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

2023 Annual General Meeting open. I'm very appreciative of the numbers of you who have come here today. I'm pleased to welcome you all, both here physically, but of course, also those of you attending electronically via the Lumi platform. AI has not devised a method of providing refreshments to those who are here electronically, but I'm pleased to say those who are physically present you will receive some after we have completed our formal business today. So I will now introduce the other members of your Board. Starting on my immediate right is Paul Yates, Senior Independent Director. And next to Paul is Fleur Meijs, Chair of the Audit Committee. And we then have Milyae Park. And at the end, we have Sir Ivan Rogers. To my immediate left is Smita Amin, Company Secretary. And on my further extreme left, not politically, I might add, but is Clare Dwyer, the Head of Investment Companies at Fidelity. And before we hear from our portfolio managers, Sam Morse and Marcel Stotzel sitting next to him. Just over here, please raise your hands, but you're probably familiar to those of you attended before. Before we hear from our portfolio managers about performance over the last year and their outlook, I will first explain how to submit a question for those of you at the meeting in person and for those of you who are attending remotely. If you're attending the meeting using the electronic platform and would like to ask a question, you need first -- 3-step process: You need to click on the messaging icon in the navigation bar at the top of the screen; you can then type your question in the box where it says "Ask a Question" at the top of the screen. That's step 2; and step 3, then once you've written out that question to submit your question, click on the arrow button to the right-hand side of the question box. I'll just repeat that. So the first step is to click on the messaging icon in the navigation bar at the top of the screen. Step 2 type your question in the box where it says "Ask a Question" at the top of the screen. Step three to submit your question, click on the arrow button to the right-hand side of the question box. Now for those shareholders here physically, we will be using roving microphones and please raise your hand at the appropriate point if you wish to ask a question. And I will then invite you to do so, and then Asher will come to you with a microphone. 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. Thank you. Our voting procedure today will be by way of a poll in accordance with the company's Articles of Association. The poll will be conducted using poll cards for those of you attending physically and for those of you attending remotely by using the voting functionality on the electronic platform. 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. For those of you attending in person today, you will have been given a poll card upon registration by Link Group by our registrars. If you are entitled to vote as a shareholder, proxy or corporate representative, but do not have a poll card, please raise your hand. Everybody happy? So 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. So it's strictly come daunting rules. And I will close the voting when we have finished answering questions. I'll 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. For those shareholders who are attending online using the online meeting platform, the Voting icon will appear on the navigation bar. So 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 1 of those options to cast your vote if you're attending remotely. 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 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. 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. And this should address any questions you might have. So it's now my pleasure to propose that each of the resolutions as set out in the Notice of Meeting is put to the meeting. Resolutions 13 and 14 are proposed as special resolutions. All other resolutions are ordinary. And I can declare that voting on the resolutions is now open. Voting will remain open throughout Sam Morse's presentation and the question-and-answer session and will close upon my instruction later in the meeting. I will, of course, give all shareholders a warning when the poll is about to close. So I would now like to invite Sam to give a presentation to shareholders and after the presentation, Sam and Marcel, his co-manager, will answer any questions you may have. And as I alluded earlier, Marcel Stotzel there just to the left as I look at it, of Sam Morse is the co-portfolio manager of the company. Sam?

