Final Results

RNS Number : 4968I

JPMorgan American IT PLC

22 March 2018

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN AMERICAN INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2017

Legal Entity Identifier: 549300QNAI4XRPEB4G65

Information disclosed in accordance with the DTR 4.1.3

CHAIR'S STATEMENT

I am very pleased to present my first annual statement as Chair of the Company. The year to 31st December 2017 was another positive one for investors in US equities, as the S&P 500 Index on a total return basis rose a further 21.5% for US investors, or 11.0% for UK investors once the effect of sterling's appreciation against the US dollar is taken into account. The Company has outperformed its benchmark in the 12 months to 31st December 2017 on a net asset value cum-income, with debt at fair value ('NAV') per share basis, returning 13.1%. The discount of the share price to NAV (calculated using the cum-income net asset value, with debt at par) widened marginally, from 3.1% to 4.5%, resulting in a total return to shareholders for the year of 11.2%.

Performance

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

This year's NAV growth represents a return to relative outperformance for the mandate, following two years of relative underperformance. As can be seen from the attribution report detailed in the Investment Manager's Report below, the Company's large cap portfolio detracted slightly from performance returns, whilst the small cap allocation significantly outperformed. Gearing was accretive to returns. It is disappointing that the large cap strategy has underperformed for a third year in a row, but the Board is encouraged that recently implemented changes to the investment process, to include reducing the number of holdings in the large cap portfolio and reducing the size of the portfolio tail, will bear fruit over the longer term. It is notable that during 2017 the market rise was significantly concentrated within a relatively narrow range of stocks and sectors. For more details of the Board's review of the investment process and its findings please refer to my predecessor's Chair statement within the Company's 2016 Annual Report.

Garrett Fish became lead manager for the Company's portfolio during 2002. Over the 15 years of his management, Garrett has delivered material outperformance. During the 15 years to 31st December 2017, the Company's share price has risen 437.5% (an annualised return of 11.9%), while the Company's benchmark returned 367.3% (an annualised return of 10.8%). This outstanding result demonstrates the long term benefits of deploying a sound investment process with the structural advantages afforded by the closed end nature of an investment trust.

Smaller Companies Portfolio

Shareholders will be aware that the Company's mandate permits the Investment Manager to invest in a diversified portfolio of quoted companies including, when appropriate, exposure to smaller capitalisation stocks. The Manager obtains this exposure by replicating the portfolio of the JPMorgan US Small Cap Growth Fund. This fund, which is managed by Eytan Shapiro and his team, invests in US small cap stocks and can only be accessed by US investors. Throughout 2017, the Company's weighting in the smaller companies portfolio ranged between 4.8% and 6.2%. Given that in 2017 US small cap stocks outperformed their larger counterparts for the first time since 2013 and Eytan and his team significantly outperformed the US small cap index, as represented by the Russell 2000, the allocation to smaller companies greatly assisted the Company's performance this year. The ability of the Investment Manager to allocate a proportion of the portfolio to small cap stocks was reviewed in detail by the Board and Manager over the year. Having examined data from 2003 to 2017, it was clear that the allocation to smaller companies stocks, given their growth characteristics, had, in aggregate, been accretive to the Company's performance returns over this timeframe. It was also clear that when small cap stocks are cheap on valuation criteria, they tend to outperform their large cap brethren, and vice versa. Accordingly, shareholders should continue to expect the Company to hold a varying allocation to small cap stocks over time, now with a higher average of around 6.5% of the assets, with an upper bound of 9.5%. Reassuringly, when reviewing the analysis from this exercise, the Board was also satisfied with the source of the Company's small cap exposure; Eytan and his team have demonstrated skill in this area of investment.

Gearing

Over the year gearing remained within the Board's strategic level of 10%, plus or minus 2%. Our Investment Manager has the ability to hold cash of up to 5% of net assets if it is felt that there is a real risk of long term capital loss.

