor concerned an early-stage approach that Brenntag made for their US industry peer, Univar. This approach was taken very badly by the market as a rights issue would theoretically be necessary. However, again, we felt that the share price reaction was too negative and created an attractive entry opportunity.

Euronext is a peer to Deutsche Börse. As a general rule, we like the "platform economics" that exchange businesses display.  They tend to be stable businesses with high margins and return on invested capital. The key attraction of Euronext has been its historic ability to consolidate the cash equities industry in a sensible and value-accretive way. Its shares have usually commanded a premium valuation reflecting this attraction. However, over the course of 2022, this valuation premium unwound, whilst the valuation of its peer Deutsche Börse increased significantly. We felt it prudent to lock in some of our gains in Deutsche Börse and to reinvest the proceeds in Euronext as a result.

I will continue to retain balance in our exposures by considering two types of investment opportunities: first, in companies where we see high and sustainable returns that are undervalued by the market and second, in companies where I can see a material improvement in medium-term business prospects.

Jamie Ross

Fund Manager

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties associated with the Company's business can be divided into the following main areas:

Information on these risks and how they are managed is given in the Annual Report for the year ended 31 July 2022. In the view of the Board, these principal risks and uncertainties continue to apply and are as applicable to the remaining six months of the financial year as they were to the six months under review. 

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors (as listed in note 12) confirm that, to the best of their knowledge:

On behalf of the Board

Nicola Ralston

Chairman