Fidelity European Trust PLC (FEV) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the new Fidelity offices. I think this will be the first time you've come here as shareholders. Hopefully, you didn't find it too much of a problem to find us, given that we've just crossed the road. And given that we've now passed 12:00 noon and that a quorum is present, I'm delighted to declare the Fidelity European Trust 2022 Annual General Meeting open. And as I say welcome you to the meeting. Since the COVID-19 pandemic, we have been unable to allow physical attendance at AGM, and we've held closed meetings with a minimum quorum of shareholders to conduct the functional business of the AGM. So this year, I'm particularly pleased to be able to welcome shareholders back to the AGM both here physically at Cannon Street. And electronically, for those of you who are attending via the Lumi platform electronically. I will now introduce the other members of your Board. So starting on my far right is Milyae Park, who joined the Board in January this year. So welcome to your first AGM, Milyae. Then we have Paul Yates. Paul will become Senior Independent Director following the conclusion of this meeting. Next is Marion Sears, our Senior Independent Director, currently, who will be stepping down from the Board after this meeting, having joined way back 9 years ago in 2013. Then Fleur Meijs, Chair of the Audit Committee. And directly to my right, Sir Ivan Rogers. To my left, are Anna-Marie Davis, Company Secretary; and Alex Denny, who is Head of Investment Trust at Fidelity. On behalf of the Board, I would like to thank Marion Sears, who is stepping down today after 9 years of service to the company. She has done a huge amount, both for the Board and for shareholders in her time with us, and we are particularly grateful to her. Before we hear from the portfolio manager, Sam Morse, about performance over the last year -- here's Sam. I'm sure most of you know him. I will first explain how to submit a question for those of you at the meeting in person and those of you who are attending remotely. [Operator Instructions] Now the notice of meeting has been made available to all shareholders. And if there are no objections, I propose to take the notice of meeting as read. Okay. Thank you. Our voting procedure today will be by way of a poll, which I will call exercising the authority in our Articles of Association. The poll will be conducted using poll cards for those of you attending physically and using the voting functionality on the electronic platform for those of you attending remotely. If you submitted your vote before the meeting via proxy, you do not need to revote on the poll card or vote electronically unless you wish to change your proxy vote. And for those of you attending in person today, you will have been given a poll card upon registration filing group. So if you are entitled to vote as a shareholder, proxy or corporate representative, but do not have a poll card, please raise your hand.

Like, you're saying to vote?

Absolutely.

With your speakers, I won't [indiscernible] it's just a bit irritating that I've not completely seek to the meetings, and I'm sure I would -- so I didn't quite know what's gone wrong.

So if you are an investor through Fidelity platform and Fidelity platform allows voting in the first instance by an online system called Broadridge; and through Broadridge, you can request attendance at the meeting, and then they will give you the letter of representation in order for you to have the poll card from them. We know who the shareholders of the platform are. So I'm sure that we can provide a poll card anyway. But there is -- the platform is the one that sets the way through which you go by the platform, and that would be the same to how we...

Well, then I'd really like to wait [indiscernible]. It is extremely complicated [indiscernible] to go through, so I think -- because I have a lot of [indiscernible] shareholder, and so yes, it's taking me several days, and it's scaring out because not only do you have to actually normally create another account with your name and password, there's also some kind of squiggly things that -- and I struggled. It didn't come up properly. So I just had a lot of confidence for -- I think you at Fidelity have decided to outsource it. I don't think you've really checked how we [indiscernible] shareholders to you. And that's what I'm...

If you'd like to come and find me afterwards, I'll help you raise that issue because, as I say, it's the Fidelity personal investing platform that appointed Broadridge.

So you're heading the investment trust, sir. Are you...

But I'm -- yes -- so I represent the investment companies, not Fidelity's investment platform. But if we speak afterwards, then I'll make sure that we...

And he'll give Broadridge a tough time on your behalf. But I would like to say, I'm so sorry that you've had that problem and that -- particularly since it runs contrary to our desire as a Board that everybody who is a shareholder should have the opportunity to vote in as convenient manner as possible.

Yes. I think that's just [indiscernible], but thank you for...

I realize that and I'm sorry, we've fallen short on this occasion. And I hope that if we see you, as I hope we will, next year, that you'll be able to say everything has gone smoothly.

I also [indiscernible].

Yes. I mean please do raise it with me, but I can only pass it on to the people who are responsible for the [indiscernible] unfortunately, and it is not this Board.

