Final Results

RNS Number : 5270A

JPMorgan American IT PLC

27 March 2017

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN AMERICAN INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2016

Legal Entity Identifier: 549300QNAI4XRPEB4G65

Information disclosed in accordance with the DTR 4.1.3

CHAIR'S STATEMENT

In 2016, the US equity market, as measured by the S&P 500 total return Index, provided a return of 11.6% to US investors. This strength was considerably boosted to UK investors by the steep decline in sterling following the result of the Brexit referendum. That decline, of 16.6% over the period, resulted in an overall return in sterling terms, from the US equity market, of just over 33%. In money terms, gains on investments of approximately £153 million were a consequence of sterling weakness following the result of the UK referendum.

Absolute Return

The absolute return for shareholders has been very strong, despite a number of major surprises on the political front. The share price total return for the period was also very strong at 34.9%, which was in addition, ahead of the market return. The discount at which the shares trade narrowed over the year, as the Board stepped up its buyback activities. This return has been influenced significantly by the strength of the dollar compared with sterling and by the strength of the US equity market itself. The Company's gearing also provided a small benefit.

Relative Returns

Over the longer term, your Company has performed well: the net asset value per share has more than trebled over ten years and has also outperformed its benchmark. However, in relative terms, the past two years have been more challenging for the Company's investment approach which has led to recent underperformance. Although the share price total return was ahead of the benchmark S&P 500 Index over the last year, the net asset value total return (based on the NAV calculated including income and taking the debt at par value) was below by just over 2 percentage points. This follows a prior year of underperformance of 2.2 percentage points. However, the 10 year performance record (over which period Garrett Fish has been responsible for investment management) remains ahead of the Index.

Board Review of the Fund Management Process

The Company's objective is to achieve capital growth from North American investments by outperformance of the Company's benchmark, which is the S&P 500 Index (with both net asset value and benchmark measured in sterling total return terms).

In 2016, the Board again visited the Manager's offices in New York where it held meetings with the Investment Management team to include both Garrett and the manager of the small companies portfolio, Eytan Shapiro. The Board further met with senior management, the behavioural finance team of which Garrett is a member, the corporate engagement and the dealing teams. The Board also attended a seminar arranged with New York University, the week after the election, and received the benefit of a wide range of economic, political and social analysis, to help put the Investment Manager's views into context.

Given shorter term performance concerns, this year the Board commissioned a consultancy firm called Inalytics to assist the Board with its understanding of how the Investment Manager's investment style and actions have impacted upon performance, both in terms of contributing to, and detracting from, performance returns against benchmark. Inalytics advise the trustees of large pension funds and other institutional investors and have many years' experience of working with active managers.

The initial findings were then developed further by the Investment Manager, who completed a forensic review of his investment decisions going back over 14 years. The results suggest that the Investment Manager has demonstrated considerable skill in buying shares, over a long period, and with statistical significance. However, some of the gains derived from buying shares which then outperformed, were being given away by holding on too long to shares which did not perform well or selling shares disadvantageously.

This exercise provided both the Board and Investment Manager with useful information, which we hope will assist with shaping investment behaviour going forward. We have worked with the Investment Manager to take the lessons from the findings, as Garrett describes in his report. We also discussed the approach with the head of US equity fund management in New York. Garrett has begun to implement changes, which are likely to result in a slightly more concentrated portfolio with a greater active share, and a more ruthless approach to underperforming holdings. At the same time, the valuation bias of the portfolio has been a benefit in relative terms in more recent months.

In addition to investment management, the Manager provides other services to the Company, including marketing, accounting and company secretarial services. These have been formally assessed through the annual manager evaluation process. The Board concluded that it was generally satisfied with JPMorgan's performance. Thus, taking all factors into account, the Board concluded that the ongoing appointment of the Manager is in the continuing interests of shareholders.

Share Price and Premium/Discount

Apart from three days in June ahead of the Brexit referendum, the Company's shares have traded at a discount to the NAV throughout 2016. The Company has continued with its buy back policy, increasing levels of activity in February 2017 after persisting with the buyback programme throughout 2016. This resulted in the purchase of a total of 17,709,623 shares into Treasury over 2016, at a cost of £54.1 million. From the emergence of the discount in the first quarter of 2015, we have now repurchased 29,963,323 shares into Treasury as at the date of this statement, representing 10.7% of the Company's issued share capital at the beginning of 2015, which has enhanced the Company's NAV by 0.5%.

As evidenced above, and to repeat our statements in previous years, the Board has this year demonstrated its willingness to buy shares back when they stand at anything more than a small discount. The Board continues to remain aware of its responsibility not to let the discount widen significantly and therefore the Company will again be asking shareholders to approve the repurchase of up to 14.99% of the Company's shares at the Annual General Meeting. We will also be seeking shareholder permission to issue shares, where Directors are confident of sustainable market demand. The authority, if approved, will allow the Company to issue up to 10% of its issued share capital. The Company will only issue shares at a price in excess of the estimated NAV including income with the value of the debt deducted at market price.