Thank you, Vivian, and good afternoon, everyone. So we have a beautiful picture here of Lake Hallstatt in Austria, some of you may know it. And this is meant to make you feel wonderfully serene and calm, while we discuss all the terrible things that are going on in the world at large and in the European stock market. I mean we're used to crisis in Europe. But I think as the Chairman noted in the annual report last year was a bit special. We seem to have at least 3 crises going on in just 1 year. We had the lingering health crisis, the pandemic, especially in China, which is obviously very important for European companies with that zero-COVID policy. We had the cost of living crisis with interest rates and inflation rising, certainly more rapidly than we would otherwise like. And finally, we had very much a geopolitical crisis with Russia's invasion of Ukraine, and also growing tensions between the U.S. and China. And maybe we've got more crises to come, and we'll discuss that a little bit later. But I think it's very important, whatever the future brings to remember the wonderful motto of the Saddlers'. Some of you may have come today down gasoline to get here, and pass Saddlers' hall. You'll know that their motto is hold fast, sit short, hold fast because these are likely to continue to be rather volatile markets. and you will need to hold on during this wild ride. But sit sure the equity markets do rise even despite all these crises. And ultimately, you will be rewarded for your tenacity. Okay. So first up, we have the usual disclaimers, which I'll give you half a minute or so to read. I'll have a sip of water. So i'll take that as all right. So during this short presentation, we're actually going to do a bit of a double act. I can't promise you it will be as entertaining as the Two Ronnies or more come and wise or anything like that. But I'm going to do the first section where we'll review 2022 and the performance of your company during 2022 and also a quick snippet on performance year-to-date. Then it's over to Marcel who will remind you about our investment approach, in particular, our focus on dividend growth and then give 1 example to try and put some flesh on those bones. And then finally, I'll resume with some recent activity we've undertaken in the portfolio and our view on the outlook. Before I do that, let me just first introduce you again to the team. And perhaps the one change that you will note on this slide from previous years is that Natalie, who is sitting here in the front row, has taken over from Christina, who has moved to our fund -- the funds business here at FIL. And Natalie has tremendous experience with many of the other European funds over the years. But she leads the investment director team, Amy Kelly supports her and others as well. And this is a wonderful resource for us because basically, they take care of anything that is not investment related, which enables Marcel and I to maximize our time on investment decision-making. The other crucial element, perhaps the secret sauce, the key ingredient to the success of your company over the years is the global equity research team here at Fidelity. And we write down, as always, the impressive numbers here. We have about 30 analysts covering pan-European sectors that Marcel and I interact with on a very regular basis. And the numbers are very impressive, but you don't really get an idea of the quality of these individuals. But Marcel is a great example of the quality. And I can tell you we have 30 more or so Marcels in that team. So a quick review of last year. You're at the poly-crisis, as I said. And obviously, all these crises generally led to unusually both a crisis in the bond market and also in the stock market. And you can see that in the index returns. I'm pleased to say that very much with the assistance of the Fidelity in-house research team, your company was able to outperform that index in that it fell less than the market. But I know that, that's a small constellation for you. At the end of the day, you'd like to see positive returns. So now I'll go through the NAV return of minus 3.6%, and that's captured in the table on the right-hand side. So as you can see, the index in euro terms was down around 12%. The euro wasn't a particularly strong currency in the year. In fact, it devalued relative to the dollar. But sterling was even weaker. So that softened the blow a little bit in sterling terms. So in sterling terms, the index return was down 7%. Now you'll note that a couple of years ago, we moved to a higher fixed -- more fixed level of gearing with a range of 10% to 15%. Now that was great in 2021 when the markets were up a lot that obviously went against us in 2022 when the markets were falling. But I'm pleased to say that we more than offset that negative impact of gearing through stock selection, which was strong during the year. And I'm sure some of you will have looked at the annual report already. As I said, it was a bit of a banner year for stock picking in that we had 3 companies that were bid for during the year and taken over by other companies. Lantea, Christian Hansen and most importantly, Swedish Match, which was a top 10 holding for us and was taken over by Philip Morris International. So those contributed quite a lot to that a strong figure for stock selection during the year. Needless to say, we always have some weak performance, too. A couple of companies in the private equity space were very weak during the year. Partners Group and EQT as performance fees shrank and also as people worried about the outlook for fundraising, but overall, as I say, it was pleasing to see the company falling less than the market. And what about progress year-to-date? What about 2023 so far? Well, this is the numbers for the first quarter. And you'll see that it's been a much happier quarter in terms of returns in the market as European markets have responded well to China reopening, which is very important for European companies and also to the fact that we've got through the winter without an energy crisis. So we've seen a good return, almost a double-digit return from the index. And broadly speaking, your company in NAV terms, has kept pace with that. How is that broken down on the right-hand side. Well, stock selection has been a bit mixed, a bit more mixed year-to-date. We've had some strong performance, certainly the luxury goods companies at 3i Group gave a very encouraging update on their main investment action. But we've also had some weaker performance, particularly in the financial space where we're quite overweight. And this was particularly following the news about Silicon Valley Bank, Bank Interim in particular, performed poorly after that. But as you can see from the right-hand side, the index in euro terms was actually up double digit. The sterling has strengthened a little bit. This year, the gearing is helping us because markets are rising. As I said, stock selection has been a bit mixed. But overall, the NAV has kept pace with the index, which has been encouraging. Of course, the year is only a quarter over the April has been okay. I reassure you. And so we don't know how this year will turn out. And as always, we will have good years and bad years. But in the long run, we do recommend holding fast and sitting shore because markets will rise and we believe if we continue to focus on attractively valued dividend growth, we will be able to continue to outperform the market. What is our goal in that respect? It's not to shoot the lights out. Our goal is to outperform the benchmark on an unlevered basis by 1% to 2% per annum. And you can see from the blue line and the dotted orange line that over the period, we have achieved that with a fund return, NAV return total return of 10.8% per annum over that, whatever it is, a 12-year period now relative to the index up around 8.2% despite all those crises we've been through. So Marcel is now going to take over and is going to just talk a little bit more about this focus on attractively valued dividend grower. Why do we focus on these sorts of companies.

