Fund manager's report

The financial year ended 30 June 2026 was a positive one for European smaller companies. The first half was shaped by a capricious US tariff policy, which weighed on corporate decision-making, a sluggish Chinese economy attempting to reignite growth through aggressive export-led stimulus and increasing scepticism over the German government's ability to deliver its promised infrastructure investment programme. The second half brought a very different set of challenges and opportunities, characterised by first an AI-driven market euphoria, followed by a sharp correction, and culminating in the US and Israel's conflict with Iran, which led to the temporary blockade of the Strait of Hormuz. Against this backdrop, markets experienced significant volatility throughout the year. Despite these headwinds, the Company delivered a return of 16.8%, compared with 12.4% for the benchmark, resulting in outperformance of 4.4%.

Although tariffs, elections and geopolitical conflict provided a volatile backdrop, the dominant investment theme of the year was the market's rapidly strengthening belief in the transformative potential of AI. From February onwards, investors increasingly viewed the market through a binary lens of 'AI winners' and 'AI losers', frequently overlooking the nuances of individual business models and competitive positions. This environment created both opportunities and challenges for the portfolio. We benefited from our exposure to several businesses aligned with AI infrastructure investment, yet several holdings were adversely affected by perceptions that they faced disruption from AI. In our view, the market often applied these labels indiscriminately, rewarding some companies while penalising others with limited regard for the durability of their franchises or the strength of their underlying fundamentals.

AI - the winners and losers

Within the 'AI winners' German listed semiconductor equipment producer of lithography, wafer bonding and photomask processing tools, SUSS MicroTec, was a substantial contributor to performance. The tools produced by SUSS MicroTec are used for the wafer-bonding and advanced packaging equipment used in the high-bandwidth memory and chiplet architectures that underpin AI accelerators and GPUs. In lay terms SUSS MicroTec provides the equipment used to make the brains behind AI computers. Other notable AI winners include Norwegian listed Smartoptics that provides optical networking solutions and devices being used in datacentres using their high-speed fibre optic links to move data between servers and sites. German listed PVA TePla makes metrology machines used to inspect the advanced semiconductor chips that power AI systems. German listed Aixtron sells the specialist equipment used to make the power semiconductors and optical chips that help AI datacentres run more efficiently and move data at higher speeds. ams-OSRAM provides laser and photonics components that also helps data move between AI chips and servers more efficiently. German listed PFISTERER provides the high-voltage cable connection technology needed in the grid to meet the power demands of datacentres.

The 'AI losers' in the portfolio that hurt performance include Swedish listed provider of legal information services Karnov. The shares took a precipitous lurch down in February after Anthropic launched a legal workflow processing module for their Claude AI model. We underestimated the risk of the stock being labelled as an AI loser because Karnov owns the data being used in its markets and has developed and launched its own AI tools that it is already selling to its clients in Sweden and Denmark. Given the proprietary data, in-house AI tools and substantial cash return programme from the company we have persevered with our position but are monitoring it closely. German listed provider of web hosting and cloud service solutions, IONOS, was also labelled an AI loser and burdened the portfolio. The AI loser thesis revolved around the idea that AI would disintermediate the use of websites and that companies would no longer bother to have them and thus host them on IONOS's datacentres. We find this argument unconvincing. Company websites are the shop window to the world, and we don't anticipate their demise any time soon. IONOS are actively selling AI tools to small businesses in their markets and in due course we expect it to shed the AI loser label. German listed provider of IT consulting services, Adesso, has also suffered under the AI loser label. The capacity of the AI models to provide computer coding skills has meaningfully lowered the cost of providing software and technology know how which might reduce the need for consultants, lower day rates and perhaps drive insourcing. As it currently stands customers seem to be asking for more help as they wrestle with how to benefit from AI within their businesses. We have held on to the position but with added scrutiny. Spanish listed HBX, that provides a cloud-based technology platform to link travel companies and hotels suffered from being seen as an AI loser, whilst also seeing a decline in US travel after tariff announcements and then later in the Middle East after the war in Iran started. We believe that its deep database and proprietary data means it is well positioned to take advantage of the changes AI will deliver.

The portfolio

Outside the AI theme, other stocks that contributed positively to performance include German listed producer of automotive semiconductors, Elmos Semiconductor ('Elmos'). Elmos manufactures sensors that make cars safer, smarter and more comfortable. Cars are increasingly becoming mobile computers and Elmos is seeing fast growth as their products become more intensively used by global automotive original equipment manufacturers. We believe Elmos remains well positioned for increasing semiconductor content within advanced driver assistance and autonomous vehicle applications. Elmos also has a number of clients in the humanoid robot sphere. Intriguingly the shares have correlated with the AI winners, though their products are not directly impacted by the AI capex theme.