Dividends

US companies continued to provide a growing dividend flow and when converted to sterling the income we received last year showed further gains. The increase in your Company's income received from the portfolio was approximately 17%. Our analysis shows that, just over 13% of the income increase over the year came from the strengthening of the US dollar vs. sterling as the dividend receipts are converted into sterling through the year as the underlying stocks trade ex-dividend. The remainder was due to an increase in dividends paid out by portfolio companies.

The Company paid an interim dividend in respect of the 2016 financial year of 2.25p on 11th October 2016. Subject to shareholder approval at the Annual General Meeting, a final dividend of 2.75p will be paid on 15th May 2017 to shareholders on the register on 18th April 2017, making a total of 5.0p per share, compared with last year's total of 4.0p per share.

After the payment of the proposed final dividend, we will have a balance in the revenue reserves of £16.0 million (equivalent to 6.2p per share or 1.2 times the current dividend). It is our intention that such reserves be used to support dividend payments when corporate pay outs are less healthy for a shorter term period, or if there are other fluctuations in the revenue account which we also assess to be temporary.

Gearing

Bar the occasional one day dip below 8% over the review period, gearing has remained within the Board's strategic gearing level of 10%, plus or minus 2% over the year. Our Investment Manager has the ability to hold cash of up to 5% of net assets if he feels there is a real risk of capital loss and we have indicated that our highest level of gearing would be 20%. Having increased its borrowing capacity in December 2016, the Company has dollar bank facilities totalling £65 million, together with a £50 million debenture. Repayment dates for the bank debt are November 2018 and April 2020; the debenture matures in June 2018. Given that the maturity of the debenture is now only 15 months away, the Board is considering replacement options carefully.

Costs and Directors' Fees

The Board continues its focus on costs and continues to consider ways to enhance shareholder value. The Board resolved again not to raise Directors' fees, so they remain at the 2015 level. However, the amount of work demanded of an investment trust director only increases year on year and hence an increase is likely for next year to ensure that the Company can continue to attract good quality candidates and reflect the workload and responsibilities involved.

The table set out below is in the same format as we have used for a number of years. It aims to shows the returns generated on the Company's investments, the extent to which the capital base of the Company has grown or shrunk through share issuance and buy-backs, and the full costs of the Company's operations. The Company's biggest cost remains the management fees at £4.5 million (2015: £4.3 million). As this fee is calculated as a percentage of assets it varies with the size of the Company and therefore rose. No performance fee was payable and a second year of NAV underperformance against the benchmark results in an increase in the negative performance fee offset. We note that the Company's Ongoing Charges remain unchanged from the prior year at 0.62% (2015: 0.62%).

	2016		2015
		Percentage		Percentage
		of opening		of opening
	£'000s	net assets	£'000s	net assets
Net assets at start of year	816,700	100.00	804,150	100.00
Increase in net assets during the year
from investing	87,077	10.67	8,567	1.06
Increase in net assets during the year
due to sterling weakness	153,000	18.73	25,000	3.11
Brokerage fees/commissions and
other dealing charges	(238)	(0.03)	(236)	(0.03)
Net investment performance	1,056,539	129.37	837,481	104.14
Income received from investing -
net of withholding tax	17,617	2.16	15,260	1.90
Interest received	77	0.01	34	0.00
Dividends paid to shareholders	(12,658)	(1.55)	(10,448)	(1.30)
Interest paid on borrowings	(4,016)	(0.49)	(3,907)	(0.49)
Currency losses on hedge	(7,174)	(0.88)	(1,968)	(0.24)
Currency losses on USD loans	(5,678)	(0.69)	(1,744)	(0.22)
Management fee	(4,545)	(0.56)	(4,266)	(0.53)
Performance fee write back/(charged)	-	-	507	0.06
Directors' fees	(177)	(0.02)	(165)	(0.02)
Other costs of the Company	(625)	(0.08)	(582)	(0.07)
Issue of new shares (net of costs)	-	-	1,708	0.21
Repurchase of shares into Treasury
(net of costs)	(54,144)	(6.63)	(15,176)	(1.89)
Net assets at end of year	985,216	120.6	816,700	101.56

Performance Fee

In relation to the Company's financial year ended 31st December 2016, the Company's NAV total return underperformed the total return of the S&P 500 Index, expressed in sterling terms, resulting in a negative performance fee calculation of £2,028,063. This amount when added to the negative £1,311,633 performance fee offset brought forward leaves a total negative offset of £3,339,696. This entire amount will be carried forward and offset against future outperformance. Full details of the mechanics of the performance fee payments are detailed within the Company's Annual Report and Financial Statements for the year ended 31st December 2016 ('2016 Report and Accounts')

The Board

The Board has procedures in place to ensure that the Company complies fully with the AIC Code on Corporate Governance and the UK Corporate Governance Code. In accordance with corporate governance best practice, all Directors will be retiring and seeking re-appointment at the Company's forthcoming Annual General Meeting. The Nomination & Remuneration Committee met formally to evaluate the effectiveness of the Board as a whole and of each individual Director and is satisfied that all retiring Directors possess the experience and attributes required of a Director for this Company. Accordingly, the re-appointment of all Directors at the forthcoming Annual General Meeting is recommended to shareholders.