Thank you very much, Sam. And yes, as Sam mentioned, I'm going to be talking through a reminder of what our process is, then we're going to go through how we actually implement that process. And then lastly, we'll use Puma, which is a new holding that we've added as a kind of case study for how we do what we do. So if we start with the investment philosophy first, these are kind of 3 North stars. So what these are the kind of guiding likes and principles that we use for investing. And the first one is bottom-up. And this means a lot of different things to different people. But to us, what it means is we want bottom-up stock picking to be the primary driver of returns. We don't want macro factors, interest rates, what the Fed does or any of these factors to be what's driving our return. We want bottom-up Stock picking to be that. And as Sam alluded to, that was the case last year. and hopefully, will continue to be the case going forward. Secondly, long term. So we typically have a holding period of 3 to 5 years. And similar to bottom up, this is not because this is the only way to manage money. This is just leveraging what Sam and I are good at. Our heritage is long-term, bottom-up stock picking. And then the healthy byproduct obviously, is that you reduce transaction fees. The one sure way to lose money in this industry is to trade too much. Sam and I are very aware of that, and we have one of the lowest transaction fees of any Fidelity fund. And then lastly, caution. Sam and I spent much more time thinking priority #1, 2 and 3, how do we avoid losing all of your capital or how do we avoid losing as much as we can. And that manifests itself in different ways. Firstly, at the stock selection level, we look much more at downside scenarios rather than blue sky. What can go wrong rather than kind of stuck 2 to 3x over the next 6 months. And then at the fund level, we aggregate in a way that is very benchmark away, we keep our sector weightings to plus or minus 5%. And in that way, we might never be on the front page of the Financial Times for good reasons, but we'll never be on the front page of financial times for bad reasons either. And then within that, our primary goal also, as Sam alluded to, is to outperform post fees by 1% to 2% per year. And in serving that purpose, we'll make sure that we're always fully invested. You give us your money to invest, and we will make sure that we do exactly that. So this is a slide that people may have seen before. In particular, on the right, this is one of my favorite charts if I had my way, the chart had been the loop, it's so beautiful, but that maybe says more about me than about the chart. But what this chart is showing is if you look at the 5-year bar, there were 38 companies over the last 5 years in Europe that consistently year after year, grew their dividends. And you can see the quantum of outperformance versus 281 companies in the orange bar too, at some point in time, shrunk or cut their dividends or held their dividends even is massive. And we've sliced and diced this data a number which ways over 3 years, 5 years, we recently did it for the U.S. market just as out of interest. And the same conclusion holds over any long enough time period that companies that consistently grow their dividend outperform those that don't. And you might say, well, the past is no guide for the future. And I would agree with you, those 38 stocks in the blue bar aren't unlikely to be the same 38 going forward. And the secret sauce comes into actually predicting which are those 38 stocks or could be higher going forward. And in doing that, we look at the attributes that are on the left as kind of signposts. So we look at positive fundamentals, disciplined use of capital, proven business models, strong balance sheet, cash generative. All of these, it's not illegal to pay if that's a dividend out of a weak balance sheet, obviously. But for a 3- to 5-year time horizon, it's probably not sustainable to do so. And then if we've got all of that right. And if we somehow -- if we've managed to make sure that we're fishing in that pond of blue bars, there's only one way we can still go wrong and lose money is so we've overpaid. And that's why the and is meant to be big and bold, its dividend growth at an attractive valuation. It's not dividend growth at any price. So summering up, it's consistent dividend growth, which outperforms the market over time. And if we do our job well, we'll be playing in that blue bar. And as a result, the trust will outperform too. So let's bring this a little bit to life with one of our new holdings. So this is Puma, which we bought early on in the year. I'm sure most people are broadly aware with the #3 sporting goods company in the world behind Nike and Adidas. But let's view this through our lens of dividend growth. Firstly, historical dividend growth has been consistent and has been attractive. So that's tick #1. But then going forward, that's obviously not a guarantee that it will continue to be so. So first and foremost, we look for positive fundamentals. Is it a good industry? Sporting goods is a fantastic industry because you have a number of structural drivers. You have the move towards healthier lifestyles, particularly post-COVID. You have athleisure movements where sporting goods is kind of blurring the lines with fashion. You have structural growth through younger consumers through Asian kind of middle class emerging, and all comes together to be a really nice long-term structural growth in the industry. So that's the first tick. Then what about Puma within that, Puma within that has very strong brand history great distribution. And in most markets, particularly in the U.S., that brand awareness is much, much higher than their market share. So people know their brand recognize that like the brand much more than is currently reflected in their sales. And U.S., obviously, is a great market to be leading in because often who leads particularly in kind of the athleisure movement in the U.S. tends to lead in other parts of the world, too. So all of that together means Puma should be outgrowing and a really nicely structurally growing industry. and then can close the margin gap with peers. So Puma around 8% margin, Adidas targeting 12% to 14%, Nike already at 14% targeting to go higher, you should get nice margin expansion too at the same time. So positive fundamentals, tick. Next question, bottom left. What about the balance sheet, very healthy 1x roughly Net debt-to-EBITA generally cash-generative business, as you can see in the bottom right over there, very strong cash conversion. So tick tick tick for all of the future outlooks for dividend growth. And then as I mentioned, the only way we could still go wrong if all of this, we've gotten right, is if we overpay. And here, the valuation for Puma looks very attractive, in particular relative to recent history. It's a 2% dividend yield, 20x, 22x PE, that was well North of 30x at various points. So we got in -- after the share price had already fallen quite materially last year. And as a result, it looks very attractive for a double-digit dividend growth going forward. And with that, I will hand back to Sam. Thank you very much.

