HENDERSON EUROPEAN FOCUS TRUST PLC

Quarterly Report • May 30, 2022

Henderson European Focus Trust plc

Update for the half-year ended 31 March 2022

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 2022. The unabridged results for the half-year are available on the Company's website:

www.hendersoneuropeanfocus.com

2

Performance

Total return performance for the six months to 31 March 2022

31 Mar 2022 £352.0m 30 Sep 2021 £370.7m

Total return performance to 31 March 2022

	6 months %	1 year %	3 years %	5 years %	10 years %
NAV1	-3.7	4.0	39.7	43.8	212.5
Benchmark index 2	-2.4	6.5	32.2	41.4	157.6
AIC Europe sector NAV 4	-8.3	2.5	36.7	51.2	195.9
Share price 3	-5.6	3.8	40.8	27.4	233.7
AIC Europe sector share price 4	-10.5	0.8	38.5	49.6	207.9
IA OEIC Europe sector5	-4.1	4.3	32.2	38.1	152.2

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") Europe ex-UK sector average

6. Comparative figures for the period ended 30 September 2021 have been restated due to the sub-division of each ordinary share of 50p into ten ordinary shares of 5p each on 7 February 2022

Sources: Morningstar Direct, Refinitiv Datastream and Janus Henderson

Chair's Statement

It is three months now since Russia did the unthinkable and invaded Ukraine. War in Europe is not something that any of us expected to see again and the resulting horrendous humanitarian consequences have been devastating. It has also had deep implications for every sector of the economy: from government budgeting and capital allocation, to central bank policy-making, to companies' operational performance and to households' discretionary expenditure. The effects are manifold and significant. Our Fund Managers elaborate on the impact in their report. Suffice to say that any forecasts from the start of 2022 have been heavily revised, if not completely re-written. Growth expectations for the Eurozone for the current year have reduced from 4.2% to 2.7%, whilst inflation expectations for 2022 have risen to 6.7% (from 2.5% at the start of the year) with current inflation across the European region at 7.4%, the highest it has been for 25 years. Unsurprisingly, this has made for a very uncertain period for investing in equities anywhere in the world, and for Europe in particular.

Share split

A sub-division in the Company's shares was approved at the AGM in January 2022 on a 10:1 basis. From 7 February 2022, the shares have been trading on this new basis. All the performance and revenue data quoted have taken this into account, including in my statement below where I refer to various historical numbers which have factored the share split into them.

We hope that by splitting the shares we will see an improvement in daily liquidity along with increased use of dividend reinvestment and share save programmes that many of the online brokers offer. We would encourage private investors to investigate these options.

Performance

In the six months to 31 March 2022, the Company's NAV total return per ordinary share declined by 3.7%, compared to a fall of 2.4% in the Company's benchmark, the FTSE World Europe ex UK index. Our NAV performance was better than the average of our closed-ended peers in the AIC Europe sector, with average performance over the six-month period of -8.3% and against the open-ended funds IA Europe ex UK OEIC sector average which fell by 4.1%.

The Company's share price total return frustratingly saw a greater fall of 5.6% as the discount at which the shares trade relative to the underlying NAV widened slightly: as with many equity trusts, particularly those invested in Continental Europe, the risk premium increased and ratings weakened. The discount at 31 March 2022 was 10.2% compared to 8.3% at 30 September 2021.

Dividend

The Company will pay an interim dividend of 1.20p per ordinary share on 27 June 2022 to shareholders on the register on 6 June 2022; this compares to 0.96p on an equivalent basis for the six months ending 31 March 2021. 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 2022.

Chair's Statement (continued)

Loan notes and gearing

As we announced at the end of January, the Board issued €35m long-term fixed-rate unsecured loan notes at a weighted average interest rate of 1.57% (€25m to 31 January 2047 at 1.53% and €10m to 31 January 2052 at 1.66%). Whilst we believe this financing will provide attractively priced long-term capital to be deployed for the benefit of shareholders, in the very short term the uncertainty arising from the war has resulted in little of this being invested in the stockmarket as our Fund Managers have 'kept their powder dry'. They discuss this in their report.