The Board continues to manage succession so that it has an appropriate balance of skills and diverse approaches to its tasks. Having served as a Director since 2005, Kate Bolsover retired from the Board in September. Kate contributed enormously to the deliberations of the Board over her tenure and we wish her well for the future. Nadia Manzoor joined the Board with effect from 1st June 2016. Nadia commenced her career as a corporate lawyer at Slaughter & May and currently works for S.W. Mitchell Capital, a specialist European equities investment management house, where she is a Partner, Head of Business Development and General Counsel to the firm. Nadia is a scholar of Downing College, Cambridge University where she read Law. The Board will continue to manage succession and refresh its own composition over time.

As previously announced, I will be standing down from the Board in July 2017. I will be seeking reappointment at the Annual General Meeting, but will be handing over the Chair to Dr Kevin Carter at the conclusion of that meeting. My reappointment will permit me to stay on the Board for a two month period to assist with a smooth handover.

Annual General Meeting and Shareholder Contact

This year's Annual General Meeting is the Company's 101st and it will be held on Thursday, 11th May 2017 at 2.30 p.m. at 60 Victoria Embankment, London EC4Y 0JP. As in previous years, in addition to the formal part of the meeting, there will be a presentation from our Investment Manager, Garrett Fish, who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, Garrett, and representatives of JPMF after the meeting. I look forward to welcoming as many shareholders as possible to this meeting. Throughout the year and in addition to the opportunity to hear from shareholders at the Annual General Meeting, I very much encourage shareholders to get in touch to share their views. I can be contacted through our Company Secretary, whose details are set out in the 2016 Annual Report.

Outlook

Given the extraordinary political surprises of 2016, making predictions for 2017 seems a little foolhardy. At the time of writing there is evidence of continued growth in the US economy and indeed the Federal Reserve has now raised rates thrice since December 2015. Sections of the US equity market remain apparently vulnerable to swings in sentiments as the new President unveils policy on Twitter but the reality of implementation is far from clear. As the academics at New York University pointed out to us, the checks and balances within the US system are many and perhaps less will change than the headlines suggest. In the meantime, US equities are not at their cheapest, but the economy is looking reasonably resilient. We have been working closely with the investment manager this year on his investment process. Delivering outperformance is not easy but we do believe we have the analysis to support a view that a return to favour of the characteristics of value, momentum and quality is likely over time. This together with an improvement in technique gives us grounds for optimism.

This is my last report as Chair and I am grateful for the commitment and support of all my colleagues over the years. I am pleased to be handing over to Dr Kevin Carter who brings considerable experience of US equities, investment trusts and chairmanship, to the role.

Sarah Bates

Chair                                                                                                                                                   

24th March 2017

INVESTMENT MANAGER'S REPORT

Market Review

US equity markets in 2016 can be best described as a tale of two halves. In the first half, volatility was attributable to several factors including the devaluation of the Chinese renminbi (RMB), crude oil prices falling below US dollar 30.00/bbl. and fears of a global economic slowdown. As a result, the S&P 500 Index (S&P 500) reached a closing low of 1829.08 on 11th February, down more than 10% in dollar terms. Equity markets were quite choppy through the spring as investors remained on edge over the sub-par growth of the US economy. As the summer months approached, investor focus turned towards the British referendum on European Union (EU) membership. The outcome caught investors by surprise as a majority of British voters voted in favour of leaving the EU which initially threw global equity markets, bond yields and the British pound into a tailspin. Once investors realised that the potential economic impact would be more localised to the United Kingdom, global equity markets rebounded. The S&P 500 rallied on June's final three trading days to finish the year's first six months with a gain of 3.8% in US dollar terms. While the market's resilience was impressive, overall the tone of the market remained defensive.

However, improvement in global economic growth, recovering commodity prices and the realisation that 'Brexit' was a political crisis rather than a financial crisis contributed to equity markets stabilising during the second half of the year. Improving sentiment led to a shift in market leadership from the defensive to the cyclical sectors. The rotation into cyclicals intensified when in another surprising turn of events, Mr Donald J. Trump was elected the 45th President of the United States. As investors anticipated a pro-growth, pro-business agenda to be put forth by the incoming president, equity markets rallied, bond yields rose and the US dollar, which had been stable for most of the year, strengthened. The yield on the 10-year US Treasury bond which had been rising steadily from its July low of 1.36% climbed to 2.45% at year end, with the majority of the increase coming after the election. With the post-Presidential election rally the S&P 500 managed to return a very respectable 11.6% (US dollar) return. The outcome looked even better in sterling terms due to the weakness of the pound after the Brexit vote, resulting in a total return of 33.1%. From a sector point of view, financials and technology bounced back from the worst performing sectors in the first half to the best in the second half. Above all, the energy sector was the winner given the recovery in crude oil prices which closed out 2016 at US dollar 53.72/bbl. On the other hand, real estate was the worst performing sector due to the considerable rise in bond yields.

