HENDERSON EUROPEAN FOCUS TRUST PLC

Quarterly Report • May 26, 2023

Henderson European Focus Trust plc

Update for the half-year ended 31 March 2023

Objective

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

This update contains material extracted from the unaudited half-year results of the Company for the six months ended 31 March 2023. The unabridged results for the half-year are available on the Company's website:

www.hendersoneuropeanfocus.com

Performance

Total return performance for the six months to 31 March 2023

Net assets

31 Mar 2023 £377.6m 30 Sep 2022 £314.4m

Total return performance to 31 March 2023

	6 months %	1 year %	3 years %	5 years %	10 years %
NAV1	22.8	10.8	64.0	55.2	173.9
Benchmark index 2	21.7	8.7	56.2	47.4	137.4
AIC Europe sector NAV 4	22.3	7.1	54.7	51.3	159.0
Share price 3	28.3	11.0	73.3	42.2	170.2
AIC Europe sector share price 4	25.7	5.3	56.2	45.6	155.3
IA OEIC Europe sector5	21.7	6.6	55.2	39.2	125.0

1 Net asset value ("NAV") total return per ordinary share (with dividends reinvested)

² FTSE World Europe ex UK Index on a total return basis in sterling terms

³ Share price total return (with dividends reinvested) using mid-market closing price

⁴ Average for Association of Investment Companies ("AIC") Europe sector of seven companies

⁵ Investment Association ("IA") open-ended investment company ("OEIC") Europe ex UK Equity sector average NAV, comprising 149 OEICs at 31 March 2023

Sources: Morningstar Direct, Refinitiv Datastream and Janus Henderson

Chair's Statement

We are living through an era in which each half-yearly update seemingly warrants a dedicated volume in the economic history books. The Company's financial year end of 30 September 2022 coincided with a trough in European equity markets. Since then, as our Fund Managers suggested (or hoped) would be the case, European share prices have recovered. Why? Because they simply became too cheap, judging by historical precedents and economies have proven more robust than expected. Whilst the ongoing war in Ukraine continued to have a major impact on supply shortages, higher food and energy prices, the mild weather over the winter proved a blessing. For many companies and households – more so for those on the Continent than here in the UK – the outcome in terms of pressure on revenues and margins or general 'cost of living' has been less pronounced than feared.

Moreover, the unthinkable has happened, at least in the eyes of the professional investors who allocate assets across global equity markets: Europe has outperformed the US and by some margin. On a common currency basis, the European index has seen a good 20% outperformance compared with the S&P500, Dow Jones and the technology-heavy Nasdaq. That is not to say the trend – if we dare to tempt fate by labelling it such – has not been tested. The US Federal Reserve had to act quickly to avert contagion from a very specific banking crisis at Silicon Valley Bank in California, but not before banks globally came under the spotlight. Unfortunately it highlighted the ongoing travails at Credit Suisse in Switzerland, requiring the Swiss National Bank to find a domestic solution in the guise of UBS and prompting a flight to quality in European banking shares. Somewhat surprisingly, however, equity markets shrugged it off relatively quickly to recoup these short-term losses, ending the period with healthy double-digit increases.

Performance

In the six months to 31 March 2023, the Company's NAV total return per ordinary share rose by 22.8%, outperforming the Company's benchmark, the FTSE World Europe ex UK index by 1.1%. Our NAV performance was just above both the average of our closed-ended peers in the AIC Europe sector (+ 22.3%) and also above that of the IA Europe ex UK OEIC sector average (+21.7%).

The Company's share price total return saw a greater rise of 28.3%, mostly due to a narrowing of the discount at which the shares trade relative to the underlying NAV from 14.0% as at 30 September 2022 to 10.4% at 31 March 2023.

The existence of such a level of discount to NAV, given the strength of our performance track record, is rather confounding but seems to be a trait of our high-performing Europe sector where the average discount was 10.9% at the end of March 2023. It is a source of frustration and discussion for the Board. Buybacks have been – and will be – used judiciously to manage liquidity, but we would much rather encourage new shareholders onto the register now that European markets may be coming into vogue, than shrink the assets of the Company.