The long-term facility replaces some of our flexible overdraft, although we still have a facility of £30m (or 10% of custody assets, whichever is lower) with HSBC at our disposal, should the Fund Managers seek to fully deploy gearing to the maximum allowed by the Company's articles (20% of net assets). We believe that these arrangements provide flexible gearing for the Company for the longer term at a relatively inexpensive rate.

Gearing was at 3.9% at 31 March 2022 (vs 0.2% at 31 March 2021) and made a marginal positive contribution to performance in this six-month period. Gearing is 1.0% at the time of writing.

Board changes

Marco Bianconi will join our Board as a nonexecutive director with effect from 1 June 2022. Marco will bring complementary skills and experiences which we believe will be beneficial to the running of the Company. Marco (who lives in Italy) will add a Continental European perspective to our debates, as well as having direct and relevant experience gleaned from both within the investment industry and from a range of senior roles with public companies in Italy. He is currently Head of Mergers and Acquisitions and Investor Relations for Cementir Group and is also audit committee chair of Gabelli Merger Plus + Trust Plc.

Outlook

We are understandably cautious in the near term and our Fund Managers write that they 'doubt there is easy money to be made in the market from here'. However, it is exactly during times such as these that active fund managers can 'earn their spurs'.

Differentiation of each investee company's prospects, coupled with deep fundamental analysis of investments made and held should produce superior investment returns for the longer term. Even when the macroeconomic statistics make grim reading, there should still be some companies bucking the trend and some industries with sustained and robust growth – along with some companies whose valuations seem at odds with their prospects: these are the investments that you should expect to find in our portfolio.

Vicky Hastings Chair of the Board 23 May 2022

Fund Managers' Report

Readers may recall that our previous update in the Annual Report contained the following forwardlooking statement:

Aside from the macro debate surrounding inflation and associated interest rates, the near-term outlook is likely to be shaped by the many and varied supply side constraints to doing business. Thus, we should not be surprised to see a margin squeeze across a wide range of companies and industries.

We did not expect a European war to be one of those constraints. The needless suffering of millions of innocent people appears to have shaken the Western world from its comfortable, introverted slumber. In order to impose the strongest possible deterrent on the Putin regime, various governments have judged that sacrifices must be made. In the case of our investee companies, the sacrifice is invariably the price – or in some cases even the availability – of the raw materials required for heat, power and processing, of which Russia constitutes a key supplier. This has further compounded an already creaking post-Covid supply chain, the increasingly complex and global nature of which has been the result of a near 30-year project since the creation of the World Trade Organisation.

We believe the invasion marks a significant shift, or at least an acceleration of emergent trends, leading to greater localisation of supply chains and prioritised tangible investment into energy, infrastructure and defence. We also hope it brings an end to the arbitrary and counterproductive 'moral score-carding' adopted by large sections of the asset management industry towards economically critical – and therefore socially critical – companies in recent years. If these forecasts prove to be correct, the market implications could be profound, requiring investors to 'care about valuation' – the price paid for a stream of cash flow – in a manner largely elusive over the last decade. Regular readers will by now be well-accustomed to our musings on the potential return of a broader, more valuationconscious equity market after half a generation of easy-money conditions and fiscal austerity.

Do we live in too much hope? Certainly, the last six months have tormented us with an epic value-growth tug of war. The summer 2021 outperformance of growth over value we spoke of in our last update only became more extreme into the end of the calendar year, with headlines of yet another Covid variant – this time Omicron – offering the perfect excuse for investors to avoid risk. This made for a Blue Christmas for your Fund Managers, given the portfolio's exposure to the 'consumer-reopening' theme. Attempting to console ourselves, we held out hope that the movements had been a nonfundamental case of risk-off into the calendar year-end; perhaps it was pure cynicism on our part to note that, for many in the asset management industry, 31 December marks the end of the annual performance measurement period that determines variable remuneration. When in doubt, get out.