So we will take that up. When you come to raise the point to be particularly valuable to us, to be as specific as possible about the problem we've encountered, so that we can relay that to Broadridge and hopefully ensure it doesn't happen again. Thank you for raising that. I will now take a few moments to explain the voting procedure that we will use today. You can vote at any time during the proceedings until I declare the voting closed. I will close the voting when we have finished answering questions, and I will give you a clear prompt later in the meeting to warn of the close in voting. If anyone present in the room has any issue with the poll card, please raise your hand and a representative from our registrar will come to assist you, notwithstanding the comments that have just been made. For those shareholders who are attending online using the online meeting platform, the voting icon will appear on the navigation bar. Once you click on this, the resolutions will appear on your screen, along with the for, against and abstain voting options. Simply select one of these options for, against and abstain to cast your vote. If you change your mind, simple, you just select another option. It will cancel what you previously put and install the new option. You can change your vote as many times as you wish up until the close of the poll and your vote will have been submitted when the voting option icon changes color having selected it and a vote received message will be displayed. There is no submit button. So particularly since it's the first time for shareholders who are attending electronically, I'll repeat these voting instructions to ensure that they're clear and ask those physically present for their understanding. For those shareholders who are attending online using the online meeting platform, the voting icon will appear on the navigation bar. Once you click on this, the resolutions will appear on your screen along with the for, against and abstain voting options. Simply select one of these options to cast your vote. If you change your mind, simply select another option. You can change your vote as many times as you wish up until the close of the poll. Your vote will have been submitted when the voting option icon changes color having selected it and a vote received message will be displayed. There is no submit button. If any person attending the meeting online is having any difficulties with using the platform, there is a user guide that has been prepared. You can access this through the platform on the documents tab. That's the platform on the documents tab, and this should address any questions you might have. So I now propose that each of the resolutions are set out in the notice of meeting as put to the meeting. Resolutions 12 and 13 are proposed as special resolutions and all the other resolutions are ordinary. So I can now declare that 13 on the resolutions is open as of this moment. And our agents newly will open the poll, as I say that. Voting will remain open throughout Sam's presentation, which will come in a moment and the question-and-answer session, and we'll then close upon my instruction later on in the meeting. I will, of course, as I said, give all shareholders a warning when the poll is about to close. So now I would like to invite Sam Morse to give his presentation to shareholders. After the presentation, Sam will answer any questions you may have. In his presentation, we only wish it could be entitled the icing on the cake, but we've changed it to the pricing on the cake given the present circumstances.

[indiscernible].

I'm afraid, not.

Not.

Can you see it albeit distracted?

If I look at that one there, it would be [indiscernible].

Yes. So I'm sorry about that. Inevitably, when we have a new building and also a new hybrid meeting, there are teething issues. But thank you for your understanding as to the few glitches. It looks like you've got yourself a rather better slot there. Over to Sam.