Dividend

I am pleased to announce that the Company will pay an increased interim dividend of 1.30p per ordinary share on 27 June 2023 to shareholders on the register on 2 June 2023; this compares to 1.20p for the six months ending 31 March 2022. Note that as for last year, this reflects an element of rebalancing between the interim and final dividend payments and should not be taken as a proxy for the full-year dividend increase. The shares will be quoted ex-dividend on 1 June 2023.

Chair's Statement (continued)

Loan notes and gearing

Net gearing was at 6.8% at 31 March 2023 (vs 1.9% at 30 September 2022) having approached 11% during the period with our Fund Managers holding some cash on a short-term tactical basis if they anticipate better buying opportunities ahead. Use of leverage made a small positive contribution to NAV performance in this six-month period. Net gearing is 7.0% at 18 May 2023, and as you will see from the Fund Managers' Report, is expected to be further deployed in a considered manner over time.

Board changes

As indicated in the 2022 Annual Report, Eliza Dungworth will retire from the Board with effect from 31 May 2023. I would like to thank Eliza for her many years of service and wise counsel on the Company's affairs, and particularly for her skilful and incisive chairmanship of the Audit and Risk Committee. In line with our long-term succession planning, the Board is currently engaged in a recruitment exercise. Meanwhile, I am pleased to announce that Robin Archibald will be assuming the role of Chair of the Audit and Risk Committee, in addition to his current role as Senior Independent Director, from 1 June 2023.

Outlook

The swift recovery has not been without its nuances. At the time of writing, the market is in the throes of a 'defensives vs cyclicals' tug of war, as markets struggle to contend with a potential recession. We are cognisant of the near-term risks to our 'quality cyclicals', but we must not take our eye off the long-term opportunities for those with the luxury of long-term capital to deploy – 'global champions' that live in Europe. This includes companies which are highly competent in providing tangible goods and services which have taken on renewed strategic importance in an increasingly multi-polar world: clean-energy generation, onshore digital automated factories, smart infrastructure, and their myriad components and raw materials. These are companies and investment opportunities which, critically, in the eyes of our valuation-conscious Fund Managers, come at reasonable valuations. As they elucidate in their commentary, if the last decade was about owning 'asset-light', the next will be 'assetheavy'. Mean reversion is alive and well.

Vicky Hastings Chair of the Board 22 May 2023

Fund Managers' Report

Even by recent historical standards, the half-year ending 31 March 2023 was eventful. While the collapse of Silicon Valley Bank and the fire sale of Credit Suisse grabbed the headlines, there were a number of other significant developments, including: 1) the emergence of a 'bull market' (say it quietly) in European equities, which, at the time of writing, remains intact despite the banking sector wobble; 2) a surprise OPEC oil supply cut which provided further proof, if any were needed, that the era of US hegemony is over and with it a 30-plus year project of ever greater globalisation; and 3) the entrance into public consciousness, via ChatGPT, of the profound potential of artificial intelligence ("AI") to transform society and the economic activities which underpin it. These paradigm shifts – of a macroeconomic, geopolitical and technological nature – guarantee that the coming decade will not look like the last one. They also guarantee that winners and losers will abound. It remains our firm conviction that Europe will have its fair share of winners and we are resolutely focused on finding them and backing them.

Performance

From the close of our last financial year at the end of September 2022 until 31 March 2023, the total return NAV increased by 22.8%, 1.1% ahead of the benchmark. On a one-year basis, NAV total return increased by 10.8%, 2.1% ahead of the benchmark gain of 8.7%. Whether we have underperformed, or in this case, outperformed the benchmark during the period under review, we always advise caution; markets can be erratic over short periods. Shorttermism drives much of the trading activity by market participants who are doing something very different to deploying your long-term capital. Companies rapidly find themselves in and out of favour from one week to the next, often with no news. Fundamentally, however, companies need longer than this to deliver value to equity holders. Therefore, we ascribe higher value to our performance figures, over three years and beyond, which are in good shape.

Key contributors over the half-year included our semiconductor exposure (BE Semiconductor, ASM International, STMicroelectronics), Holcim and Kion, with the latter recovering from a particularly punishing end to the last financial year following a profit warning.

That said, it remains a top-ten contributor over three years. Our semiconductor, materials and cyclicals

exposures were major recipients of capital when we concluded that Europe had become too cheap in September 2022 and we were thus rewarded.