The ability to gear remains one of the differentiating features of the investment trust structure and, accordingly, the Board is cognisant that gearing should be employed, but in a controlled and risk aware manner. Attribution informs us that the gearing employed by the Company was accretive to performance this year. The Company's gearing is implemented through the use of bank borrowing facilities and a debenture. The debenture was issued in 2000 and carries a fixed interest rate of 6.875%. In the latter half of its life the debenture has proved to be a drag on performance and its maturity in June this year will allow the Company to refinance at a significantly lower rate. Its forthcoming maturity has also provided the Board with an opportunity to conduct a detailed review of the Company's gearing strategy and the structure and sources of borrowing going forward. Shareholders will be informed of the results of this exercise once completed.

Board Review of the Manager

As in prior years, the Board has visited the Manager's offices in New York where it held meetings with Garrett Fish and the manager of the smaller companies portfolio, Eytan Shapiro. The Board further met with JPMorgan's senior management, members of the behavioural finance team of which Garrett is a member, the corporate engagement and the dealing teams. The Board also travelled to Washington D.C. and met with economic and political commentators, including the British Ambassador, senior Embassy staff and experts at the Brookings Institution, all of which helped put the Investment Manager's views into context, and provide a perspective on Mr Trump's first year as U.S. President.

In addition to managing the portfolio, the Manager provides other services to the Company, including accounting, company secretarial and marketing 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.

Management Fees and Other Company Expenses

As reported in my Half Year Statement, and announced in June 2017, the Board confirmed a significant reduction in the Company's fee structure. With effect from 1st October 2017, the annual management fee, which was 0.50% of total assets less current liabilities, with no tiering, is charged at an annual rate as detailed below:

−     0.35% on the first £500 million of net assets;

−     0.30% on net assets above £500 million and up to £1 billion; and

−     0.25% on any net assets above £1 billion.

As reported previously the Board and JPMorgan believe that this new fee structure allows the Company to retain its competitive position against both Exchange Traded Funds ('ETFs') and other quant and smart beta products, while continuing to pursue a core active management strategy with an improved investment process.

The Board continues to focus on costs incurred by the Company across all of its functions, with a view to enhancing shareholder value. Over the year, fee reductions have also been negotiated with each of the Company's Depositary, Registrar and Broker. Furthermore, following the implementation of regulatory changes detailed below, JPMorgan has undertaken to pay for all broker research commissions from 1st January 2018. Although only a proportion of the fee reductions achieved are reflected in the Company's Ongoing Charge for 2017, at 0.55%, this figure represents a significant reduction from 2016 at 0.62%. The fee reductions should further reduce the Ongoing Charges in 2018, ensuring that the Company remains on a competitive footing.

The table set out below illustrates 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 £4.6 million (2016: £4.5 million). As this fee is calculated as a percentage of assets it varies with the size of the Company and therefore rose, although since only one quarter of the year reflects the changes in management fee structure, this figure is likely to reduce next year. No performance fee was payable. However, the Company's NAV total return outperformed the total return of the S&P 500 Index resulting in a performance fee calculation of £1,736,492 for 2017. This amount, when added to the negative £3,339,696 performance fee offset brought forward, leaves a total remaining negative offset of £1,603,204. This entire amount will be carried forward and offset against future outperformance. Full details of the mechanics of the performance fee payments are detailed in the Company's Annual Report & Financial Statements for the year ended 31st December 2017 ('2017 Annual Report').

	2017		2016
		Percentage		Percentage
		of opening		of opening
	£'000s	net assets	£'000s	net assets
Net assets at start of year	985,216	100.00	816,700	100.00
Increase in net assets during the year from investing	97,960	9.94	240,077	29.40
Brokerage fees/commissions and other dealing charges	(226)	(0.02)	(238)	(0.03)
Net investment performance	1,082,950	109.92	1,056,539	129.37
Income received from investing - net of withholding tax	16,594	1.68	17,617	2.16
Interest received	177	0.02	77	0.01
Dividends paid to shareholders	(12,065)	(1.22)	(12,658)	(1.55)
Interest paid on borrowings	(4,545)	(0.46)	(4,016)	(0.49)
Currency gains/(losses) on hedge	2,809	0.29	(7,174)	(0.88)
Currency gains/(losses) on USD loans	4,684	0.48	(5,678)	(0.69)
Management fee	(4,644)	(0.47)	(4,545)	(0.56)
Directors' fees	(173)	(0.02)	(177)	(0.02)
Other costs of the Company	(480)	(0.05)	(625)	(0.08)
Repurchase of shares into Treasury (net of costs)	(104,877)	(10.65)	(54,144)	(6.63)
Net assets at end of year	980,430	99.52	985,216	120.60