Thank you, Marcel. Okay. So in terms of recent activity, it's picked up a little bit -- some of you may have noted that we've been sitting on our hands a little bit for the last couple of years. And certainly in the first quarter of this year, we decided to pull the trigger on a number of names. Yes, it was a bit of a crisis in 2022 in the stock market. But as you all know, crisis often produces opportunities. And a number of long-duration names that are quite often moving up and down the stock market based on what bond yields are doing, actually sold off very heavily in 2022. And a number of these names that we purchased, like Lonza Group, DSM, Rexel, Tecan and Puma, are companies that we have coveted for many years, but they've always seemed a little bit out of touch in terms of being a little bit expensive, but a number of them fell as much as 50% last year as bond yields rose. And we view that maybe we're not buying at the bottom, but it's a good opportunity to get in a good entry point. Likewise, we had a few companies where we have gradually lost confidence in their ability to grow the dividend sustainably going forward. One or 2 of these are already on the NorthSteppe, in that they had already cut dividends. So Grifols being a case in point, where also we felt that the leverage was too high. But a number of them have not yet cut dividends, but we feel that the current level of dividend may be unsustainable. So Telenor, Telecoms business, which has a growing debt pile and also is not currently covering its dividend through its cash flows. Fielmann, which had a difficult time in recent years and has stopped growing its dividend. So -- and then finally, Christian Hansen actually, we sold because that was 1 of the takeovers that was taken over by a company called Novozymes, and we decided to sell out on that takeover. So activity has picked up a little bit recently, but I want to reassure you that we're not now becoming training bandits or anything like this. We're still very keen on our long-term hold -- Buy and Hold strategy. And I suspect that the turnover will return to more muted levels going forward. But certainly, the crisis of 2022 in the stock market threw up some good opportunities. And that's the real reason or the main reason why activity has picked up. So as I say, this is -- this activity has helped to refocus the company on dividend growth in many of the companies that we sold. We're not growing their dividends. The ones that we bought, we think can sustainably grow their dividends going forward. So what about the outlook? I mean I think you know they're always gloomy about the outlook, no change, I'm afraid. We are somewhat gloomy -- there's been one big dark cloud on the horizon now for almost a year, which is the inversion of the on-deal curve in the states, where 2-year bond yields have risen above the 10-year bond yield. And many of you all know that, that in the past has often been a very good predictor or a reliable predictor of recession, right about 80% of the time. The problem is, it's a bit like when a big dark cloud appears on the horizon, you say, well, it might rain in the next week. It can often -- there can often be a big lag before the recession hits can be anything from 6 months to 3 years and we're already 1 year in. But we've recently seen some other dark clouds appear on the horizon. And these are things that certainly worry us and our macro team and to be frank, probably worry Marcel and I as well. Obviously, we saw the collapse of the Silicon Valley Bank in the states and the collapse of a number of regional banks. And certainly, since then, we've seen quite a tightening in credit conditions in the U.S. That's usually not a good lead indicator for economic growth going forward. And as you all know, the U.S. is super important in this respect. When the U.S. sneezes, the rest of the world catches cold. The U.S. debt limit, I'm sure we'll be talking a lot more about that in the coming months. It's going to be a lot of brinkmanship between Republicans and Democrats. But if the U.S. government has to stop paying its bills or has to stop paying wages. That's not going to be fun. I can tell you, and I'm sure will cause quite a lot of ripples in the stock market, perhaps as soon as the summer. Earnings. What about earnings in Europe? Marcel actually did a really good question or an answer in the annual report about the outlook for earnings. Earnings aren't growing in Europe. We actually think this year, it's likely that earnings will fall in Europe. And given what stock prices have done in the last 6 months or so and the fact that valuations are now back to midrange levels, that's not a healthy combination. And of course, geopolitical tensions. I mean, I guess the war in Ukraine has sort of ground down to a halt. It's likely that things will start up again there fairly shortly and the ongoing tensions between U.S. and China, I don't think we see those going away either. So we do see a lot of dark clouds on the horizon. And -- are there more crises coming? Well, I think an economic crisis in the U.S. is quite possible towards the tail end of this year or into next year. So that's all very gloomy as usual. But please don't get too depressed and please do continue to think about that beautiful Lake Hallstatt in Austria and stay, Serene and calm. Because as we've seen before, these crises come and go. But over time, equity markets do rise. So please hold fast. It may be a wild ride, but hold on and sit sure, sit sure in the knowledge that in the long term, equities do rise and in the long term, attractively valued dividend grows will outperform. So thank you very much for listening. And Marcel and I'll be delighted and, the Board as well, for any questions.