Key detractors included Dutch insurer ASR Nederland – part of the collateral damage of the 'banking crisis' – along with UPM Kymmene and our oil exposures (Shell and AkerBP), which trailed an emergent European bull market intent on rewarding the prior year's laggards and duly punishing the leaders.

Activity

We added the world's biggest and most-profitable brewer, Belgium-listed Anheuser-Busch InBev ("AB InBev"), attracted to the organic growth and debt-reduction strategy of its new CEO. The company has a long history of being an over-indebted industry consolidator, which fostered a reputation for brand-neglect with investors. Moreover, the inflationary backdrop and corresponding end of the free-money era does not just have implications for over-hyped tech valuations; in the brewing industry it significantly undermines the competitive position of those thousands of low-margin 'craft' entrants, which were lavished with easy funding over the last 10 to 15 years and which smartly exploited the complacent brand strategies of the majors. With many small breweries now falling by the wayside and those that do cling on forced to rapidly raise prices in order to maintain any sort of margin, the brewing industry is a tangible example of our 'Big is beautiful' sub-thesis (which pertains to the tangible implications of the change in the price of money). AB Inbev, which boasts an industry-leading gross margin of 55% even after facing a commodity price squeeze, can simply raise prices more slowly than craft players and regain market share. Correspondingly we exited Carlsberg, which remains a leading company in a clearly attractive industry. But, having been a long-term contributor to the Company and following the exit of the management team which led us to invest in the stock over five years ago, we felt now was the right time to recycle capital into the opportunity taking shape at AB Inbev.

Siemens was another notable addition to the Company, complementing our existing position in Schneider Electric. Both are global champions at the heart of a number of the next decade's mega-themes, including the onshoring of supply chains, electrification, digitalisation and automation.

Fund Managers' Report (continued)

As already mentioned, the pace of investment by corporates big and small in optimising their operations has really struck us over recent months. Our own meetings with management teams offered up some illuminating examples. Premier Foods, a UK food producer, is allocating one third of its capital investment into 'cost out' activities – automation projects with payback periods now as low as 2.5 years given the rising labour and energy costs which they help to mitigate. Marks and Spencer, that charmingly inert stalwart of the UK high street, has 'near-shored' manufacturing of certain garments to Eastern Europe, away from China, in order to improve supply chain resilience and also to enable it to be more reactive to customer trends. As the world re-tools and re-calibrates, a more streamlined and focused Siemens – now with 'only' around 300 thousand employees compared to the half-a-millionstrong blob of bureaucratic complexity that we avoided for years – is set to be a critical enabler.

Elsewhere we returned to Adidas, another great franchise, but one which was in urgent need of the fresh wind of management change. This has duly arrived in the form of Bjorn Gulden, former CEO of Puma. We exited Amadeus IT, the airline booking system software provider, as we chose to concentrate our 'travel recovery' exposure on aerospace names such as Airbus and Safran.

Outlook

At the time of writing the market is moving to price recession. Stocks with defensive qualities such as food, beverages and healthcare are back in vogue, while those of a more cyclical nature – such as chemicals, materials and certain industrials – are given short shrift. You can, as always, expect us to navigate the short-term tumult to the best of our abilities, while firmly remaining focused on the profound long-term opportunities for the long-term capital that we deploy on your behalf. Our net gearing intentions are consistent with this; careful in the near term, but with the expectation that we will further deploy over time to maximise value for shareholders.

At the risk of testing our readers' patience with repetition, it remains our view that we are unlikely to return to the madness of the free-money era, that inflation is likely to linger for longer, and that interest rates are more likely to plateau than to pivot. As a result, we believe that valuation – the price you pay for an asset – will regain its rightful place as the cornerstone of one's investment framework. It is worth reflecting for a moment on just how financially absurd recent history has been. The total value of negative yielding bonds (yes, you pay the borrower to take your money…) peaked at 18 trillion dollars in 2020. The amount as of today is negligible. The withdrawal of silly money has seismic consequences for the investment regime, but it will take time to fully bear out.