Share Price and Premium/Discount

Throughout the year, the Company's shares have traded at a discount to the NAV. The Company has continued with its buy back policy, repurchasing 27,487,592 shares into Treasury, at a cost of £104.9 million, representing 10.6% of the Company's issued share capital at the beginning of 2017. These shares were purchased at an average discount to NAV of 4.4%, producing a modest accretion to the NAV for continuing shareholders. Such action reaffirms the Board's commitment to its shareholders to buy shares back when they stand at anything more than a small discount to NAV.

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 from Treasury. 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

The Company paid an interim dividend in respect of the 2017 financial year of 2.25p on 5th October 2017. Subject to shareholder approval at the Annual General Meeting, a final dividend of 3.25p will be paid on 15th May 2018 to shareholders on the register on 13th April 2018, making a total of 5.5p per share, compared with last year's total of 5.0p per share, representing an increase of 10%.

After the payment of the proposed final dividend, we will have a balance in the revenue reserves of £17.8 million (equivalent to 7.7p per share (2016: 6.2p) or 1.4 times (2016: 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 in the short term, or if there are other fluctuations in the revenue account which we assess to be temporary.

Regulation

As shareholders may be aware, from January this year the Company has become subject to considerable new regulation with additional regulatory changes awaited later in 2018, to include new regulation from the EU to bring data protection legislation in line across Europe. The first new requirements relate to the Packaged Retail and Insurance-based Investment Products ('PRIIPS') and the Markets in Financial Instruments Directive II ('MiFID II') regulations, which came into force on 1st January and 3rd January 2018, respectively.

PRIIPS require Managers, who are deemed to be the manufacturer of investment products (which includes investment trusts), to prepare a Key Information Document ('KID') in respect of the Company. The Company is not responsible for the information contained in the KID and investors should note that the procedures for calculating the risks, costs and potential returns are tightly prescribed by regulation. The figures in the KID may not reflect future returns for the Company and anticipated performance returns cannot be guaranteed. The KID is available on the Company's website. It is recommended that the KID is not considered in isolation but is read in conjunction with other documents published by the Company and its Manager.

The original MiFID EU regulation, which came into force in 2007, with the aim of creating a common internal market and increasing competition across Europe for investment services and trading activity has been extended through the introduction of MiFID II. MiFID II supplements the existing regulation covering trading and reporting requirements. It is worth highlighting that MiFID II has improved the transparency around research costs that had been paid by clients, which in future will now be absorbed by JPMAM. Considerable work was undertaken by JPMAM to ensure compliance by the Company on the date of implementation.

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, an externally facilitated board evaluation was completed in respect of 2017 and the results confirmed that all Directors possessed the experience and attributes to support a recommendation to shareholders that they retire and seek re-appointment at the Company's forthcoming Annual General Meeting.

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, Sarah Bates retired from the Board in July last year. Robert Talbut joined the Board with effect from 11th May 2017. These changes were described more fully in my Half Year Statement of 3rd August 2017.

The Board will continue to manage succession and refresh its own composition over time.

Directors' fees have not been increased since 1st January 2015. To ensure that the Company can continue to attract good quality candidates and to reflect the increasing workload and responsibilities involved, an increase of £1,000 per Director will be payable from 1st January 2018.

Annual General Meeting and Shareholder Contact

This year's Annual General Meeting is the Company's 102nd and it will be held on Wednesday, 2nd May 2018 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 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 below and in the 2017 Annual Report.

Outlook

Since the Great Financial Crisis of 2008, unorthodox monetary policies have been followed by the world's leading Central Banks. These policies have succeeded in avoiding a global recession and recapitalising the tenuous balance sheets of the banking sector. But along the way, they have also created asset price inflation. Over this period, the Company's NAV has comfortably more than tripled as the US stockmarket has appreciated in value. We may now be at a point of change. The Federal Reserve, along with other Central Banks, has begun to tighten monetary policy. It remains to be seen how bond and equity markets fare when faced with a headwind of rising short interest rates, but it would seem prudent to expect occasional bouts of market volatility.