Overall Asset Allocation and Performance

The investment management team is responsible for managing the allocation between the large and the small cap growth portfolios, together with the levels of cash and gearing. In 2016, the Company's gearing ranged between 7.8% and 9.2% of shareholders' funds, with the level at the year-end being 8.5%. The level of gearing has been adjusted at regular intervals within the gearing guidelines laid down by the Board. With the strong finish to the year, gearing, minus the cost of the debt, was beneficial to the portfolio. The weighting in the small cap portfolio ranged between 3.7% and 5.9% of the Company's total assets less current liabilities and ended the year at 4.8%. Our allocation model prompted us to add and trim from our small cap allocation during the year. We believe that our ability to move between the two segments enhances returns to shareholders over the long term and also helps to balance our overall risk. Attribution data for 2016 shows that both our large cap portfolio and our smaller companies portfolio detracted for the period.

In the quest to improve upon our management of the portfolio we embarked upon on project during the year that should prove beneficial in the years to come. It began with utilising the analysis received from Inalytics, the firm mentioned in the Chair's statement. We took this to a more granular level which consisted of running a multi-faceted analysis of the purchasing and selling of securities in the portfolio. The primary take aways from this analysis were that the performance of the new purchases were more beneficial than the sales of the portfolio. In order to increase the positive effect we learned that our new purchases should be larger than they have in the most recent past and smaller holdings that do not rank well in our ranking methodology should be exited more quickly. Also in order to decrease the drag from the securities that have started to underperform we need to be more diligent in removing those securities from the portfolio in a more timely fashion and place the proceeds into more attractive and better performing securities. One of the end results will be a portfolio with a smaller amount of securities but these securities obviously have a higher weighting. In technical terms this adaptation will also increase the portfolio's 'active share'. This term in relatively new in the past few years and shows the amount of overlap a portfolio has with its respective benchmark. For example if a security has a 2% weighting in the benchmark and we hold a 4% position in the same security, the active share contribution will be 2%. Simplistically, a portfolio that mimics the benchmark completely will have an active share of 0 while a fund that has zero holdings in its respective benchmark will have an active share of 100. Our active share for the large cap portfolio ended the year at 67.1 and has ranged between the mid 60's and the low 70's over the past decade. With these enhancements we expect the active share of the large cap portfolio to be at the higher end of this range more consistently.

Performance attribution

for the year ended 31st December 2016

	%	%
Contributions to total returns
Net asset value total return (in sterling terms)		30.8
Benchmark total return (in sterling terms)		33.1
Excess return		-2.3
Contributions to total returns
Large cap portfolio		-2.4
Allocation effect	-0.9
Selection effect	-1.5
Small cap portfolio		-0.2
Allocation and selection effect	-0.2
Gearing		2.7
Cost of debt		-0.7
Currency hedge		-1.3
Share issuance/buy back		0.2
Management fee/expenses		-0.6
Total		-2.3

Source: JPMAM and Morningstar. All figures are on a total return basis.

Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index. A glossary of terms and definitions is provided within the 2016 Annual Report.

Large Companies Portfolio

Our investment methodology continues to focus on investing in high quality, reasonably valued companies. This style leads us to invest in companies that exhibit good growth characteristics with growing earnings, strong cash flows and reasonable valuations. When constructing our portfolio, we use the core tenets of behavioural finance to narrow our investment universe. Behavioural finance theory indicates that on average, high quality, fast growing, cheap stocks with good news-flow outperform lower quality, slow growing, and expensive stocks with bad news-flow. Taking this approach, we rank the stocks in our universe to uncover those companies that are high quality, attractively valued and are also exhibiting improving sentiment (momentum). We then undertake fundamental research to validate the rankings. This leads us to invest in quality companies that exhibit good growth characteristics with growing earnings, strong cash flows and reasonable valuations.

2016 was a difficult investment environment for our strategy. The year started with a double-digit decline in the S&P 500 and ended the year with a positive 12% return. We have a valuation bias throughout our portfolio and this proved to be poor year based on that sole criterion. A 'valuation bias' means that our portfolio has securities that are less expensive using our valuation criteria relative to the benchmark. Our portfolio has generally the same, if not better growth characteristics, while being more reasonably valued than the benchmark. In 2016 it was those securities that were more expensive than the benchmark that performed the best, a rare occurrence. We know that valuation does not work all of the time but that it has been, and we continue to believe will be, the most powerful attribute to performance over the longer term. Economically not much changed throughout the year as the US witnessed a continuation of employment growth, low to stable unemployment rate, low inflation, modest GDP growth and modest earnings growth. Prior to the Presidential election the market was marginally higher (in US dollar terms) than the beginning of the year. What changed is the perception that the Trump administration will be much more pro-business which could lead to an acceleration of growth. This is the return of the 'animal spirits' to the markets. The real test for 2017 will be what policies the new President will be able to enact working with both the House of Representatives and the Senate.