Good afternoon, everyone, and wonderful to see so many familiar faces actually in person this year rather than on Zoom. So as Vivian already mentioned, the title of my talk today will be the pricing on the cake. Clearly, somebody in marketing got the wrong message and thought I was going to be talking about a lake rather than a cake. But it is a rather beautiful picture anyway, and I'm sure we'll have a picture of a cake later on. So as always, important information, which I'll let you read. I know you're all speed readers, so maybe we can move on. So today, yes, I'm going to do a brief review of last year -- performance of last year, 2021; and then a quick reminder of the investment process. I know many of you have seen this presentation before. I know the investment process well. But I think it's always useful because there's always 1 or 2 new attendees. And then we will talk about year-to-date and the outlook. Before we get cracking, I'd like to introduce the other members of the investment team on the Trust. First off, Cristina Dondiuc, many of you know well, who is the Investment Director; and Amber who is part of the same team. And really, they're responsible for everything to do with the funds that Marcel and I run, that is not investment related, so [indiscernible] with marketing, helping to prepare presentations like this. And that's extremely helpful to Marcel and I because it really means that we can maximize the time that we spend on investment decision-making. You should feel very privileged that we have Marcel in person today and not on Zoom. I think he spent his first 18 months as Portfolio Manager on Zoom. But I hope you'll give him a great welcome. And obviously, Marcel will be here for the Q&A and will be helping me in terms of answering the questions that you pose, and please do ask him any questions about his particular role as Co-PM on the portfolio. And finally, and very importantly, perhaps the most important element of the team, they can't be with us today, is the research analysts, the in-house research effort at Fidelity. You've got the numbers on the slide here. Marcel is a great example of the quality of those people. I would say we've got about 35 analysts who specifically focus on pan-European sectors, and there are large and critical resource that Marcel and I can draw on. So let's take a look back at 2021. I'm sure you've all read the annual report. So I'll be brief. Seems like a long time ago, but it was a good year in terms of both absolute returns and also relative performance. The left-hand side just simply gives you a bar chart with the index return, the NAV return and the share price return. At the right-hand side, breaks the NAV return down into its various components. And the reason why the indices don't match, the index on the right-hand side, that's in euro terms. So then you have to take off the appreciation of Sterling last year to get to the index on the left-hand side, which is the return of the index in Sterling. You can see that gearing made quite a big contribution to the performance last year. As you may have read in the annual report last year, we moved to a structurally high level of gearing in the earlier part of the year, and that certainly benefited the performance. But in addition to that, as always, we had plenty of winners and losers, and I'm sure you've read about those in the annual report, but overall stock selection was a good contributor to performance over the year. So the NAV return was a little bit more than 6% ahead of the index. The share price return was ahead of the index as well, but was less than the NAV return because we saw some widening in the discount during the year. So as I say, it was a decent year, strong performance in an important year. Why was it an important year for the Trust? Well, as many of you know, in November of last year, we celebrated the 30th anniversary of the Fidelity European Trust. And if you had invested GBP 10,000 on the launch day in '91, actually Guy Fawkes Day, you'd be out -- you'd be sitting on about GBP 500,000 today. That does require you to have reinvested all dividends received into the -- back into the Trust. But I think it's testament to the power of compounding, also to the power of gearing. Obviously, we've enjoyed some gearing over this period. That is one of the great advantages in Investment Trust, but also a testament to the power of stock picking. We've had 4 different managers on the Trust over this period. I think the England football teams had about 14 different managers over the same period. And obviously, Anthony, who ran it for the first 10 years of its life, got it off to a cracking start. It doesn't look like he outperformed a huge amount the way we've done this chart, but believe you me, his outperformance was quite staggering in the first 10 years. But each manager, subsequently, Sudipto, Tim and myself have added value relative to the benchmark. And that added up to an outperformance of around 4% per annum over that period. I think the unsung heroes, though, again, are the Fidelity research analysts. I calculate about 300 different analysts have probably contributed to this Trust over that period of time. And they've each added a lot of value. It's interesting to note, too, we get a lot of detractors about Europe. But actually, the European indices over that 30-year period have performed pretty much in line with the rest of the world. Anyway, moving on, the investment process. As I mentioned, we've had 4 different managers and each of us have had our own particular stock-picking approach. Mine is very much focused on dividend growth. And so just to really summarize the philosophy, as I said, I'm very much bottom up, as you'd expect with the Fidelity Fund Manager, and as I said, very much with a focus on dividend growth, and we'll come back to that why I focus on dividend growth. But I do take quite a long-term approach. So typically, I'm looking for companies that I think can grow their dividends on a 3- to 5-year horizon, trying to make sure I'm not paying too much for that dividend growth. It does mean because we take quite a long-term approach that the turnover in the portfolio is relatively low. I actually think that's a good thing because it means that the transaction costs in the portfolio are also relatively low. And finally, I'm quite a cautious chap. Alex often says that I'm just downright gloomy, but I think it does pay to always consider the downside risk in the stocks in which we are invested, not just the upside potential. And we also look for businesses with strong balance sheets. This generally means that the [ data ] on the portfolio on an unlevered basis tends to be well below 1, usually about 0.9 to 0.5. And finally, and very importantly, we do like to stay fully invested in the other funds that we run like the open-ended fund. We always have at least 99% net exposure in the Investment Trust. Obviously, we have gearing, as I mentioned before, we've moved to a high level of gearing. So why do we focus on dividend growth? Well, that's really captured in the right-hand side of this chart, which very simplistically provides the performance in the blue bars of companies that have consistently grown their dividend each year over those various time periods compared to the performance of the rest of the market, the rest of the benchmark companies, which have cut or held their dividends over that same period. And so you can see that 46 companies have