The Board takes reassurance from the fact that the Manager constructs the Company's portfolio to have favourable valuation, quality and momentum attributes when compared to the overall market benchmark. While these cannot provide immunity from market declines, over time they are the features which should favour outperformance.

Dr Kevin Carter

Chair

22nd March 2018

INVESTMENT MANAGER'S REPORT

Market Review

Performance in the US equity markets in 2017 proved to be much stronger than most investors anticipated at the beginning of the year. The newly passed tax reform act, the continued strength in the job market and the resulting hopes for greater capital investment have led Street analysts to raise earnings estimates and lent support to the equity market. The S&P 500 Index finished the year up 11.0% in sterling terms, including dividends, and hit all-time highs 62 times over the course of the year. The median daily market move was just 0.18%, the smallest on record. The largest peak-to-trough drawdown was 2.8%, the mildest year since 1995. To put some context around that number, the average intra-year drawdown since 1980 has been 13.8%.

Growth stocks, those stocks that tend to have a low dividend yield but above average prospects for capital growth, surged this year with the Russell 1000 Growth Index up 30.2% versus 13.7% for the Russell 1000 Value Index, an index that tracks higher yielding, slower growing value stocks. The technology and materials sectors, up 38.8% and 23.8%, respectively led the S&P 500 Index, with the telecom and energy sectors trailing.

The economic environment was robust over the course of the year. The Federal Reserve raised interest rates three times in 2017, bringing the Fed Funds rate to 1.25% - 1.50%. The Fed also increased the cap on the balance sheet run-off, the process by which it plans to shrink its balance sheet as the bonds it acquired in the course of its quantitative easing policy mature, to USD20 billion per month starting in the first quarter of this year. The FOMC decision relied on evidence of underlying strength in the economy and the labour market. However, inflation continues to be muted which means a gradual approach to interest rate policy normalization will be likely. IHS Markit US Manufacturing PMI™ (Purchasing Managers Index) was strong over the course of the year. The December number of 55.1 was the highest since March 2015 and signalled a solid improvement in the health of the industrial sector. US strength coincided with strength around the globe with the J.P. Morgan Global Manufacturing PMI™ rising to 54.5 in December, near a seven-year high.

Legislative reform was perhaps the biggest political consideration of the year for the equity markets. After the failure to pass the American Health Care Act (AHCA) put the proposed tax plan in question, the early optimism around a legislative boost to corporate earnings waned. The eventual signing of the tax reform act in late December resulted in raised earnings estimates for many companies and gave investors renewed hope that 2018 would see an increase in investment spending.

The US Consumer Price Index rose 0.4% in November, and by 2.2% over the last 12 months. This was driven by a strong increase in the energy components of the index. Crude oil (WTI) rose more than 12% over the year supported by a continued drawdown of global inventories late in the year. This tightening in inventory was caused by a number of factors, including supply disruptions caused by the hurricane season, increased compliance of production quotas by OPEC members and strong global demand.

Overall Asset Allocation and Performance

The Company's NAV rose by 13.1% in total return terms in 2017. The return was above the benchmark, the S&P 500 Index, which rose 11.0% in sterling terms.

The investment management team is responsible for managing the allocation between the large and the small cap portfolios, together with the levels of cash and gearing. In 2017, the Company's gearing ranged between 8.5% and 9.2% of shareholders' funds, with the level at the year-end registering at 9.2%. The level of gearing has been adjusted at regular intervals within the gearing guidelines laid down by the Board. With the market rising last year more than the cost of debt, gearing contributed to relative performance. The weighting in the small cap portfolio ranged between 4.8% and 6.2% and ended the year at 5.0%. We have reduced our number of holdings in the large cap portfolio to improve the performance in this area, to bring greater focus to the core portfolio and to reduce the size of the portfolio tail. 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 2017 in dollar terms, shows that our large cap portfolio modestly detracted for the period, while our smaller companies portfolio was additive. We further enhanced our Small Cap Growth allocation tool to increase our weighting even more when the outlook is more favourable and vice versa in order to capture the strength of the underlying signal.

Large Companies Portfolio

Our investment methodology continues to focus on investing in high quality, reasonably valued companies. 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.