The large companies' portfolio posted a positive return, but underperformed the benchmark for the period under review. This underperformance was mainly driven by weak stock selection in financials, energy and telecom services sectors. Within financials selling Voya Financials and Bank of America during the year had the largest negative impact on our performance in that sector. These two companies, along with many other financials, struggled to perform in a market with low interest rates. In the run up to the Presidential election interest rates began to move higher and this led to financials regaining traction relative to the rest of the market. By reducing our position too early we missed the sharp rally in the last quarter of the year. Given increased confidence in the health of the US economy in the second half of the year, the yield on the 10 year US treasury started to increase, coinciding with the Fed expressing confidence in rate increases. This move in rates accelerated post the US election. Since Bank of America is one of the most interest rate sensitive US banks with high leverage to the US economy, the stock outperformed. Additionally, the company's various restructuring initiatives started to bear fruit with investors expressing increased confidence in management. Finally, the hope of roll-back of some banking regulations post the US elections contributed to the banks' outperformance.

While financial names benefited from the post election rhetoric, health care names bore much of the brunt mainly due to concerns about drug pricing as well as the future of the Affordable Healthcare Act. As a result, health care was the worst performing sector in the S&P 500 in 2016. We have several overweight positions in the sector which were negatively impacted, with the worst impact coming from Gilead Sciences and Cigna. Shares of Gilead Sciences declined on pricing pressure concerns within their US Hepatitis-C business. The company also experienced a few small setbacks in its pipeline. Volumes in Hepatitis-C have started to show some stabilisation but overall results continue to be mixed. We continue to hold the name due, to the strength of the management team, their capital allocation policies as well as the stock's attractive valuation. Shares of Cigna struggled to perform during the year as the US Department of Justice was taking a harsh view of the proposed merger between Anthem and Cigna.

In the energy sector, negative stock selection was driven by names such as Marathon Petroleum and Valero Energy. After being significant contributors in the prior year, both securities were hurt by the recovery in the oil price during the year. Their input costs (crude oil) rose more quickly than their selling prices of refined products (diesel, petrol, jet fuel) which hurt their margins and earnings. On the other hand, our stock selection in the information technology, consumer discretionary and consumer staples sectors proved beneficial. Within information technology our overweight positions in Qualcomm, Hewlett Packard Enterprise and HP Inc. were among the largest contributors. Shares of Qualcomm rose due to a widely anticipated accretive buyout of NXP Semiconductors. Hewlett Packard Enterprise and HP Inc. rose sharply during the year after the two companies split from the old Hewlett Packard. The management teams were newly reinvigorated to cost cuts and to position both companies onto a growth trajectory. We have very large positions in both Microsoft and Apple and both companies marginally beat the benchmark during the calendar year. We believe that both companies are positioned for success in some of the faster growing areas of technology and are trading at reasonable prices.

In the consumer discretionary sector shares of our overweight position in Time Warner rose after AT&T offered to acquire the company. In the consumer staples space, our investments in Tyson Foods and Energizer Holdings proved beneficial. Shares in Tyson Foods outperformed for the year as the positive impact from their Hillshire Farms acquisition began to pay off in improved margins and faster growth. Their results were further aided by lowered input costs due to the ample supplies of grain. Our position in Wal Mart Stores also added to performance as it has started to reap the benefits of it prior year's investments into increasing its online presence and its renewed commitment to having the lowest prices for its customers.

Among individual names, overweight positions in UGI and Northrop Grumman contributed to relative performance. In 2016, UGI continued to execute on its strategy to drive core gas utility growth and make opportunistic acquisitions and investments at attractive returns. Earnings reports were solid throughout the year driven by better international propane performance and growth at the US gas utility. Northrup Grumman continued its strong performance in 2016 as prior contract wins and disciplined expense management contributed to continued strong earnings, cash flow and dividend growth. Several large contract wins from the US and foreign governments during the year also contributed to the share price performance. Research and development costs will now begin to increase to support these long term contracts.

In terms of portfolio positioning, we added to our health care exposure and trimmed from consumer staples. Consumer staples is now the third largest overweight after health care. Our largest overweight remains in the information technology sector. We are overall optimistic on the technology sector due to its growth profile and we are currently overweight the hardware and semiconductors areas. On the other hand, we retain our underweight in the materials sector, as we are less excited about the long term growth prospects as well as unappealing valuation levels relative to other sectors. We have also shifted to a larger underweight in industrials during the year.