In any case, our hope was rewarded with a dramatic value and 'reopening' rotation ushered in at the start of 2022 on the back of rising interest rates and Omicron-relief. Yet just as capitulation felt imminent by those who have spent a career as growth disciples (we noted broker headlines such as "Is rotation becoming momentum"?), the great rotation was abruptly stamped out by Russian boots in Ukraine. The market reverted to defensive stocks and those offering secular quality growth. An intermittent flirtation with yield curve 'inversion' – indicating recessionary sentiment – while inflation aggressively erodes cash and bonds, has hinted at a form of 'TINA' ('there is no alternative') to equities that avoids economically sensitive areas of the market. European industrial recession is increasingly being priced into many stocks, as is the impact from a less dynamic consumer, squeezed by higher energy and food bills.

Outlook

Our outlook is therefore strikingly similar to the one we offered six months ago, only more acute: the Q1 results season so far has not offered up margin shocks in the quantity we might have predicted, but share price behaviour implies that 'the worst is yet to come', as companies grapple with an exceptionally difficult operating environment. We doubt there is easy money to be made in the market from here, but active stock-picking should enable a level of protection and differentiation. We stay close to our

Fund Managers' Report (continued)

investee companies precisely to gain an edge in navigating such environments. The key, as always, given the equity market is a forward-looking construct, is to judge when these new, fresher, bigger, scarier uncertainties are priced in. We already feel that edging closer in a number of stocks – if not the market as a whole – and we are poised.

Activity

Our activity over the last six months has primarily been to refine our consumer discretionary exposure due to the growing cost of living squeeze, something which pre-dated the Russian invasion of Ukraine. As such we exited mass-market franchises and/or those that had benefitted from Covid resilience; Dometic (manufacturer of outdoor leisure equipment), Autoliv (airbags and safety systems for cars), Stellantis (formerly Fiat and Peugeot cars), Adidas and Inditex (owner of the Zara clothing business). We added Amadeus (airline booking systems) and Kering (the parent company of luxury super-brand Gucci), reflecting our expectation of resilience in both leisure travel and premium apparel.

Performance

From the close of our financial year at the end of September 2021 until 31 March 2022, the total return NAV declined by 3.7%, 1.3% behind a benchmark decline of 2.4%. On a one-year basis the NAV total return increased by 4.0%, 2.5% behind the benchmark gain of 6.5%. While disappointing of course, we would always caution against reading too much into short timeframes, especially during periods of market shape volatility; indeed, during this half-year we lost our outperformance into Christmas, gained it all back in the rotation of early 2022, only to then lose it again once Russian artillery was fired. Individual stocks often require longer periods of time to distinguish themselves from their designated 'factor baskets', which indiscriminately drive so much short-term price action in markets. As a final point of illustration, the period since the end of March has, at the time of writing, been much more positive for relative performance and the Company is ahead of the benchmark for the financial year to date.

Our top three contributors were Lundin Energy (oil), Novo Nordisk (global leader in treatment for

diabetes) and ASR Nederland (insurance), perhaps an indication of how inflation has somewhat distorted market shape distinctions (an energy stock, a growth stock and a higher interest rate beneficiary are rarely outperformance bedfellows), though also hopefully a testament to the value of bottom-up stock-picking.

Our top three detractors were Nokian Renkaat (a largely Russian-based tyre producer), Acast (a smallcap Swedish technology company) and Euronext (the trading exchanges business).