Moreover, given the multi-polar geopolitical shifts now undoubtedly taking place, we believe tangible goods – the energy, infrastructure and supply chains that underpin a society's security and resilience – are to be desired over the many intangible winners of the last decade – think software, technology and other often over-hyped 'asset-light' business models. On this basis Europe, which has now outperformed the US over the last six months by over 20%, screens rather attractively; valuations are reasonable and the region – often dismissed as the 'museum continent' – actually excels at 'making stuff'. It is home to global champions whose competencies include renewable energy infrastructure, semiconductor manufacturing equipment, the provision of digital automated factories, not to mention the vast and varied skills, materials and components which they draw upon. It is no longer novel to suggest that the Western world is urgently moving to rebuild its strategic resilience, but what is still underappreciated by the market, in our opinion, is the speed with which these new long-duration capital investment cycles are emerging. A major takeaway from full-year 2022 results season was the number of companies: 1) highlighting a tangible benefit to their orderbooks from these trends; and 2) taking action to improve their own supplychain resilience through the onshoring of manufacturing activities, or the investment into automation.

'Asset-light' was a poster child of the last decade, courtesy of monetary abundance, non-existent inflation and a still largely unipolar world order. 'Asset-heavy' will have renewed significance in the next. In this realm, Europe has winners.

Tom O'Hara and John Bennett Fund Managers 22 May 2023

Portfolio Information

Investment portfolio at 31 March 2023

Company	Sector	Country of listing	Valuation £'000	% of portfolio
Novo-Nordisk	Pharmaceuticals and Biotechnology	Denmark	21,683	5.4
Shell	Oil, Gas and Coal	United Kingdom	19,724	4.9
UPM-Kymmene	Industrial Materials	Finland	18,998	4.7
TotalEnergies	Oil, Gas and Coal	France	15,741	3.9
LVMH Moët Hennessy	Personal Goods	France	15,693	3.9
Louis Vuitton
STMicroelectronics	Technology Hardware and Equipment	Switzerland	15,027	3.7
Saint-Gobain	Construction and Materials	France	14,573	3.6
BP	Oil, Gas and Coal	United Kingdom	14,174	3.5
BE Semiconductor	Technology Hardware and Equipment	Netherlands	13,902	3.5
ASR Nederland	Non-life Insurance	Netherlands	13,558	3.4
10 largest			163,073	40.5
Safran	Aerospace and Defence	France	12,954	3.2
Airbus	Aerospace and Defence	France	12,534	3.1
Adidas	Personal Goods	Germany	11,452	2.8
Hugo Boss	Personal Goods	Germany	10,898	2.7
Holcim	Construction and Materials	Switzerland	10,825	2.7
Schneider Electric	Electronic and Electrical Equipment	France	10,815	2.7
Linde	Chemicals	Germany	9,985	2.5
Solvay	Chemicals	Belgium	9,686	2.4
Arkema	Chemicals	France	9,498	2.4
Siemens	General Industrials	Germany	9,488	2.4
20 largest			271,208	67.4
Nordea Bank	Banks	Finland	9,068	2.2
Koninklijke Ahold	Personal Care, Drug and Grocery	Netherlands	8,898	2.2
Delhaize	Stores
Euronext	Investment Banking and Brokerage Services	Netherlands	8,604	2.1
ASM International	Technology Hardware and Equipment	Netherlands	8,537	2.1
Aker BP	Oil, Gas and Coal	Norway	7,745	1.9
Sandvik	Industrial Engineering	Sweden	7,586	1.9
L'Oréal	Personal Goods	France	7,524	1.9
Deutsche Boerse	Investment Banking and Brokerage Services	Germany	7,455	1.8
Sanofi	Pharmaceuticals and Biotechnology	France	7,151	1.8
Metso Outotec	Industrial Engineering	Finland	6,885	1.7
30 largest			350,661	87.0

Portfolio Information (continued)

Investment portfolio at 31 March 2023 (continued)