grown their dividends consistently over 5 years. And you can see it's not just that they've outperformed the quantum of outperformance. I think it's really quite staggering. Obviously, the problem is that in the past, there's no guide to the future. And you can be pretty sure that the companies that have grown their dividends consistently in the past may well not be the same companies that grow their dividends consistently in the future. So a lot of what Marcel and I do is try to identify which companies will grow their dividends consistently going forward. And we don't get 100% perfect execution on that, I can guarantee you. But if we get reasonably good execution, we should be fishing in a good pond. We should be delivering decent long-term performance. So how do we identify those companies? Well, that's what's captured on the left-hand side of this chart. This is what we look for in the companies in which we're invested. The top 3 criteria really relate to the ability of a company to grow its dividend, positive fundamentals. Typically, we're looking for proven business models, companies with a long-term track record of sales, earnings, cash flow and dividend growth. We do prefer companies that generally have good cash flow return on cash invested. We do like for the companies to be cash generative. I mean clearly, you can borrow to pay a dividend. But generally, we find the companies with a good track record in terms of cash generation, also have a good track record in terms of dividend growth. And finally, in terms of these 3 criteria, we do like a strong balance sheet. Obviously, this slightly depends on the nature of the business. It is very operationally levered. You probably want a lot of cash on the balance sheet. If it's a regulated utility, you might allow some gearing. And then the end is meant to be particularly big. Just to point out, this is not dividend growth at any price. It's meant to be dividend growth hopefully at an attractive valuation or at least at a reasonable price. As we say in the tag line, the key point here is that companies that grow their dividends consistently do consistently outperform. It's our job to be able to identify which companies those will be going forward. So, obviously, we have good years and bad years. This is the performance of your company during the period that I've been running it. And there's certainly been uncomfortable AGMs where I've had to report to difficult periods for performance and there have been better periods. But over time, as you can see, our objective is not to shoot the lights out, but is to outperform the benchmark by about 1% to 2% per annum post fees. And today, we've achieved that. And you can see that the 2 lines, one is the benchmark line in orange and then the blue line is the performance side. They are quite correlated. So they go up and down together, which shows that it is quite a balanced benchmark-aware approach. But gradually, over time they have dispersed. And we're currently hitting a little bit above our target, but obviously, that includes the gearing that we employ on this one. And we very much feel that this long-term outperformance is due to our focus on attractively valued dividend growth. So thoughts on the year-to-date and beyond. Obviously, this year has got off to a much more difficult start. And I think there are a number of reasons for that, that we'll come on to. Year-to-date, the NAV, as you can see, has actually fallen a little less than the market. And I know that that's not much consolation for you guys. And it's also particularly upsetting that the discount has continued to widen, such that the share price return is actually underperforming the index year-to-date. Again, on the right-hand side, you have the breakdown of the contributors to the NAV performance year-to-date. So you can see the index is down about 9% in euro terms. Sterling -- the exchange rate is pretty neutral. You can see that gearing this year, unlike last year, has obviously been a detractor in falling markets. Stock selection has helped to mitigate some of the issues and has offset the impact of gearing to date, such that, as I said, the total NAV return has fallen, but a little less than the benchmark has fallen. So why are markets weaker year-to-date? I'm sure some of you will remember this slide from last year. And I think I said when I presented it that I'm a bit like the chap with the blinkers on. I don't necessarily see inflation persisting. Well, I think here on, you can say to me, Sam, you were wrong because I think inflation does look like it's persisting longer, and there are a number of reasons for that. And it is certainly a growing problem. But why is that a problem? Well, 2 key reasons. Number one, obviously, the cost of living crisis putting a lot of pressure on consumers' wallets. And that's a problem for Continental European economies when consumption is the biggest component of GDP growth. Secondly, it's taken away a very important crutch for the market in terms of valuation, i.e., the very low bond yields. Investors are now worrying about growing inflation expectations and rising bond yields. And clearly, we're seeing a derating in the market. We haven't actually seen earnings downgrades yet. And the market is trying to work out what is the right PE rating going forward. And then this happened. And clearly, the market has been in a very risk-off mode since the invasion of Ukraine. And really, what I put here is sort of a schematic, but it's not Fidelity is schematic, this actually comes from Bank of America, one of the brokers. And it's their sort of assumption of what some of the long-lasting structural shifts may be as a result of the war in Ukraine, and I'm sure we could debate whether this will happen or not. An increase in defense spending, Marcel is actually our defense analyst here at Fidelity, so you can talk to that later on, but I think it's clear that some nations in Europe will increase their defense spending going forward, energy independence. You'll all be very aware of these items, reshoring, et cetera. But I think it's really the dark blue part of this chart that is most important, the impact on inflation and interest rates. And I think you could argue that really all of these factors are likely to lead to a more inflationary outlook. So the key question is, how will this impact your company, this change in the macro environment? So this is a rather busy chart, but what it attempts to do is show the impact of various macro factors on the performance of your company and the portfolio. And so for instance, perhaps one of the easier ones to look at would be the large dog and the little dog. So that's meant to be large caps outperforming small caps. Actually, it looks like -- a bit like a mega cap. But -- so what this would say in a one standard deviation move or the outperformance of large cap relative to small caps, that generally is a positive impact for the portfolio relative to the benchmark, and that's why it's a blue line. So if you look down these, and we've got some rather fun photos, you'll see -- I think, one, hopefully, you can see that one of James Bond. So that's about bond yields. So as you can see that if bond yields rise and inflation expectations rise, caeteris paribus, that's not great news for this portfolio, generally, we will underperform given that headwind. Likewise, in value-add performance growth, the inverse of the top one, again, generally, we will struggle. And