Structural gearing

At the end of January and as the Chair notes in her Statement, we successfully placed a €35m long-duration loan note in two tranches – of 25 and 30 years – with a blended interest rate of 1.57%. This is a first for the Company, with your Fund Managers having previously deployed gearing on an ad-hoc basis using an overdraft facility, a prime example of this being the rapid Covid-driven sell-off of March 2020 which prompted us to take gearing up to 6% of net asset value in order to 'lean into' the market recovery. So why take on structural gearing? Quite simply, because such low-cost, patient debt should be accretive to net asset value over the long term, as long as we stick to our proven mantra of pragmatic, style-agnostic, bottom-up stock-picking. It is fair to say we also saw a narrowing window of opportunity to lock in such a low cost of debt given the outlook for inflation and interest rates. We estimate that the same placement today would come at a rate of 2.8-3.0%, at least 1.2% higher. We can assure shareholders that the proceeds will not burn a hole in our pockets – they will be utilised on your behalf when the time is right, for the right opportunities. At the time of writing, we are holding most of the loan proceeds in cash; having initially deployed a third in the aftermath of the Russian invasion, we gradually pulled back as the market quickly regained its losses. We prefer to err on the side of caution, for now, given the exceptional nature of the aforementioned constraints to doing business.

Tom O'Hara and John Bennett Fund Managers 23 May 2022

Portfolio Information

as at 31 March 2022

Company	Sector	Country of listing	Valuation £'000	% of portfolio
ASR Nederland	Non-life Insurance	Netherlands	16,593	4.5
Nestlé	Food Producers	Switzerland	15,501	4.2
Roche	Pharmaceuticals and Biotechnology	Switzerland	15,470	4.2
Novo-Nordisk	Pharmaceuticals and Biotechnology	Denmark	15,019	4.1
UPM-Kymmene	Industrial Materials	Finland	14,983	4.1
Holcim	Construction and Materials	Switzerland	14,072	3.8
Lundin Energy	Oil, Gas and Coal	Sweden	13,040	3.6
Koninklijke Ahold Delhaize	Personal Care Drug and Grocery Stores	Netherlands	12,233	3.3
ASML	Technology Hardware and Equipment	Netherlands	11,570	3.2
LVMH Moët Hennessy Louis Vuitton	Personal Goods	France	10,341	2.8
10 Largest			138,822	37.8
Mowi	Food Producers	Norway	10,007	2.7
Airbus	Aerospace and Defence	France	9,880	2.7
Deutsche Boerse	Investment Banking and Brokerage Services	Germany	9,234	2.6
Amadeus IT Group	Software and Computer Services	Spain	9,138	2.5
Nordea Bank	Banks	Finland	8,558	2.3
Euronext	Investment Banking and Brokerage Services	Netherlands	8,408	2.3
Hugo Boss	Personal Goods	Germany	8,303	2.3
Sanofi	Pharmaceuticals and Biotechnology	France	8,269	2.3
Saint-Gobain	Construction and Materials	France	8,025	2.2
TotalEnergies	Oil, Gas and Coal	France	7,864	2.1
20 largest			226,508	61.8
Danone	Food Producers	France	7,523	2.1
Mercedes-Benz	Automobiles and Parts	Germany	7,381	2.0
Wacker Chemie	Chemicals	Germany	7,106	1.9
Schneider Electric	Electronic and Electrical Equipment	France	7,062	1.9
Linde	Chemicals	Germany	6,962	1.9
Kering	Personal Goods	France	6,483	1.8
Arkema	Chemicals	France	6,304	1.7
Essilor Luxottica	Medical Equipment and Services	France	6,261	1.7
BE Semiconductor	Technology Hardware and Equipment	Netherlands	6,135	1.7
Akzo Nobel	Chemicals	Netherlands	6,081	1.7
30 largest			293,806	80.2

Portfolio Information (continued)