UK listed IG Group, the provider of a global online trading platform that enables retail investors to trade financial markets, saw strong customer growth and strong trading that helped drive the stock's rerating. Swedish listed Acast, that provides a global podcast platform used by creators to host, distribute and monetise their podcasts by connecting them with advertisers and audiences continued to drive strong topline growth and delivered good performance for the trust. Swedish listed online department store, Boozt, has had strong performance as the Swedish consumer recovery begins to materialise.

Other detractors include German listed Stroeer, the leading operator of billboards and digital advertising screens in Germany. They had a tough set of comparative numbers after a strong 2024 and as bid speculation fell away. Swedish listed Lindab, that turns sheet metal into ventilation products and building profile business that makes products like wall cladding and rainwater systems has missed forecasts as the Profile business is exposed to new-build construction that has remained soft in Sweden. Swedish listed Bonava, that builds houses in Sweden and parts of northern Europe, endured weak trading for the same reason. German listed forklift manufacturer Jungheinrich performed poorly due to weak end markets, having to close its Russian subsidiary and a strike at its main production plant.

Geographical and sector distribution

The portfolio carried a substantial Information Technology overweight in the period. This allocation effect, combined with strong stock selection, drove the performance of the portfolio. Other positive IT contributors include Swiss-listed provider of geolocation technology u-blox, which was acquired by Advent International; Swiss-listed Inficon, which produces vacuum instruments to monitor and control production processes, also did well. Swedish-listed distributor of printed circuit boards NCAB and Swedish-listed producer of semiconductor equipment Mycronic, also contributed positively.

The portfolio was mildly underweight Financials, but stock selection made for a strong contribution to returns in the period. Exposure to southern European banks such as Banco Comercial Portugues in Portugal, and Alpha Bank, CrediaBank and Optima in Greece, delivered good returns for the portfolio. Our positions in German listed retail trading platform, flatexDEGIRO and Dutch wealth manager Van Lanschot Kempen also did well.

Conversely poor stock selection in Industrials weighed on performance with names such as Norwegian listed producer of reverse vending machines, Envipco, struggling as governments shifted decisions to later time periods for bringing in legislation mandating the use of machines for collecting deposits on plastic bottles. German listed defence equipment manufacturer RENK burdened the portfolio in the period. Our underweight position in Energy further weighed on performance after the price of oil and gas spiked following the closure of the Strait of Hormuz.

The portfolio remains heavily overweight Germany with a mixture of domestic exposure such as IT service and equipment provider, Bechtle, and more internationally focused stocks such as specialty chemical producer of creatine and nitroguanidine, Alzchem. The travails of the German economy are widely advertised with significant challenges in the automotive sector weighing on the economy. The prejudices about this market have created the opportunity to buy some great businesses at great prices. We have also built an overweight position in Sweden. Swedish small cap has been facing significant outflows following a period of weak performance and the consolidation of Swedish public pension providers has created some forced selling of Swedish smaller companies. We have taken advantage of this period of dislocation to build positions in some mispriced companies. We opened a position in Swedish housebuilder JM as we see a housing recovery coming in Stockholm and expect the rest of Sweden to follow suit. We invested in Asmodee, a leading provider of board games and trading cards such as Pokémon. Other new positions in Sweden include organ transplant technology company, XVIVO, leading manufacturer of bike racks, cargo carriers and hitch solution for vehicles, Thule, and software provider for cancer radiation therapy RaySearch Laboratories.

We have large underweights in Italy, Switzerland and Norway where we struggle to find attractively valued companies.

Other purchases

We started a position in German listed provider of children's storytelling entertainment products, Tonies. As part of our integration of EAT, we inherited a position in Danish bank, Ringkjobing Landbobank that we have maintained. We took part in initial public offerings of Finnish provider of office pods, Framery, and Austrian truck mounted crane business, Palfinger.

Other disposals

We exited our position in Spanish credit insurer, Grupo Catalana Occidente, which was taken private by the controlling family. Irish hotelier, Dalata, was also taken private as was Hellenic Exchanges, the Greek stock exchange and German branded pharmaceutical company, Dermapharm, was de-facto bought by the founder.

Currency

The Company is denominated in sterling, while investing in largely euro-denominated assets. We do not hedge this currency exposure.