I think that's a sort of environment that many commentators are talking about going forward. The good news is that there are some things to mitigate this. One thing is that life is never caeteris paribus. There's always something else going on at the same time. We very seldom get a perfect storm. So for instance, very often when bond yields are rising, the inflation expectations are rising, credit spreads will be widening and we've certainly seen that today. Widening credit spreads will be helpful for the performance of the portfolio. So we'll get some offsets. But in addition to that, I actually don't worry so much about the rising inflation expectations because a lot of companies we own, although they get hurt initially on the increase in the discount rates affecting their valuations, a lot of these companies actually have pricing power. And I think those are the sorts of companies you want to focus on in an environment of inflation and that gives them some protection and protects their dividend growth going forward. So are rising bond yields a headwind? Yes. Yes, they are. Pricing power is very important. And Marcel and I have always focused on this, but particularly so in this more inflationary period. So what is pricing power? In my opinion, this is not a dictionary definition, this is my definition. It gives the company the ability to mitigate inflationary pressures on both the P&L and cash costs through increased pricing. And there are many different sources of pricing power. So maybe going in a clockwise fashion, starting with the top box, products with inelastic demand. So these are products where you can put the price up a lot and the demand will still hold up. And actually, the left-hand side, I mean some of you may have remembered from your economics classes discussing Giffen goods and Veblen goods, and the Birkin bag, which is the picture, probably Hermès' most profitable product, is actually an example that many academics use of Veblen good. This is a luxury product that is exclusive and is very much seen as a status symbol. Such that actually when the price rises, often demand rises. Not many products you can think of like that, although one my colleague said, maybe that's also true with Bitcoin. Then Swedish Match and Nestlé, I think you could argue their products are quite inelastic probably because there's an element of addiction in both. Certainly for me, I'm not a tobacco man, but I do enjoy a cup of Nespresso in the morning, fairly insensitive as the price goes up. So products with inelastic demand, generally, that's certainly a source of pricing power. And in the case of Swedish Match, because tax is such a big part of the retail price, they can actually put up their wholesale price without it having such a big impact on the retail price. Competitive position is another source of pricing power. ASML is probably a great example in that respect, provides lithography to semiconductor manufacturers. And it's new technology, extreme ultraviolet or EUV, they're pretty much the only supplier out there. So having that a virtual monopoly position is, obviously, a very good position to be in from a point of view of pricing power. They don't gauge their customers, and they actually have sort of a value-based pricing formula, which means that it's -- there's a lag in terms of them being able to get the pricing improvements, but they will be coming certainly. So that's an example of pricing power as a result of the competitive position. And then finally, small but critical, the example here is Symrise, which is an ingredients company. And they obviously very often provide the sort of magic ingredient in a scent or a food ingredient. I think this is vanilla here that makes the product really extra special. And it would be a small part of the total price of the product, but a critical element. And so very often, they also have a greater pricing power. And in all these cases, I think it's important because although they all suffer as discount rates rise and we've seen that to date, fundamentally, the earnings will hold up better than other companies in the market because of the pricing power that they enjoy. And it will also, therefore, help to protect their dividend growth in times of inflation. Assa Abloy is the latest addition to the portfolio. Again, it meets all the criteria that we set out earlier, positive fundamentals. The main business is what they rather grandly call, opening solutions. I think you and I would call them locks. And I'm sure you're familiar with Yale in the U.K., but actually locks are becoming increasingly complex, electromechanical locks, locks that you can control with your smartphone, you call it smart locks. And as the dominant player in the industry, I think they're benefiting from this increased complexity of products because they have a much larger R&D budget, so they can introduce new products, greater innovation. And in addition to that, the complexity of these products means there's a lot more aftermarket support. And generally, aftermarket has better pricing power and is more profitable. When you think of pricing power for this company, you think of the day when you've got MERKEL's, and you're very keen to replace the lock as quickly as possible. You're a little bit price insensitive and you'll probably go for the brand in lock that you're familiar with. So certainly, this is a business that has pricing power and that's reflected in the cash flow returns on cash invested were extremely high. And as a result, it is a very cash-generative business. The balance sheet is not as strong as I would like. That's partly because they've just recently done a big acquisition in the U.S. that we favor of HHI, which is a big player in the residential market in the state. So the balance sheet is currently at the top end of the targeted range at 3x net debt-to-EBITDA. But because of the cash generation, they will be able to pay that debt down relatively quickly and also continue to do small bolt-on acquisitions, which has been a good contributor to their growth over the years. And finally, we -- in terms of valuation, this has never been a cheap stock. It pays about a 1.5% dividend yield. It grew its dividend last year 8%, but we actually think going forward, this company could maintain double-digit growth. You add the 2 together, that's a very decent TSR, and we actually think there is room for some rerating as well. The shares are in line with their historical average, but they look good value relative to quality industrial peers. So our approach has not changed, still very much focused on dividend growth because we do believe strongly the consistent dividend growth will consistently outperform, but the environment has changed. And I know that may be of a concern that, that will have an impact on the portfolio going forward. And certainly, we have faced some headwinds in terms of the shift from growth to value, and also rising inflation expectations impacting the discount rates on some of the companies that we own. But as I mentioned already, pricing power is something that we very much focus on, and I think will be a very important protector of dividend growth going forward in times of inflation. So the great thing is that these companies, the strong business franchises, they will do well irrespective of the environment, but they'll do particularly well, in my opinion, in a time of inflation, and that's the pricing on the cake. Thank you very much.