Total investments at fair value			365,817	100.0
Nokian Renkaat*	Automobiles and Parts	Finland	1,766	0.5
Acast	Software and Computer Services	Sweden	2,363	0.6
Atlas Copco	Industrial Engineering	Sweden	3,314	0.9
Siemens Healthineers	Medical Equipment and Services	Germany	3,657	1.0
Legrand	Electronic and Electrical Equipment	France	3,844	1.1
Signify	Construction and Materials	Netherlands	4,310	1.2
40 largest			346,563	94.7
BNP Paribas	Banks	France	4,395	1.2
KBC	Banks	Belgium	4,895	1.3
Metso	Industrial Engineering	Finland	5,070	1.4
Merck KGAA	Pharmaceuticals and Biotechnology	Germany	5,110	1.4
Carlsberg	Beverages	Denmark	5,113	1.4
Pandora	Personal Goods	Denmark	5,379	1.5
Grifols	Pharmaceuticals and Biotechnology	Spain	5,608	1.5
Interpump	Industrial Engineering	Italy	5,695	1.6
L'Oréal	Personal Goods	France	5,739	1.6
Solvay	Chemicals	Belgium	5,753	1.6
Company	Sector	Country of listing	Valuation £'000	% of portfolio

*The Fund Managers placed the trade to sell the position in Nokian Renkaat (which had 85% of tyre production capacity in Russia) on 30 March 2022 but, due to significant liquidity constraints in the aftermath of the invasion of Ukraine, it took longer to complete than usual and, therefore, the portfolio held 46 stocks for a short period. The portfolio had 45 holdings by mid-April 2022.

† As a percentage of the portfolio excluding cash at 31 March 2022 and at 31 March 2021.

Financial Summary

		Half-year ended 31 Mar 2022		Year ended 30 Sep 2021
Extract from the Condensed Income Statement (unaudited except September 2021 figures)	Revenue return £'000	Capital return £'000	Total return £'000	Total return £'000
(Losses)/gains on investments held at fair value through profit or loss Exchange (losses)/gains on currency	-	(15,878)	(15,878)	63,777
transactions	-	(164)	(164)	154
Income from investments	4,565	-	4,565	9,091
Other income	1	-	1	-
Gross revenue and capital (losses)/gains	4,566	(16,042)	(11,476)	73,022
Expenses, finance costs and taxation	(889)	(957)	(1,846)	(3,840)
Net return/(loss) after taxation	3,677	(16,999)	(13,322)	69,182
Return/(loss) per ordinary share	1.72p	(7.96p)	(6.24p)	32.36p

Extract from the Condensed Statement of Financial Position (unaudited except September 2021 figures)	31 Mar 2022 £'000	31 Mar 2021 £'000	30 Sep 2021 £'000
Investments held at fair value through profit or loss	365,817	345,926	382,205
Net current assets/(liabilities)	15,538	(597)	(11,469)
Creditors: amounts falling due after one year	(29,404)	-	-
Net assets	351,951	345,329	370,736
Net asset per ordinary share – basic and diluted1	164.80p	161.50p	173.38p

1. Comparative figures for 2021 have been reinstated due to the subdivision of each ordinary share of 50p into ten ordinary shares of 5p each on 7 February 2022.

Dividends

The directors have declared an interim dividend of 1.20p per share (2021: 0.96p), payable on 27 June 2022 to shareholders on the register on 6 June 2022. The shares will be quoted ex-dividend on 1 June 2022.

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 2021. In the view of the Board, 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.

The risks associated with the war in Ukraine and the economic sanctions on Russia fall into the "Market" risk category, relating to political and economic risks, including global military emergencies, interest rates and inflationary pressures. Expectations for economic growth have been substantially reduced whilst at the same time inflation is running at generational highs exacerbated by supply side shortages and burgeoning energy costs. Any of these factors will have an impact on equity market levels and the Company's investments. The Board and the Fund Managers continue to monitor the situation closely and have reduced gearing to mitigate the impact.

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 as considering the specific risks related to the invasion of Ukraine by Russia, the directors consider it appropriate to adopt the going concern basis of accounting in preparing the financial statements.

Statement of Directors' Responsibilities

The directors confirm that, to the best of their knowledge:

• a. the condensed financial statements for the half-year ended 31 March 2022 have been prepared in accordance with FRS 104 Interim Financial Reporting, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
• b. the Interim Management Report and condensed financial statements include a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
• c. the Interim Management Report includes a fair review of the information required by the Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related-party transactions and changes therein).

On behalf of the Board

Vicky Hastings Chair of the Board 23 May 2022

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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