Outlook

Recent years have seen consistent disruption that has sucked the momentum out of a European recovery. 2024 had the disruption of UK, French, German and US elections. 2025 had Liberation Day tariffs. 2026 had the start of a war in the Middle East and the fear of a further energy shock. Despite the recurring setbacks there are plentiful reasons for optimism. An energy shock was absorbed by the global economy with little drama and no spike in inflation. Indeed, the global economy seems to be growing far less reactive to the statements coming from the US administration. German stimulus in defence is coming through and there is the strong prospect of the infrastructure spend to follow in 2027. Despite the frequent assertions to the contrary, Europe has a thriving technology sector, much of which resides in the smaller company arena and is benefiting from booming orders as huge AI capex spending comes through from the US technology majors. European smaller companies lead in niches such as industrial automation, specialty chemicals, medical technology and machine tooling. We operate in a universe with considerable innovation, robust balance sheets and attractive valuation. The asset class remains fundamentally under-owned providing an environment rich in opportunities. We are firmly focused on deploying your capital towards undervalued companies with considerable potential across the entire region.

Ollie Beckett, Rory Stokes and Julia Scheufler

Fund management team

Our principal risks

Investing, by its nature, carries inherent risk. The Board, with the assistance of the investment manager, carries out a robust assessment of the principal and emerging risks and uncertainties facing the Company which could threaten the business model and future performance, solvency and liquidity of the portfolio. A matrix of these risks, along with the steps taken to mitigate them, is maintained and kept under regular review. The mitigating measures include a schedule of investment limits and restrictions within which the fund management team must operate.

Alongside the principal risks, the Board considers emerging risks, which are defined as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of the probability of them happening and the possible effects on the Company. Should an emerging risk become sufficiently clear, it may be classified as a principal risk. During the year under review, the Board did not identify any emerging risks which were not already encompassed within the existing principal risks. The assessment included consideration of the possibility of severe market disruption.

The principal risks which have been identified and the material controls in place to mitigate these, are set out below. The Board does not believe these principal risks to have changed materially over the course of the year.

Investment strategy and objective

The investment objective or policy is not appropriate in the prevailing market or sought by investors, leading to a wide discount and hostile shareholders.

Poor investment performance over an extended period leading to shareholders voting to wind up the Company.  This may be the result of:

·      external factors such as notable advancements in technology, geopolitical instability, financial shock, pandemic, climate change, changes in the regulatory environment, etc.

·      internal factors such as poor stock selection, poor management of gearing, loss of key members of the fund management team, etc.

Investment mandate limits established by the Board are inappropriate leading to out-of-scope investments which may negatively impact shareholder value. 

Material controls:  The Board periodically reviews the Investment Objective and Policy in line with best practice and taking account of investor appetites.

The Board receives regular updates on professional and retail investor activity from the investment manager and corporate broker to inform themselves of investor sentiment and how the Company is perceived in the market. From time to time, research may be undertaken by third-party consultants to specifically ascertain the views of retail investors.

The Board reviews the key performance indicators, portfolio composition and diversification, gearing, compliance with the investment mandate limits, the level of discount and changes to the share register at each meeting.

The Board maintains an understanding of the fund management team's investment process and considers the external and internal factors, which may impact the value of the portfolio.

The Board must approve changes to the investment limits and restrictions and reviews compliance with these at each meeting.

Operational

Failure of, disruption to or inadequate service levels provided by principal third-party service providers leading to loss of shareholder value or reputational damage.

Inadequate cyber security arrangements at the Company's third-party service providers leading to data being compromised or lost, and shareholder value impacted.

Material controls:  The Board engages reputable third-party service providers and formally evaluates their performance, and terms of engagement, at least annually.

The Audit Committee receives regular reporting from the investment manager's Chief Information Security Officer on the firm's cyber security framework, any material incidents and their oversight of the cyber security arrangements in place at third-party service providers. The Audit Committee reviews the independently audited assurance reports from third-party service providers which set out the effectiveness of the internal controls in place.  These include controls relating to information technology and the robustness of recovery arrangements.

Legal and regulatory

Loss of HMRC approved investment trust status or changes in the taxation regime applicable to investment trusts. 

Breach of the Companies Act 2006, the UK Listing Rules, Prospectus Rules, the Disclosure Guidance and Transparency Rules, the articles of association or the Alternative Investment Fund Manager's Directive.

Legal action brought against the Company/directors/investment manager leading to loss of shareholder value and reputational damage.

Material controls:   At each meeting, the Board reviews compliance with the investment mandate and testing against the requirements of the Corporation Tax Act 2010 to ensure HMRC approved investment trust status is maintained.