Thank you very much Sam, for your presentation. And in particular, I thought for expressing so cogently the consistent long-term investment rationale through which you seek to steer the shareholders' portfolio through good and more troubled times alike. So the Board and portfolio managers, remember, because Marcel Stötzel with us, we'll now take any questions. And for those shareholders asking a question remotely, your questions will be put to the meeting by Alex Denny here. Questions of a similar nature will be grouped together to avoid repetition and to ensure we answer as many questions as possible. For any questions we are not able to answer today, a personal response will be provided in writing after the meeting. So now I will take the first question from the floor. [Operator Instructions] And please also bear in mind that we'll be alternating questions from the floor with questions, which have been supplied electronically. So if we don't come to you immediately, be assured that your turn will come. So I would now welcome the first question from the floor.

[ Colin Packham ], shareholder. I couldn't find anything in the annual report nor in your presentation that talked about major disposals. Did we have any GII for the purposes of report and since year-to-date?

We have very few. I'm trying to get into the appendix here because we've got a list of the transactions. Which side, Anna?

On 32.

32. Okay. Yes, so this is activity actually over the last 6 months rather than the last year, so to the end of February. And the only disposal over that period was Fresenius Medical Care. And this is basically a business that runs dialysis clinics, largely in the U.S. The U.S. is a big part of their business. And it's been a very long-term holding in the Trust, but they've had a pretty rough pandemic because needless to say, their customers, people who need dialysis tend to be not the healthiest, and therefore, have suffered greatly in the pandemic and they've seen an increase in the mortality rate. In addition to that -- and that could correct itself going forward, but I think that will be a headwind for 1, 2 years because most number of customers, which has basically decreased the capacity utilization in each of their centers, which is an issue. But more important than that, I think it's a company that will actually suffer in this more inflationary environment. Nurses wages in the states are going up very rapidly, as you can imagine, partly because of Trump's immigration policies, and partly just because of the strength on the system due to the pandemic. And this is a company where it has to renegotiate the rates that it achieves with its commercial customers and also with the government on a fairly regular basis. And I think it will be challenging for them not to see a margin squeeze, i.e., this increase in costs. They'll find it difficult to recoup that in their remuneration rates. And basically, they compete with another big player in the States, DaVita, and also with quite a lot of mom-and-pop operators. And when I last met with the company, one of the things that kept me hang in the shares because I thought maybe a lot of these mom-and-pop operators will go out of business, but they explained that actually the government in a way is helping to support these operators, so it's not really a level playing field. And that made me really quite concerned. So for that reason, we took decision to sell out. The company had also stopped growing its dividend, which I always see is a bit of a red flag as well. So that's the only full disposal in the last 6 months. I'm sure there were other stocks that we disposed off last year. I'm trying to remember what they were. Maybe you'll come back to me, and I will come back to it, yes.

We'll come back to you, madam, in just a second, but if we can use this alternating principle, if we may. Alex?

Yes, we've received a couple of questions via e-mail as well from our platform holders. So maybe we'll start with this one. Sam, you mentioned earlier, obviously, the widening discount and a tougher environment. How did you cope in previous periods of risk aversion and settlements?

Well, as I said before, I mean we run quite a benchmark-aware approach. So the portfolio does tend to correlate quite highly with the market movement. So generally, when the market goes down, our portfolio will also go down in absolute terms. Having said that, because the [ data ] on the portfolio on a non-levered basis is quite low, about 0.9, generally, the portfolio goes down a little less than the market fall. Obviously, in the Investment Trust, that's somewhat offset by the fact that we have gearing. But I would say that generally, in periods that are risk off and where the market is falling, generally, we should -- the portfolio should fall a little bit less than the market. And I think that's partly also because of our focus on companies with strong balance sheets, which tend to outperform those with weak balance sheets during these sorts of periods. But I'm always a bit wary of saying that because then the market will fall for some reason and maybe we won't outperform, but -- so we always worry about the future. But I'd say on the flip side, the times where we struggle is an exuberant market. We tend to struggle to keep up with the benchmark when the markets are exuberant, when people are feeling risk on partly because we don't own a lot of the sort of blue sky, more speculative stuff that doesn't pay any dividends, but might earn lots of money in the future. That's not really our strategy. So we tend to lag into recovering markets or markets that are very exuberant.

So perhaps a couple of questions. You've spoken quite a lot about gearing, but I couldn't see the interest rate that you're paying in the annual report. So maybe you could just -- yes, let us know how that's performing? And then just really an easy question, the Swedish Match. I don't recognize the company, so you could just perhaps explain what that product is, although, perhaps I can guess. And then the other one, you've spoken quite a bit just about the U.S.-focused companies. And looking at the geographical breakdown of companies, you don't include the U.S., obviously, it's a European. So they perhaps included in the other, but maybe you could just elaborate on that if there is something.

So on the gearing, basically, we achieve the gearing through use of contracts for difference, so this is a derivative contract. And basically, it's an arrangement with the broker where we get compensate if the share price goes up, but we don't have to put the full [ hedge of ] capital behind it. And we use those because basically, they're quite an inexpensive way of gearing the portfolio. And so whereas fixed debt, we paid typically in interest rate. The contract for differences, generally the level of interest that we're having to pay is much lower. And I can't quite remember which line item that's captured in, but Alex is looking it up, and he'll be able to tell you very shortly. And then the second question was about Swedish Match. Yes, Swedish Match. Swedish Match is actually in the news. I don't know whether you know that, but they -- there was a rumor yesterday, which both companies have now confirmed that Philip Morris International is very interested in potentially in buying Swedish Match. So it's subject to potentially a takeover. But in the press release, they very much emphasized that it could all come to naught, so it's having a good day today. It's up some 23% or something.