And may I just say before we invite these questions. Thank you, Sam and Marcel for a very lucid explanation of what you do and how you do it and why you do it. And we very much take the message that you look very cautiously after shareholders' money, but that given the long-term dynamics of markets and how to outperform those markets, you concentrate our investments on companies that are able to grow their dividends. So many thanks. So for those shareholders asking a question remotely, your questions will be put to the meeting by Clare Dwyer on my left here. And 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, indeed, on the presentation that has just been made or on wider questions of Board governance of the Trust, a personal response will be provided in writing after the meeting. So now I will take the first question from the floor. And then with your permission, I will alternate between questions from the floor and questions which have been submitted to us electronically and potentially grouped together. So if you have a question, please raise your hand. And when invited to speak, if you could clearly state your name and, if relevant, the name of the organization you represent before asking your question. So the floor is, as we're now open both physically and remotely for your questions. Can we have the first question from the floor.

I'd just like to make a comment, the New York Stock Exchange closed in [ 1914 ], there's no banks or any stock exchange in Europe closing to the geopolitical sectors. You concentrate obviously on companies for other than companies, but do you have a favorite strong economy in Europe? And secondly, the company to invest in all of the large nationals or any component of their own markets.

Yes, I would say that large multinational I mean it's amazing actually Eurozone represents less than 30% of the sales and profits of the benchmark we're operating and Europe, less than 40%. And generally, as it says in the annual report, we're focused on larger companies. So they tend to be very global by nature. Obviously, banks is a bit of an exception to that. Banks tend to be a little bit more national. So we own -- Intesa Sanpaolo is probably 90% Italy. DNB is probably 90% Norwegian. So there are some sectors where they're much more national. But I would say, buy and large, for the portfolio, it's very multinational. And then just to answer your question on the countries -- very quickly. That's the breakdown by country. But this is -- this is a little bit misleading because this is basically done by where the company is headquartered. So you can see that generally, we are quite overweight French companies. Why is that? And generally, they just had some great companies. So LVMH, Essilor in the luxury space, some very good long-term, long-duration dividend grows. So we've ended up, this is really more of an outcome than an input. We haven't said -- we like the French economy, we think it's safe secure. We think Macron is a great guy, et cetera, so we're going to buy French companies. This is an outcome of company stock selection, and we just end up overweight French companies. And interestingly, we ended up really quite underweight German companies. Again, it's not because we have anything against Germany. It's just that Germany is the home of many large industrial conglomerates, so a company like Siemens or a company like BASF, et cetera. And we tend to -- we tend to invest in these large conglomerates because we think we can find the bits of them that are the most attractive. So like, for instance, that's our system relative to Siemens, D&I sector or something of that nature. But based on where companies are headquartered, this is -- yes, this is the outcome. And you'll see interestingly that Switzerland is crucial. Switzerland has some massive companies like Nestle, Novartis, Roche, et cetera. We're generating a little bit overweight there as well. So that's the split of the portfolio based on where the companies are headquartered. But then we also have another split, which I think is quite interesting that we should probably talk to briefly. This split of the portfolio in blue by value relative to the index weight. And this is by see-through revenue exposure. So that's taking that French company for instance and saying, where do they do their business, where are the sales or profit that expect might be in North America, 10% might be in UK and then splitting it up on that basis. And you'll see that we're pretty much in line, slightly underweight, Continental Europe. But you can see the figure, it's only, what 32%, and that's amazing, isn't it? The stock market of Europe, sales and profit coming from Europe is 1/3. I mean it's a bit like the U.K. market, right? I'm sure you've probably seen that market. Emerging markets is very important. And China is quite a big element of that. So if China does a Russia watch out. Emerging markets as much as 30%, North America, very important as well around a quarter. [ Durood ] U.K. used to be 6%, now about 4% and actually outstrip now by developed Asia. So that -- I mean, I think the key point on this chart is that we're very similar to the benchmark. Why is that? Because we actually have quite a benchmark aware approach and we tend to be quite similar to the benchmark on sectors. We try not to get outside plus or minus 5% on the large sector groupings. And I think the result of that is we tend to be quite balanced across all these sorts of macro factors including regional exposure. I personally think this is much more meaningful than the previous chart about where the business is based. We don't tend to look at that so much. Hopefully, that answers the question.