Company	Sector	Country of listing	Valuation £'000	% of portfolio
Interpump	Industrial Engineering	Italy	6,605	1.6
Universal Music	Media	France	5,905	1.5
BNP Paribas	Banks	France	5,894	1.5
Anheuser-Busch InBev	Beverages	Belgium	5,699	1.4
Siemens Healthineers	Medical Equipment and Services	Germany	5,107	1.3
UCB	Pharmaceuticals and Biotechnology	Belgium	4,977	1.2
Essilor Luxottica	Medical Equipment and Services	France	4,839	1.2
Unicredit	Banks	Italy	3,817	0.9
ING	Banks	Netherlands	3,749	0.9
Grifols	Pharmaceuticals and Biotechnology	Spain	3,726	0.9
40 largest			400,979	99.4
Danone	Food Producers	France	2,233	0.6
Total investments at fair value			403,212	100.0

2 0 2 3 2 0 2 2	Country of listing*
	2023	2022
	%	%
France	31.1	25.2
Netherlands	17.9	17.9
Germany	13.5	13.1
Finland	8.7	8.3
UK	8.4	-
Denmark	5.4	7.0
Belgium	5.0	2.9
Switzerland	2.7	12.2
Italy	2.6	1.6
Norway	1.9	2.7
Sweden	1.9	5.1
Spain	0.9	4.0

Financial Summary

		Half-year ended 31 Mar 2023		Year ended 30 Sep 2022
Extract from the Condensed Income Statement (unaudited except September 2022 figures)	Revenue return £'000	Capital return £'000	Total return £'000	Total return £'000
Gains/(losses) on investments held at fair value through profit or loss Exchange losses on currency	-	70,132	70,132	(55,148)
transactions	-	(361)	(361)	(1,142)
Income from investments	3,195	-	3,195	12,529
Other income	55	-	55	25
Gross revenue and capital gains/(losses)	3,250	69,771	73,021	(43,736)
Expenses, finance costs and taxation	(824)	(1,075)	(1,899)	(3,692)
Net return/(loss) after taxation	2,426	68,696	71,122	(47,428)
Return/(loss) per ordinary share	1.14p	32.28p	33.42p	(22.21p)

Extract from the Condensed Statement of Financial Position (unaudited except September 2022 figures)	31 Mar 2023 £'000	31 Mar 2022 £'000	30 Sep 2022 £'000
Investments held at fair value through profit or loss	403,212	365,817	320,289
Net current assets	4,968	15,538	24,678
Creditors: amounts falling due after one year	(30,588)	(29,404)	(30,548)
Net assets	377,592	351,951	314,419
Net asset value per ordinary share – basic and diluted	177.47p	164.80p	147.67p

Dividends

The directors have declared an interim dividend of 1.30p per share (2022: 1.20p), payable on 27 June 2023 to shareholders on the register on 2 June 2023. The shares will be quoted ex-dividend on 1 June 2023.

Principal Risks and Uncertainties

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

• Market
• Investment performance
• Business strategy and market rating
• Gearing
• Operational
• Regulatory and reporting

Information on these risks and how they are managed is given in the Annual Report for the year ended 30 September 2022. In the view of the Board, with the rising interest rate environment clearly noted, these principal risks and uncertainties at the year-end remain and are as applicable to the remaining six months of the financial year as they were to the six months under review.

Going Concern

The assets of the Company consist of securities that are readily realisable and, accordingly, the directors believe that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these financial statements. Having assessed these factors and the principal risks, as well considering geopolitical risks and macroeconomic factors, the directors consider it appropriate to adopt the going concern basis of accounting in preparing these financial statements.

Called-up share capital

At 31 March 2023, there were 216,389,910 shares in issue, of which 3,621,788 were held in treasury. During the half-year period ended 31 March 2023, 145,000 shares were repurchased for treasury at a cost of £183,000 (half-year ended 31 March 2022: 260,300 at a cost of £427,000, and year ended 30 September 2022: 912,658 shares at a cost of £1,324,000). No shares have been issued or repurchased since 31 March 2023. As at 18 May 2023, 212,768,122 shares were entitled to a dividend.

On behalf of the Board

Vicky Hastings Chair of the Board 22 May 2023

Warning to shareholders

There are always fraudsters who seek to profit at the expense of others during moments of crisis, often impersonating genuine financial services firms. The Board would take this opportunity to remind investors to be particularly alert to cold calls or emails purporting to relate to your investments.

Henderson European Focus Trust plc 201 Bishopsgate London EC2M 3AE ★★★★★

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