[indiscernible] what would it sell? What...

Yes, I'm about to tell you. So the name is a bit misleading. It does sell matches or lights, and it also sells lighters, but that's a very small part of the business. The main part of the business is snus, which it sells in Sweden and Norway. I don't know whether you've ever been a snus user, but it's a bit like snuff. It's basically a tobacco product that comes in a little packet that you put between your gum and your lip and then enjoy the benefits of a little rush of nicotine. I hasten to add that I don't use these products. But the ESG is, obviously, a big issue currently in the market, and this is a company that from an ESG perspective is often questioned. It is a tobacco product, and it has nicotine in it. They argue that it's actually quite helpful for getting smokers off cigarettes, reduce -- and actually in the States, it had a reduced harm label from the FDA. But I think that's a big -- that can be debated. And then in the U.S., part of the reason why the stock has been so strong of late and such a good performer in the portfolio is in the U.S., they've introduced a new product, which is called nicotine pouches, which is very similar to snus. Again, it's a little packet that you put into your mouth, tobacco-derived product. But this has really taken off in the States, and they've had the advantage of being the market leader and first-mover advantage in the States. They've got a very high market share, approaching 70% in this category that's growing extremely fast. So that's really helped. And I think companies like Philip Morris International trying to sort of diversify their revenue streams going into more smokeless tobacco, and so Swedish Match fits the bill from that perspective. So watch the space. Hopefully, that will be a nice boost to the outperformance of the fund, but we'll see. And then the last question I think...

The last question was on the U.S., clearly, a very, very important market for the Trust. I don't know if Cristina or Amber, you have the exact percentage of revenue.

[indiscernible]

Yes. Sure. What is that.

[indiscernible] the U.S. is around 25%.

So around 25% of the Trust's revenues come from the U.S., and that's really grouped in a certain -- a few segments. So pharma, clearly, U.S. is a great market for pharmaceutical products, so the likes of Roche, Novo Nordisk; and then technology, obviously, U.S. at the forefront of most techs so the likes of SAP, Dassault, would have very strong sales in the U.S. And then lastly, luxury is a very strong markets [indiscernible], LVMH, et cetera, would -- do have a lot of sales from the U.S. Does that answer your question?

Yes. And I think [indiscernible].

If not, we'll pull it out definitely next time. But yes, clearly, a very, very important market for the Trust.

If I could just add on your question on the cost of gearing. Within the annual report on Page 63, there's some breakdown of finance costs. It's not actually that easy to read. So just to give a bit of background to it, during some of the financial year, interest rates were actually negative. We pay a price over the base rate in euros. So there have been times where we were actually getting paid for having borrowing. For the most part, we weren't getting paid for having borrowing, but it's only a few basis points. And the difference, I think, that beyond the kind of the flexibility of just how you deploy the CFPs is that if you don't get -- and Sam has been here throughout the year, but if you chooses to delever and take any of that off or indeed increase leverage, then you only have to pay for the gearing that you actually have at the time as opposed to a bank loan where if you borrow 10% of the NAV, then you will be paying an interest rate on that, whether you're deploying it or not. So the actual impact on NAV from the cost of gearing is basis points 2 or 3. I mean it's very small.

And we have reviewed that method of raising our gearing against the alternatives on a regular basis, but it's always been most cost effective to use CFPs. We might just take another question.

Yes. In fact, it's a good segue, which is simply given the outlook. Are you comfortable with the level of gearing and what it might from an investment...

Yes. I mean one is never comfortable with the outlook. I think in the annual report, when we discuss the decision to move it to a structurally higher level of gearing and a more fixed level of gearing. I think I observed that there's always something to worry about in markets. And one of the reasons -- I think on reflection, we felt that the 6% gearing that was the average of the previous stock market cycle was a little bit too low. I mean gearing is one of the great advantages of Investment Trust over the long term. And the reason why it was a low average was because there was of course something to worry about from -- when I started in the GFC to the Eurozone crisis, the various sort of integration crises. So there's always something that's sort of holding you back in terms of gearing and you're worrying about the outlook, worrying about the future. And also trying to time the market is a bit of amongst game. We strongly believe that. So we always say fully invested in the open-ended fund. So we felt that it was appropriate to move to a higher level of gearing and a more fixed level of gearing, and the Board has given me the leeway of 10% to 15% gearing. And whether now do I -- is it the right time? Who knows. I mean everybody is, in my opinion, particularly about the outlook, sentiment is poor. I think you can see that from the widening of the discount, not just in this investment trust, but other investment trusts. I think also, we've seen quite heavy outflows from our European equity funds in the recent past. So I would say sentiment factors are pretty low. What could go right? I think there are 1 or 2 things that could improve. And we suddenly forgotten about the pandemic, and that's good news in a way, but a lot of economies are now reopening. I mean Marcel does the aerospace sector. We see more people on flights and aerospace improving, et cetera. So there are some boost to the economy coming from that. China has been a big problem, as you probably all know, but Xi Jinping wants to be re-elected coming this fall, unprecedented third term. To do that, I think he's going to have to put out all the stops, and we're certainly seeing some easing there. So we may see some improvement, some green shoots in China, which I think would -- the market would like. So yes, I think everyone is very downbeat, very negative, but I think we could see an improved environment. And as I said before, we do see a recovery period very often. We -- our portfolio on an unlevered basis tends to lag. So I think actually having that gearing at that point in time will be quite handy.