So I was promised we're now going to take a question submitted electronically.

So Sam and Marcel, can you explain the difference between the European Trust open-ended Fidelity European funds.

Yes. I mean they're very similar. So the overlap on the underlying portfolios will be about 97%, 98%. And Obviously, the investment trust has 1 important differentiator, which is its ability to gear. And as I said before, we've now, for a couple of years, gone to a higher fixed level of gearing of 10% to 15%, which we think will give the investment trust a nice boost over market cycles. But obviously, it will be a distractor in down years and an enhancer in our peers. The other main difference is that we can use contracts for differences in this front. We use those to achieve gearing, but we also occasionally use them to go short single stock names. That's never going to drive the performance of the portfolio, but it gets us access to the shortening of resource at Fidelity, which is quite helpful. And occasionally, hopefully, we will make a little bit of added value through our shorting activity. But I would say those are really the main differences. I don't know if there's anything else.

Other question from the floor?

Thanks for the presentation. Just some years ago, I think the policy changed to make the trust focused on dividend growth and dividend growing companies. On that basis, do you invest in non-dividend stocks. I think a process, which you've now sold, I don't think, pays a dividend. And do you want to what percentage of the portfolio is in non-dividend-paying companies? And then secondly, your objective, obviously, to be in these companies that have sustainable dividends and growing dividends. Does that contrast somewhat were being in cyclical sectors such as oil companies and banks which are perhaps not best known for being able to sustain and grow dividends.

Yes, sure. So I would say, in the normal state of business, we would very rarely own a company that doesn't pay a dividend. And the reason why I say in the normal case of business was during COVID, we needed to be a bit pragmatic because obviously during COVID, a large number of companies stopped paying dividends not necessarily through their own choice, regulators often came in, in banks, for example, or in luxury or other places. So we needed to be a bit pragmatic there. Otherwise, you would have churned half the portfolio, and that would have been contrary to low turnover long-term focus. But barring that, I would say, hence, we're getting back now finally thankful into a normal world, it's very rare that in fact, we would never buy a company that's not paying a dividend. And the company in the holding in the portfolio, so that's already there needs to have a very, very good reason for us not to sell it if it's cutting its dividend. Process is an example of a company that did pay a tiny dividend, and that's okay. We have holdings, particularly in tech or some of the higher multiple names, they pay a very small dividend. But as long as they're consistently growing, you can actually make very good returns from that still. And dividend growth, if you look at stock like ASML, from a very low level, can grow to a very high level over 5, 10 years of compounding. And then your second question was -- sorry?

Second question...

The focus of the trust

Banks and cyclicals.

The areas that are -- those companies don't do necessarily be able to sustain and grow dividends as banks often blow up and...

Yes, obviously. Yes. So firstly, we value the balance of the portfolio. So as we said, being plus or minus 5% within the sector weight, gives us that balance and that means that we do run it as very benchmark aware and so even if sectors such as banks or others or commodities are much more cyclical, we value having that balance so that it has happened last year, while realities very strongly, we won't get carried out on a stretch yet. But actually, even within that, you'd be surprised. Some of the majors like Total, despite being in a very cyclical underlying industry, actually build up buffers and are able to have relatively stable dividend growth as the trust has been able to do, too, through building up reserves in the past. So I wouldn't say that just being in a cyclical industry excludes the company entirely from progressive dividend growth.

I mean, famous last words, but Total actually was the 1 oil major that didn't cut dividend in the last downturn when Shell and others did. And I think they really pay a big focus on the sustainability of that dividend and the growth of that dividend over time. They are currently growing their dividend from the very attractive yield level and the combination of yield and dividend growth adds up to more than double-digit tier, so without assuming any sort of rerating on the stock, and it's not a particularly expensive stock. But you're absolutely right. I mean banks are always tricky, but banks is a big part of our benchmarks. So I think we're not going to be naked on banks. And we've been able to find -- generally, we focused on more plain vanilla sort of retail banks that are sort of national champions in their areas. So like DNB in Norway or KBC in Belgium. And these are generally banks that earn pretty good returns on tangible equity. And generally, over time, they've been able to compound and actually grow their dividends. Now obviously, during the pandemic, the ECB said, you can't pay a dividend. So then we had to be a little bit pragmatic. But you're absolutely right. I mean it's a challenge, but we think that the balance in the portfolio is extremely important. So we try to focus on those companies that we think are best-in-class in terms of their focus on dividends and dividend growth.