Sector Weightings of the Large Cap Portfolio versus S&P 500 as at 31st December 2016

	Large
	company
	portfolio	S&P 500
Sector	%*	%
Information Technology	25.4	20.8
Health Care	17.6	13.6
Financials	13.3	14.8
Consumer Staples	11.1	9.4
Consumer Discretionary	10.4	12.0
Industrials	8.2	10.3
Energy	7.6	7.5
Utilities	3.6	3.2
Telecommunication Services	2.8	2.7
Real Estate	-	2.9
Materials	-	2.8

*Does not include small cap stocks and net current assets.

Source: Wilshire. Based on the MSCI Global Industry Classification Standards.

The table below shows the largest positive and negative stock contributors to the Company's portfolio performance in 2016:

	Stock return	Average position
	(based on	relative to
	average weight	Benchmark	Impact on
	over the year)	over year	performance
Stock	%	%	%
Positive Contributors
UGI Corporation	66.4	1.6	0.43
Northrop Grumman Corporation	49.3	2.9	0.40
Allergan Plc	0.0	(0.5)	0.34
Qualcomm Incorporated	48.6	1.8	0.29
FMC Technologies	38.1	0.6	0.26
Negative Contributors
Gilead Sciences	(13.7)	2.0	(1.02)
Voya Financial	(27.1)	0.5	(0.57)
Cigna Corporation	8.8	1.0	(0.34)
Bank Of America Corporation	(12.6)	(0.6)	(0.34)
Marathon Petroleum Corporation	20.1	1.1	(0.27)

Smaller Companies Portfolio

US small cap growth names came under pressure in 2016 and ended the period lagging their large cap peers for the third year in a row. The year presented a challenging environment for our investment style and our US small cap growth portfolio posted a positive return, however, underperformed the benchmark during the period.

In particular, our stock selection in information technology, consumer discretionary and consumer staples proved unsatisfactory and was the main driver behind our results. While several of our small cap information technology stocks did well, our earlier stage investments and some overweights materially hindered performance. On the positive side, stock selection was strong in the real estate and materials space. For our smaller companies portfolio we believe that long-term investments in companies with leading competitive positions, run by highly motivated and talented management that can sustain growth over a period of many years, will lead to stock market outperformance.

Outlook

We believe that many of President Trump's stated polices are pro-growth and the prospect of corporate tax reform, increased infrastructure spending and less regulation are positives for equities. Given that one of his top priorities is the repeal and replacement of the Affordable Care Act, we would expect heightened volatility in the health care sector. We believe caution is warranted regarding the post-election enthusiasm as there remains a large degree of uncertainty as to what the final outcome of President Trump's broad agenda will be and to the timing of when proposals will become law. It could be a strong possibility that the President's ambitious proposals may be scaled back and implemented later than expected as the legislative process unfolds.

While the recent time period has not lived up to our expectations in terms of performance, we still firmly believe that our investment process of purchasing and holding attractively valued securities with positive operating momentum will pay off through time. While a frustrating period, we believe that patience will be rewarded with better outperformance in the future.

Garrett Fish

Investment Manager                                                                                                                       

24th March 2017

PRINCIPAL RISKS

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The risks identified and the ways in which they are managed or mitigated are summarised below.

With the assistance of JPMF, the Risk Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board. These key risks fall broadly under the following categories:

•   Market: Market risk arises from uncertainty about the future prices of the Company's investments. This market risk comprises three elements - equity market risk, currency risk and interest rate risk. The Board considers the split in the portfolio between small and large companies, sector and stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMF. The Board monitors the implementation and results of the investment process with the Manager. However, the fortunes of the portfolio are significantly determined by market movements in US equities, the rate of exchange between the US dollar and sterling and interest rate changes. This is a risk that investors take having invested into a single country fund.

•   Investment and Strategy: An inappropriate investment strategy, poor asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and its peer companies, resulting in the Company's shares trading on a wider discount. The Board mitigates this risk by insisting on diversification of investments through its investment restrictions and guidelines which are monitored and reported on regularly by the Managers. JPMF provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the investment manager, who attends the majority of Board meetings, and reviews data which details the portfolio's risk profile. The investment manager employs the Company's gearing within a strategic range set by the Board.

•   Operational and Cybercrime: Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the custodian's or depositary's records could prevent accurate reporting and monitoring of the Company's financial position. On 1st July 2014, the Company appointed BNY Mellon Trust & Depositary (UK) Limited to act as its depositary, responsible for overseeing the operations of the custodian, JPMorgan Chase Bank, N.A., and the Company's cash flows. Details of how the Board monitors the services provided by the Manager and its associates and the key elements designed to provide effective internal control are included in the Internal Control section of the Corporate Governance report on pages 29 and 30. The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Board has received the cyber security policies for its key third party service providers and JPMF has assured the Directors that the Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by independent reporting accountants and reported every six months against the AAF Standard.

•   Loss of Investment Team or Investment Manager: The sudden departure of the investment manager or several members of the wider investment management team could result in a short term deterioration in investment performance. The Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach. The Board continues to stress to JPMF the importance of retaining the current investment manager.