That's the old proverb, which says, it's always darkest before the dawn. That doesn't, of course, preclude that it won't get a little bit darker first. That's the catch. We have time for two more questions. One, we'll take from the floor, one from our shareholders online. Gentlemen over there.

Apologies for my later arrival, but notwithstanding, ASML, you mentioned as one of your top shares. It's taken rather a hammering in recent months. Is there any reason that you sort of have -- it seems to perverse on semiconductors. And secondly, has that been an opportunity for you to top up your holdings?

I'll take this one. So if we take a step back, why do we invest in ASML to begin with? It's essentially an unregulated monopoly as Sam alluded to. They sell kind of crucial semi-cap equipment into the likes of Intel, TSMC, Samsung. And with chip explosion, as you alluded to, that's only going to continue for the years to come. I don't see the growth of data or the growth of chips slowing down. You layer on top of that pricing power and reshoring companies, questioning whether being close to Taiwan is a great strategy. Reshoring is in general bringing production back. This is a fantastic outlook for ASML over years, if not decades. It's really one of the companies where you can see the strongest growth outlook. So that's the original reason why we really are bullish on ASML long term. But on the short term, and what the market has realized is it is still a capital expenditure decision. And if we are going into a downturn, our Intel, TSMC and these likes -- and the likes of these companies still going to make multiple hundred millions of dollars purchases from ASML, or are they going to postpone and say, "Look, hold up, I can take this next year or 2 years down the line." And I think it's that cyclicality that the market is worried about. And in the short term, it's certainly what we are worried about, too. But longer term, I don't see that changing the fundamental story. So it's one that Sam and I have been looking at quite a bit in terms of topping up and all else equal, if we can get comfort on the short term, I think we'll do so.

And it's quite a highly rated stock too, the PE is quite high. So I think it's one of the large group of companies that have suffered as a discount rate has risen. I mean we discussed this a lot, timing of adding to it, because I think you have to also bear in mind that a lot of the sorts of funds that have performed very well over a long period of time that have suffered a bit more in the last year or so, will own a lot of ASML and companies like that, Nasdaq-type businesses. And if they're suffering, maybe you could see some redemptions, maybe overshoots on the downside. So I think we're still discussing it. The good news is that we did take some money out of it last year when it was riding high. But I think, as Marcel said, the fundamental story is very strong. So at some point, we'll be looking to get back in.

At this point, I would like to confirm, as I alluded to earlier, that the poll will close following the conclusion of the next question, which is going to come from online, and that will be the last question.

So a question from Ricardo [ Binny ] here, and I think you alluded to the pricing power. So are you finding that -- some of the stocks that you have been invested in for years because of their strong pricing power and now struggling because of the raw material cost inflation and supply chain issues are now finding it tough to pass these costs on?

I mean definitely, definitely. And one thing I should have said probably a bit -- emphasized a bit more in the presentation is the lags. So very often, it does take time, for instance, Symrise, seen a lot of inflation in its input costs. It will go to the customers. It will discuss, and it will take them time, call from their own annual contract or something that nature. So it will take time for them to recoup those increased costs in their pricing. And I think Marcel and I are aware that the pricing power of a company can change every time, and perhaps the best example of that is Netflix. I mean I think they had tremendous pricing power when we were all locked down. But once we're all free to move around a bit and can do some other activities and then enjoy some other entertainment, maybe the pricing power is a little bit less powerful. So it's -- we're on top of it. But I guess the point I was trying to make is that, ultimately, if you do focus on pricing power and you are investing in companies with good pricing power, I think that's good anyway for the long-term strength in the business and the dividend growth potential of that company. But I think in particular, in times of inflation, it's important to be focused on that, yes.

So I confirm at this point that the poll is now closed, and thank all shareholders for your interest and your questions whether present here at Fidelity or online. And that, ladies and gentlemen, concludes the formal business of this Annual General Meeting. And to your questions, the proxy votes submitted in advance are now shown on the screen and are available from the Company Secretary. Those aren't the final ones, however, which will be posted on our website as soon as possible after being scrutinized by Link Group, our registrar, and after the poll cards have been collected here in the room. So thank you very much for attending today's AGM and indeed, for your continued support as shareholders. We appreciate that. And may I invite you to join the Board and the Fidelity team for some refreshments as soon as we have concluded. And that point, ladies and gentlemen, is now. Thank you.