Thank you. our electronic shareholders are proving a little bit shy, so we can take another question from the floor.

I guess, everyone would like to buy on an attractive valuation with -- and of course, attractive is a matter of opinion and an attractive doesn't stop it being even more attractive tomorrow. How do you mitigate against that sort of thing?

Yes. No, it's very hard because people often ask me about RMS because of RMS, I mean, the only thing that's more expensive than their bags of the shares. And it is challenging I mean, it actually generates a decent free cash flow pays a reasonable dividend yield does grow the dividend attractively over time, but still the valuation is right up there. I actually think -- generally, what we've seen over time is that, that level of valuation has been sustained. And the shares have performed in line with the earnings and dividend growth. But it always feels a bit uncomfortable, which is why it's not right at the top of the list as a holding. And I think when we feel we tend to track it relative to its typical historic range and when we feel it's getting towards the higher levels, which it probably is now and actually the luxury sector as a whole is getting towards the higher levels relative to its historic range. We will trip -- but if we feel that the fundamentals are still positive, the underlying fundamentals behind the company is still positive, which we do, especially with the China reopening, we won't sell out. So we tend to add and trim based on where we think the company is in its valuation range. And we think we add quite a lot of value through that process. And we tend to only really sell out if the dividend policy changes, i.e., they cut or hold their dividend or if we think the fundamental reasons for only the company have changed. So that's not a very scientific answer to your question, but that's how we do it. We're more -- probably more artists than scientists.

I think the related to the opposite side of that is how do we make sure that we're not buying a stock all the way as it keeps on going down and gets cheaper, cheaper, cheaper, all the way to 0 potentially. And that's where Sam and I have something that Peter Lynch is a big advocate, I've called the 3 reasons sheet. And it's very simple. Just if you can't fit to your 3 reasons why you own a stock on a simple A4 piece of paper is either too complicated or you can't articulate it, well, neither of which you should be earning. So when things, for example, like the private equity names that we highlighted that are going down, down and down. we refer religiously back to that 3 reasons sheet are our original 3 reasons still valid. If yes, then we can top up. If not in the case of some of the disposals that we made at the beginning of the year, then we sell at a loss. That's fine. We pack up and try again better for the next one.

And of course, most of our managers, we get it right about 50% of the time, and we get it wrong about 50% at the time, but hopefully, the performance would suggest that we're a little bit more right than wrong.

Further questions?

Thank you. So some argue that why the investment read at met for a fund, the more opportunities it has, for example, a global fund has more opportunities and obviously, Fidelty European is Continental Europe. Without the U.K., although it can buy some U.K. stocks. I'm sure that you've seen the backdrop of de-equitization, the number of U.K. shares are supposedly fallen 40% since 2008. I assume that's the same in Europe. There could be an argument to say that this trust is a great remit, but perhaps it could include the U.K. as well just so that -- I think the less so because if you're European, Europe is probably the second best place to invest after U.S. And the quality of the European stocks is mixed. So there's more scope for an active manager to add value. But I think with the number of stocks falling globally and especially in Europe, I mean, Linde, I think, was just moving to the U.S. Is there not a case to say that if your performance and diversification will be better if it was pan-European, that there's not a good case of doing that. And whenever that's question put to an investment trust manager, they always say, investors don't want it, but which investors wouldn't want better performance and more diversification by being Pan-European. I guess that would be my argument just because of the context of fully number of shares that, that might be advantageous potentially.

I completely understand your question. I'm quite sympathetic with it [ Nache ]. And actually, quite often, we've had this debate with the Board over time as to the fact that we constrain ourselves to investing in companies that happen to be headquartered in Europe, why do that. As regards to the U.K., we do actually research the sectors on a pan-European basis. And I used to be a U.K. fund manager, so I'm very familiar with the opportunities in the U.K. and we do have the ability in this fund to invest up to 20% of benchmark. So in theory, I could go up to 20% U.K. And I do have a couple of holdings in the U.K. So I own 3i Group and also Intertek. But generally, when I'm investing in U.K. companies, I only do so where I feel that there's a good argument that there's a big sort of European influence there. So 3i Group, obviously, it's key holding is action, which is a Continental European discount retailer doing fantastically well. Intertek competes with Bureau Veritas and SGS. So there's sort of a European competition angle there. But I think if we felt that there was a wonderful opportunity in the U.K., and there's no reason why we couldn't take advantage of that. Having said that, I mean I completely understand from an intellectual point of view, the argument about why constrain yourself to European companies, why not be global, for instance. And I understand your point about surely, that gives you more opportunity to make money. The only thing I would say is maybe it also gives you more opportunity to lose money because if you have a broader benchmark you probably don't know it quite as well, right? Whereas if you know you're smaller, more defined benchmark, you maybe will be a little bit better at avoiding those big losses. Investing company that you don't know so much about that then goes down 100% on you. And I'd love to see the academic write-ups on this and the theories on this, i.e., do actually global funds outperform the best of regional funds stitched together as a global fund, if you understand what I mean. And it's something I'm going to do when I retire, which I should hasten to add is not going to be until at least 65, which is still 5 years away. But I'd love to do that academic research. I think it'll be fascinating because your point is the breadth should give you more opportunity, therefore, higher returns. I'd love to see academic proof of that. I'm not sure it's actually necessarily true.