Performance attribution

for the year ended 31st December 2017

	%	%
Contributions to total returns
Net asset value total return (in sterling terms)		13.1
Benchmark total return (in sterling terms)		11.0
Excess return		2.1
Contributions to total returns
Large cap portfolio		-0.6
Allocation effect	1.0
Selection effect	-1.6
Small cap portfolio		1.2
Allocation and selection effect	1.2
Gearing (including change in the value of the debenture)		1.8
Cost of debt		-0.5
Currency hedge		0.4
Share issuance/buy back		0.4
Management fee/expenses		-0.6
Total		2.1

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 alternative performance measures is provided within the 2017 Annual Report.

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 companies that exhibit the qualities we think are important; good growth characteristics with growing earnings, strong cash flows and reasonable valuations.

The S&P 500 Index returned 11.0% in sterling terms, while our Company strategy outperformed by 210 bps. The returns from the broad market were driven by companies with strong momentum characteristics, whereas those companies which we would define as of high quality and attractive from a valuation perspective underperformed. The performance of a portfolio is reflecting in not only the securities within the portfolio, but also the securities not held. In our case several large securities that did not meet our investment thesis found favour with the market and this negatively impacted our performance.

The large companies' portfolio posted a positive return, but marginally underperformed the benchmark over the 12 months to the end of December 2017. This underperformance was mainly driven by unrewarded stock selection within the consumer staples, health care and information technology sectors.

Within consumer staples, our overweights in Walgreens Boots Alliance and CVS were among the largest detractors in the sector. Shares of both companies fell during the period amid fears that Amazon may enter the pharmaceutical industry, which would present a significant headwind for incumbent companies.

More positively, overweight exposure to the information technology stock Apple buoyed relative returns over the period driven by surprisingly positive results for its largest revenue generating product - the iPhone. Most investors expected a large drop in orders ahead of the launch of the 10th anniversary iPhone in the second half of the year, which failed to materialise. Apple's shares remain attractively valued and the next iPhone upgrade cycle is expected to be the largest yet. Similarly, our overweight position in Microsoft boosted performance during the period as the stock rallied on the back of strong earnings, with revenues and earnings that came in better than expected. Among the highlights in its earnings announcement was the strong performance of its cloud computing offering, Azure.

Within information technology, our lack of exposure to Facebook and the specialist chip company NVIDIA detracted. NVIDIA's shares rallied on the back of strong earnings results in the second quarter driven, in part, by high year-on-year growth in their datacentre and gaming segments. At the same time, an overweight position in Qualcomm featured among the portfolio's largest detractors at the individual stock level as the company remained mired in legal disputes with Apple and the Federal Trade Commission.

Within the health care sector, overweight positions in the pharmaceutical stock Allergan and the biotech firms Celgene and Gilead Sciences weighed on performance, reflecting growth concerns regarding new products approvals and pricing. We still believe in their existing products and the future success of their pipeline.

On the other hand, the portfolio benefited from strong stock selection in the financials and consumer discretionary sectors. Here, a greater than benchmark exposure to fast food restaurant chain operator McDonalds added value as the firm reported better-than-expected sales results.

Furthermore, an overweight in Home Depot featured among the top contributors to returns as the stock outperformed in the fourth quarter driven by its strong execution and market share growth. The company announced improved revenue, profit and same-store sales growth figures, propelling its shares higher.

Another bright spot in performance over the period was within financials. Here, our exposure to MSCI and overweight in Citigroup buoyed relative returns. MSCI is benefiting from prior acquisitions which are enabling it to capture a broad range of growth opportunities. Shares of Citigroup outperformed during the period as investors cheered the prospects of a stronger capital return plan given this year's favourable Comprehensive Capital Analysis and Review (CCAR) results, and interpreted the Treasury Department's recent white paper as indicating a greater likelihood of a more favourable regulatory landscape for financials.

In terms of portfolio positioning, we added to our consumer discretionary and financials sectors, while trimming health care, telecom services and industrials. Consumer staples is now our largest overweight followed by financials and consumer discretionary. On the other hand, we retain our underweight position in the industrials, real estate and materials sectors, as we are less excited about their long term growth prospects and unappealing valuation levels relative to other sectors.