The Board engages reputable third-party service providers to deliver the Company's operations. Service levels are agreed and monitored, and the services delivered by the Company's third-party service providers are undertaken by suitably qualified individuals.

The Audit Committee assesses the effectiveness of internal controls in place at the Company's third-party service providers through review of the independently audited assurance reports, which include provisions regarding qualifications and ongoing training.

Financial

Market, liquidity and/or credit risk, inappropriate valuation of assets or poor capital management leading to a loss of shareholder value.

Material controls:  The Board determines the investment limits and monitors compliance with these at each meeting. The directors review the portfolio liquidity at each meeting and periodically consider the appropriateness of hedging the portfolio against currency risk.

The Board reviews the revenue statement, balance sheet and portfolio valuation at each meeting.  Holdings in the portfolio are valued in line with accounting policies.

Investment transactions are carried out by a large number of approved brokers whose credit standard is periodically reviewed and limits are set on the amount that may be due from any one broker, cash is only held with the custodian or reputable banks.

The Board monitors the broad structure of the Company's capital including the need to buy back or allot shares and the extent to which revenue in excess of that which is required to be distributed, should be retained.

Assessing our viability

In keeping with provisions of the Code of Corporate Governance issued by the Association of Investment Companies (the 'AIC Code'), the Board has assessed the prospects of the Company for a period of at least twelve months from the date of this report, being 29 September 2027 (our assessment of going concern) and also over the longer period of three years (our assessment of viability).

We consider the Company's viability over a three-year period as we believe this is a reasonable timeframe reflecting the longer term investment horizon for the portfolio, but acknowledges the inherent shorter term uncertainties in equity markets.

As part of the assessment, we have considered the Company's financial position, as well as its ability to liquidate the portfolio and meet expenses as they fall due. The following aspects formed part of our assessment:.

·      the closed-end nature of the Company which does not need to account for redemptions;

·      an assessment of the principal and emerging risks, as well as the uncertainties facing the Company, including the potential impact of climate change on the value of investee companies;

·      the diverse nature of the portfolio and its anticipated liquidity in normal and stressed market conditions;

·      the level of the Company's revenue reserves and the size of the bank overdraft facility; and

·      the expenses incurred by the Company, which are predictable and modest in comparison with the assets and the fact that there are no capital commitments currently foreseen which would alter that position.

Also of relevance in contemplating the duration of the Company, is the three-year cycle for its continuation vote. Shareholders were last asked at the annual general meeting in 2025 if they wished the Company to continue in operation. The resolution was passed with the overwhelming support of 99.8% of the shareholders who voted. The next continuation vote will be put to shareholders at the annual general meeting due to be held in 2028. Based on the voting record since 2000 for such resolutions and the recent tender offer which facilitated an exit for all shareholders not wishing to continue their investment in the Company, the Board is confident that shareholders will continue to support the Company. In the event this is not the case, the directors are required under the articles of association to put forward proposals for the liquidation or reconstruction of the Company.

As well as considering the principal risks and financial position of the Company, along with the continuation vote, the Board has made the following assumptions:

·      investors will continue to wish to have exposure to European smaller companies

·      investors will continue to invest in closed-end funds;

·      the Company's performance will continue to be satisfactory; and

·      the Company will continue to have access to adequate capital when required.

Based on the results of the assessment, we have:

·      concluded that the Company has adequate resources to meet its liabilities for a period of at least twelve months from the date of this report, meaning it is therefore appropriate to prepare these financial statements on a going concern basis; and

·      a reasonable expectation that the Company will be able to continue operations over the coming three-year period, as well as meeting its expenses and liabilities for that period.

Transactions with related parties

The Company's transactions with related parties in the year were with the directors and the investment manager.

There have been no material transactions between the Company and its directors during the year. The only amounts paid to them were in respect of remuneration, ad hoc payments in respect of additional work undertaken in respect of the requisition, tender offer and combination with EAT, and expenses, for which there were no outstanding amounts payable at the year-end.

In relation to the provision of services by the investment manager, other than fees payable by the Company in the ordinary course of business and the provision of marketing activities, there have been no material transactions affecting the financial position of the Company during the year under review. More details on transactions with the investment manager, including amounts outstanding at the year end, are given in note 21 of the Annual Report 2026.

Directors' responsibility statements

Each of the directors in office at the date of this report confirms that, to the best of their knowledge:

·      the financial statements prepared in accordance with UK Adopted International Accounting Standards give a true and fair view of the assets, liabilities, financial position and profit and loss of the issuer and the undertakings included in the financial statements as a whole; and

·      the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Daniel Burgess

Chairman of the Audit Committee