•   Share Price Relative to Net Asset Value ('NAV') per Share: If the share price of an investment trust is lower than the NAV per share, the shares are said to be trading at a discount. Throughout the majority of 2016, the Company's shares traded at a discount. The Board monitors the Company's premium/discount level and, although the rating largely depends upon the relative attractiveness of the trust, the Board will seek, where deemed prudent, to address imbalances in the supply and demand of the Company's shares through a programme of share issuance and buybacks.

•   Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given within the 2016 Annual Report. Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by JPMF and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure & Transparency Rules ('DTRs'). A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing, which in turn would breach Section 1158. The Directors seek to comply with all relevant regulation and legislation in the UK, Europe and the US and rely on the services of its Company Secretary, JPMF, and its professional advisers to monitor compliance with all relevant requirements.

•   Political and Economic: Changes in financial or tax legislation, including in the US, UK and the European Union, may adversely effect the Company either directly or because of restrictions or enforced changes on the operations of the Manager. JPMF makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. In addition, the Company is subject to political risks, such as the imposition of restrictions on the free movement of capital. The Company is therefore at risk from changes to the regulatory, legislative and taxation framework within which it operates, whether such changes were designed to affect it or not. The Board will continue to keep under review the impact of the UK's decision to leave the European Union. The negotiations between the UK and European Union will likely introduce further currency volatility to the Company's affairs.

statement of directors' responsibilities

The Directors are responsible for preparing the annual report and accounts in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards) and applicable law. Under Company law the Directors must not approve the financial statements unless they are satisfied that, taken as a whole, the annual report and accounts are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business

and the Directors confirm that they have done so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The accounts are published on the www.jpmamerican.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that have occurred to the accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in the Annual Report and Accounts, confirm that, to the best of their knowledge, the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return or loss of the Company.

The Board confirms that it is satisfied that the annual report and accounts taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the strategy and business model of the Company.

For and on behalf of the Board

Sarah Bates

Chair     

24th March 2017

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31ST DECEMBER 2016

	2016			2015
	Revenue	Capital	Total	Revenue1	Capital1	Total1
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value
through profit or loss	-	239,839	239,839	-	33,331	33,331
Net foreign currency losses2	-	(12,852)	(12,852)	-	(3,845)	(3,845)
Income from investments	20,533	-	20,533	17,747	-	17,747
Interest receivable	77	-	77	34	-	34
Gross return	20,610	226,987	247,597	17,781	29,586	47,367
Management fee	(909)	(3,636)	(4,545)	(853)	(3,413)	(4,266)
Performance fee write back	-	-	-	-	507	507
Other administrative expenses	(802)	-	(802)	(747)	-	(747)
Net return on ordinary activities before
finance costs and taxation	18,899	223,351	242,250	16,181	26,680	42,861
Finance costs	(803)	(3,213)	(4,016)	(782)	(3,125)	(3,907)
Net return on ordinary activities before
taxation	18,096	220,138	238,234	15,399	23,555	38,954
Taxation	(2,916)	-	(2,916)	(2,488)	-	(2,488)
Net return on ordinary activities after
taxation	15,180	220,138	235,318	12,911	23,555	36,466
Return per share (note 3)	5.70p	82.66p	88.36p	4.64p	8.47p	13.11p

1 Relevant figures have been restated due to liquidity funds being reclassified as cash equivalents.

2 Includes gains and losses on forward foreign currency contracts which are used to hedge the currency risk in respect of the geared portion of the portfolio. Details of the Company's hedging strategy are given within the 2016 Annual Report.

The dividends payable in respect of the year ended 31st December 2016 amount to 5.0p (2015: 4.0p) per share, costing £13,043,000

(2015: £11,051,000). Details of dividends paid and proposed are given in note 2 below.

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31ST DECEMBER 2016

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st December 2014	14,052	150,172	8,151	613,646	18,129	804,150
Issue of ordinary shares net of costs to
the market	30	1,678	-	-	-	1,708
Repurchase of shares into Treasury	-	-	-	(15,176)	-	(15,176)
Net return on ordinary activities	-	-	-	23,555	12,911	36,466
Dividends paid in the year	-	-	-	-	(10,448)	(10,448)
At 31st December 2015	14,082	151,850	8,151	622,025	20,592	816,700
Repurchase of shares into Treasury	-	-	-	(54,144)	-	(54,144)
Net return on ordinary activities	-	-	-	220,138	15,180	235,318
Dividends paid in the year	-	-	-	-	(12,658)	(12,658)
At 31st December 2016	14,082	151,850	8,151	788,019	23,114	985,216

¹ This reserve forms the distributable reserve of the Company and may be used to fund distribution of profits to investors via dividend payments.