Smaller Companies Portfolio

The smaller companies' portfolio delivered a standout 2017 with stock selection being materially additive across the majority of the portfolio in 2017. For the calendar year, the smaller companies portfolio returned 29.4% in sterling terms which significantly outpaced the benchmark of the Company. Stock selection in technology was the top contributing sector as our software & video game holdings delivered strong growth throughout the year. A position in video games publisher and distributor Take-Two Interactive featured among the top contributors as shares in the company rallied after it reported strong results. Revenues, earnings and full year guidance all came in above consensus. Market research data was subsequently released that pointed to digital revenue for Grand Theft Auto being up over 40% driven by micro-transactions and users purchasing in-game content.

Health care was also a large driver as a number of our biotech holdings benefited from outstanding clinical data releases. Here, a position in Kite Pharma - a clinical stage biopharmaceutical company which focuses on the development of immunotherapy drugs - was the top contributor at the individual stock level. Shares in the company rallied after the announcement of an acquisition by Gilead Sciences via an all cash offer that equated to a 29% premium. From a strategic perspective the deal provides Gilead with a strong foundation in oncology.

Outlook

We continue to believe earnings for the S&P 500 Index will grow over the next year. Year-over-year comparisons will be more challenging but tax reform should act as a tailwind to the current late cycle growth environment. The energy sector has continued to stabilise and its improving profitability should contribute to overall earnings. With over 40% of S&P 500 Index earnings coming from overseas, a weaker dollar will be a boost to foreign sales in 2018. Inflation should continue to gently rise, helped by the weaker dollar, higher oil prices and a tightening labour market. This means that the Fed is likely to stay on track for the further rate increases expected by the market.

We do not see a material risk of a recession in the near term, but we continue to monitor a broad range of potential risks that could represent headwinds for US equity markets. The passage of the tax reform act removed one risk to the market, but prudent equity investment will require us to act with flexibility, as the implications of tax reform, trade policy, inflation and rising rates could drive rotations among sectors and styles.

Garrett Fish

Investment Manager   

22nd March 2018

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 in the 2017 Annual Report. 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 2017, 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 on page 18. 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 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 position, 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 accounting 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 auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts 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, Strategic Report, Statement of Corporate Governance and Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in the 2017 Annual Report 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; 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.

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.

The Board also confirms that it is satisfied that the Strategic Report and Directors' Report include 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 the Company faces.

For and on behalf of the Board
Dr Kevin Carter
Chair

22nd March 2018

statement of comprehensive income

for the year ended 31st December 2017

	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss	-	97,734	97,734	-	239,839	239,839
Net foreign currency gains/(losses)1	-	7,493	7,493	-	(12,852)	(12,852)
Income from investments	19,317	-	19,317	20,533	-	20,533
Interest receivable	177	-	177	77	-	77
Gross return	19,494	105,227	124,721	20,610	226,987	247,597
Management fee	(929)	(3,715)	(4,644)	(909)	(3,636)	(4,545)
Other administrative expenses	(653)	-	(653)	(802)	-	(802)
Net return on ordinary activities before finance costs and taxation	17,912	101,512	119,424	18,899	223,351	242,250
Finance costs	(909)	(3,636)	(4,545)	(803)	(3,213)	(4,016)
Net return on ordinary activities before taxation	17,003	97,876	114,879	18,096	220,138	238,234
Taxation	(2,723)	-	(2,723)	(2,916)	-	(2,916)
Net return on ordinary activities after taxation	14,280	97,876	112,156	15,180	220,138	235,318
Return per share (note 2)	5.93p	40.67p	46.60p	5.70p	82.66p	88.36p

1 Includes gains and losses on forward 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 in the 2017 Annual Report.

statement of changes in equity

for the year ended 31st December 2017

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
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 (note 3)	-	-	-	-	(12,658)	(12,658)
At 31st December 2016	14,082	151,850	8,151	788,019	23,114	985,216
Repurchase of shares into Treasury	-	-	-	(104,877)	-	(104,877)
Net return on ordinary activities	-	-	-	97,876	14,280	112,156
Dividends paid in the year (note 3)	-	-	-	-	(12,065)	(12,065)
At 31st December 2017	14,082	151,850	8,151	781,018	25,329	980,430