Just closer to the ground module and these [indiscernible] so just in Europe and Europe as a less efficient market that may be held out for.. And so -- and I think that's well as it's been a disease Europe has pretty top of mixed quality companies. And then yes, there is oftern this thing that global helps [indiscernible] the question essentially.

Well, if I can add an observation as channel responsible for picking the stock. But I'm very glad in the light of recent history that we weren't pan-European. I'm not sure if we were the weather would have been substantially invested in Russia, but that was a big problem for more pan-European based funds. But taking the positive attitude, as you clearly do so. There's always an opportunity set out there. So you can be sure that this is something we will continue to discuss. But I think to some extent, that opportunity set is covered by being allowed to invest 20% outside the benchmark. And that could incorporate not just U.K. companies, it could incorporate wider Europe it could even incorporate global companies, the 1 condition being that they have a substantial interest in Europe, which our managers think it's a good idea to get involved too.

Yes. The only thing I would add is that we actually are quite bullish on Europe right now. And the reason for that is simply this chart up on that we put up on the screen. This was the greatest trade that there ever was almost over the last 15 years, long U.S., short Europe. And if you take out your magnifying graphs, you can see right at the end that Europe is facing a very valiant recovery. And this doesn't -- in light of what we said before, European companies only getting 1/3 of their revenues from Europe and being equally global to U.S. companies, this doesn't really make a lot of sense to us. And who knows what the Spark will be that states more valiant recovery. But Philip Morris was a great example, acquiring Swedish Match, a company that had a big U.S.-based business in [ Zinc ]. We might see investors looking at it in the same way and saying, "I can get $1 for $0.80 and looking at Europe much more attractively." So Yes. We don't -- I don't know if even if we could invest in U.S. if we would go big because we actually do like the setup for Europe right now.

And you mentioned companies moving their listing from Europe to the U.S. So CRH, Linde ,Ferrovial, that suggests to us that there is actually a postcode discount for similar sorts of companies because they're moving to U.S. because they think they'll get more liquidity and they'll get a higher valuation. So that, again, I think suggests to us that maybe Europe has got too cheap. And it's not just about sectoral mix, it is also cheap on a postcode basis.

Now I'm aware that time is marching on, and I don't want to deny shareholders or delay shareholders getting their lunch. But on the other hand, I'm also keen to answer any further questions you may have. So are there any final questions you'd like to ask?

Well, it's just a comment really before you start changing thinking of changing your mandate, the responsibility of the diversification in my portfolio is mine. If you buy 1 global, i'll buy global as well as European, I want somebody who's going to manage Europe for me, which is different.

The point is well made and in the unlikely event of there being any change in mandate, which is usually a disaster for fund manager contemplating it, we would, of course, have a full consultation with shareholders. But I think you'll find that in our view, the opportunity set given by current disciplines is sufficient to enable the fund managers to give us their best on your behalf. With that, therefore, it looks like our last question. And so I'm going to ask therefore, that the poll is now closed and recognize that our formal business has now concluded. And with the poll being closed for those of you in the room, your poll cards will now be collected in order to be added to the final tally of the votes, which are being kept by our registrars. That, ladies and gentlemen, concludes the formal business of this Annual General Meeting. The proxy votes submitted in advance are going to be shown on our screen. After we conclude. Okay. Thank you. and are also available from our company Secretary, [ Smitha Amin ]. And so the final voting results will be posted on our website as soon as possible, incorporating among other things, the votes we've received today on the poll cards after being scrutinized by our registrars, Link Group. So thank you very much for attending today's AGM. And indeed, if I may say so, for your continued support as shareholders. It goes without saying, but I think it is worth saying in the final analysis that we couldn't do this without you, you are the most vital element of this trust. So many, many thanks for that support. And may I invite you to join the Board and the Fidelity team now for some refreshments. Thank you very much for coming along today. Much appreciated.