STATEMENT OF FINANCIAL POSITION

AT 31ST DECEMBER 2016

	2016	2015
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	1,068,848	885,383
Current assets
Derivative financial assets	358	939
Debtors	921	923
Cash and cash equivalents1	10,114	18,789
	11,393	20,651
Current liabilities
Creditors: amounts falling due within one year	(558)	(36,417)
Derivative financial liabilities	-	(2,990)
Net current assets	10,835	(18,756)
Total assets less current liabilities	1,079,683	866,627
Creditors: amounts falling due after more than one year	(94,467)	(49,927)
Net assets	985,216	816,700
Capital and reserves
Called up share capital	14,082	14,082
Share premium	151,850	151,850
Capital redemption reserve	8,151	8,151
Capital reserves	788,019	622,025
Revenue reserve	23,114	20,592
Total shareholders' funds	985,216	816,700
Net asset value per share	381.0p	295.6p

¹ This line item combines the two lines of 'Investments in liquidity funds held at fair value through profit or loss' and 'Cash and short term deposits' in the financial statements for the year ended 31st December 2015 into one. Under FRS 102, liquidity funds are considered cash equivalents as they are held for cash management purposes.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31ST DECEMBER 2016

	2016	2015
	£'000	£'000
Net cash outflow from operations before dividends
and interest	(3,234)	(4,378)
Dividends received	17,283	15,041
Interest received	70	33
Overseas tax recovered	354	100
Interest paid	(4,020)	(3,865)
Net cash inflow from operating activities	10,453	6,931
Purchases of investments	(313,586)	(354,123)
Sales of investments	370,087	377,466
Settlement of forward currency contracts	(11,753)	(2,239)
Net cash inflow from investing activities	44,748	21,104
Dividends paid	(12,658)	(10,448)
Repayment of bank loans	(41,283)	(6,446)
Draw down of bank loans	44,627	10,369
Issue of ordinary shares	-	1,708
Repurchase of shares into Treasury	(54,562)	(14,758)
Net cash outflow from financing activities	(63,876)	(19,575)
(Decrease)/increase in cash and cash equivalents	(8,675)	8,460
Cash and cash equivalents at the start of the year	18,789	10,329
Cash and cash equivalents at the end of the year	10,114	18,789
(Decrease)/increase in cash and cash equivalents	(8,675)	8,460
Cash and cash equivalents consist of:
Cash and short term deposits	10	305
Cash held in JPMorgan US Dollar Liquidity Fund	10,104	18,484
Total	10,114	18,789

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31ST DECEMBER 2016

1.       Accounting policies

(a)     Basis of accounting

The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

All of the Company's operations are of a continuing nature.

The financial statements have been prepared on a going concern basis. The disclosures on going concern within the 2016 Report and Accounts form part of these financial statements.

The policies applied in these financial statements are consistent with those applied in the preceding year.

2.       Dividends

(a)     Dividends paid and proposed

	2016	2015
	£'000	£'000
Dividends paid
Unclaimed dividends refunded to the Company	(2)	-
2015 Final dividend of 2.5p (2014: 2.25p)	6,728	6,304
2016 Interim dividend of 2.25p (2015: 1.5p)	5,932	4,144
Total dividends paid in the year	12,658	10,448
Dividends proposed
2016 Final dividend of 2.75p (2015: 2.5p)	7,111	6,907

All dividends paid and declared in the period have been funded from the Revenue Reserve.

The dividend proposed in respect of the year ended 31st December 2015 amounted to £6,907,000. However the amount paid amounted to £6,728,000 due to shares repurchased after the balance sheet date but prior to the share register record date.

The dividend proposed in respect of the year ended 31st December 2016 is subject to shareholder approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st December 2017.

(b)    Dividend for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year, shown below. The revenue available for distribution by way of dividend for the year is £15,180,000 (2015: £12,911,000).

	2016	2015
	£'000	£'000
2016 Interim dividend of 2.25p (2015: 1.5p)	5,932	4,144
2016 Final dividend of 2.75p (2015: 2.5p)	7,111	6,907
Total	13,043	11,051

The revenue reserve after payment of the final dividend will amount to £16,003,000 (2015: £13,685,000).

3.  Return per share

	2016	2015
	£'000	£'000
Revenue return	15,180	12,911
Capital return	220,138	23,555
Total return	235,318	36,466
Weighted average number of shares in issue during the year	266,333,049	278,231,109
Revenue return per share	5.70p	4.64p
Capital return per share	82.66p	8.47p
Total return per share	88.36p	13.11p

4.  Net asset value per share

	2016	2015
Net assets (£'000)	985,216	816,700
Number of shares in issue	258,573,403	276,283,026
Net asset value per share	381.0p	295.6p

5.     Status of results announcement

2015 Financial Information

The figures and financial information for 2015 are extracted from the Annual Report and Accounts for the year ended 31st December 2015 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Register of Companies in due course.

2016 Financial Information

The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 31st December 2016 and do not constitute the statutory accounts for that year. The Annual Report and Accounts has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

24th March 2017

For further information:

Alison Vincent,

JPMorgan Funds Limited             020 7742 4000

ENDS

A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The annual report will shortly be available on the Company's website at www.jpmamerican.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

JPMORGAN FUNDS LIMITED

 

END

 

 

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