1 These reserves form the distributable reserves of the Company and may be used to fund distribution of profits to investors via dividend payments.

statement of financial position

for the year ended 31st December 2017

	2017	2016
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	1,070,243	1,068,848
Current assets
Derivative financial assets	1,359	358
Debtors	919	921
Cash and cash equivalents	13,689	10,114
	15,967	11,393
Current liabilities
Creditors: amounts falling due within one year	(87,299)	(558)
Net current (liabilities)/assets	(71,332)	10,835
Total assets less current liabilities	998,911	1,079,683
Creditors: amounts falling due after more than one year	(18,481)	(94,467)
Net assets	980,430	985,216
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	781,018	788,019
Revenue reserve	25,329	23,114
Total shareholders' funds	980,430	985,216
Net asset value per share	424.3p	381.0p

statement of cash flows

for the year ended 31st December 2017

	2017	2016
	£'000	£'000
Net cash outflow from operations before dividends and interest	(6,558)	(3,234)
Dividends received	16,829	17,283
Interest received	166	70
Overseas tax recovered	(259)	354
Interest paid	(4,596)	(4,020)
Net cash inflow from operating activities	5,582	10,453
Purchases of investments	(437,710)	(313,586)
Sales of investments	533,956	370,087
Settlement of forward currency contracts	3,073	(11,753)
Net cash inflow from investing activities	99,319	44,748
Dividends paid	(12,065)	(12,658)
Repayment of bank loans	(3,858)	(41,283)
Draw down of bank loans	19,474	44,627
Repurchase of shares into Treasury	(104,877)	(54,562)
Net cash outflow from financing activities	(101,326)	(63,876)
Increase/(decrease) in cash and cash equivalents	3,575	(8,675)
Cash and cash equivalents at the start of the year	10,114	18,789
Cash and cash equivalents at the end of the year	13,689	10,114
Increase/(decrease) in cash and cash equivalents	3,575	(8,675)
Cash and cash equivalents consist of:
Cash and short term deposits	19	10
Cash held in JPMorgan US Dollar Liquidity Fund	13,670	10,104
Total	13,689	10,114

Notes to the financial statements 

for the year ended 31st December 2017

1.     Accounting policies

        Basis of accounting

The financial statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, 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 and updated in January 2017.

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 in the 2017 Annual Report form part of these financial statements.

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

2.     Return per share

		2017	2016
		£'000	£'000
	Revenue return	14,280	15,180
	Capital return	97,876	220,138
	Total return	112,156	235,318
	Weighted average number of shares in issue during the year	240,684,981	266,333,049
	Revenue return per share	5.93p	5.70p
	Capital return per share	40.67p	82.66p
	Total return per share	46.60p	88.36p

3.     Dividends

(a)   Dividends paid and proposed

		2017	2016
		£'000	£'000
	Dividends paid
	Unclaimed dividends refunded to the Company	(4)	(2)
	2016 Final dividend of 2.75p (2015: 2.5p)	6,801	6,728
	2017 Interim dividend of 2.25p (2016: 2.25p)	5,268	5,932
	Total dividends paid in the year	12,065	12,658
	Dividends proposed
	2017 Final dividend of 3.25p (2016: 2.75p)	7,510	7,111

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 2016 amounted to £7,111,000. However the amount paid amounted to £6,801,000 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 2017 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 2018.

(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 £14,280,000 (2016: £15,180,000).

		2017	2016
		£'000	£'000
	2017 Interim dividend of 2.25p (2016: 2.25p)	5,268	5,932
	2017 Final dividend of 3.25p (2016: 2.75p)	7,510	7,111
	Total	12,778	13,043

The revenue reserve after payment of the final dividend will amount to £17,826,000 (2016: £16,003,000).

4.     Net asset value per share

		2017	2016
		£'000	£'000
	Net assets (£'000)	980,430	985,216
	Number of shares in issue	231,085,811	258,573,403
	Net asset value per share	424.3p	381.0p

        Status of results announcement

2016 Financial Information

The figures and financial information for 2016 are extracted from the Annual Report and Accounts for the year ended 31st December 2016 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.

2017 Financial Information

The figures and financial information for 2017 are extracted from the published Annual Report and Accounts for the year ended 31st December 2017 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.

22nd March 2018

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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