Annual Financial Report

RNS Number : 0935O

JPMorgan Emerging Mkts Invest Trust

05 October 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EMERGING MARKETS INVESTMENT TRUST PLC

ANNOUNCEMENT OF FINAL RESULTS

The Directors of JPMorgan Emerging Markets Investment Trust plc announce the Company's results for the year ended 30th June 2012.

Chairman's Statement 

The Company has again outperformed its benchmark index, the MSCI Emerging Markets Index, in the year to 30th June 2012, albeit in a year which saw negative returns to equity investors. As I explained previously, following the successful issue of Subscription shares in 2009, we report our net asset value on a diluted basis to reflect the potential dilution to net asset value assuming full conversion of the Subscription shares to Ordinary shares. Until expiry of the Subscription shares, this gives a somewhat misleading impression of the Company's underlying portfolio performance as it has a negative effect on the net asset value calculation. Once again, I would emphasise that it is not the basis on which we judge the performance of the Manager, which we continue to do excluding the dilution effect of the Subscription shares, which was -0.1% during the year.

Accordingly, I can report that the portfolio return net of fees and expenses was -11.5% before adjustments, against a fall of 14.0% in the benchmark. Allowing for the dilution effect of those Subscription shares that were actually exercised in the year, this adjusts to a fall in net asset value of 11.6%. The fall on a fully diluted basis was 10.4%.

This outperformance was driven by active stock selection and asset allocation, as the Manager details in his report, continuing the traditional source of added value in the Manager's performance over many years. It also gives rise to a non-offsetable performance fee payment due to the Manager of £1.8 million; this sum will be paid only when there is a positive movement in the net asset value over a financial year.

We continue to monitor closely the share price and therefore the fluctuations in the discount of our share price to their diluted net asset value. The Ordinary share price fell 11.0% through the year, from 597.5p to 531.5p at the year end. The Subscription shares declined 44% over the year, from 135.0p to 75.0p. The discount on the Ordinary shares ranged between 6.0% and 11.2%, averaging 8.8% through the year. A total of 170,000 shares were repurchased into Treasury during the year and a further 93,335 shares have been repurchased since the year end.

The Board's policy on discount management is that it is prepared to take action to ensure that the fully diluted discount does not touch or exceed 10% for an extended period, but only if the discount is out of line with our peer group and market conditions are orderly. We are prepared to buy shares in at discounts of between 8% and 10% in order to achieve this, subject to those caveats.

Income after expenses rose by more than 17% and we are proposing to pay an increased dividend of 4.5p. Our investment policy is aimed at maximising capital growth and does not focus on income. Hitherto the Company has only paid dividends to the extent necessary to maintain investment trust status, but feedback at last year's AGM suggested that an increased dividend would be welcomed by shareholders. However, given that the Company's objective is to achieve capital growth, it remains the case that dividends may fluctuate from year to year according to our income position.

The Board continues to take seriously its governance obligations and we comply fully with the AIC Code of Corporate Governance and the UK Corporate Governance Code. We support the general drive to diversity in terms of board representation as recommended in the Davies Report and this will be borne in mind when we recruit a new director in ensuing years.

We continue to monitor our Manager carefully through the Management Engagement Committee. We confirm that we remain fully satisfied that the Manager is the right manager for the Company, not only in terms of investment performance but also in terms of risk management, administration, controls and compliance.

The Board itself has remained stable in terms of composition over the year. As previously, we carry out a review of the Board and separately the Board reviews my role as Chairman. I am pleased to say no major concerns were raised and I would like to thank my colleagues for their continuing support.

Last year, I concluded by pointing out that the Company was now 20 years old and had navigated its way successfully through that period to the benefit of shareholders. I am pleased to record that shareholders gave a positive endorsement at last year's AGM by voting strongly in favour of the resolution to continue the Company for another three years

It is naturally disappointing to report a fall in shareholder returns for the first year of our new decade, though our managers have done a satisfactory job relative to the benchmark index. The Board remains confident however that emerging markets remain an attractive investment in the long term and are confident in the ability of our manager to deliver a strong performance.

Alan Saunders

Chairman                                                                                            

5th October 2012

Investment Manager's Report

Results

The Company's financial year has been a challenging period for investment markets and this is reflected in a decline both in share prices generally and in the value of the Company's assets. While emerging markets fell by 14%, as measured by the MSCI index, the net asset value of the Company's portfolio declined by 11.6% on an undiluted basis, and by 10.4% when dilution (which is itself reduced by declining markets) is taken into account. It is of course disappointing to report negative results, but the Company's history so far has shown that patience and a focus on longer term outcomes can bring satisfactory results and there is no reason to expect that the future will be any different.

Performance attribution analysis shows a positive contribution both from stock selection within markets and from asset allocation. Although we appear to have made most of the excess performance by being in the right countries, our decisions were always made by finding stocks that we liked and this in turn led us to have more money invested in some places than in others.

The past year

The financial year began with a sharp fall in markets during the late summer of 2011 as the crisis in the Euro zone rumbled onwards and the US government nearly failed to approve its own borrowing requirement. The Euro crisis was to provide something of a refrain through the year and acted as the main determinant of market direction - an effect that extended into emerging markets as well: when policy measures seemed to be addressing Europe's problems, equities rose; when delay or political differences surfaced, they fell. Briefly, in September 2011, there was a whiff of real fear to be detected in financial markets and we found share prices offering significant value. Emerging markets subsequently rallied strongly, rising by more than a quarter, before slipping back again in February. Since then, there has been little clear direction in markets, though volatility has continued through the summer and into September.

There has also been plenty of divergence within the asset class: Thailand and the Philippines were among the few markets to rise in value during the 12 months to June, while larger countries like India and Brazil had poor years, both seeing declines of more than a quarter in sterling terms. In addition to economic factors, politics has played a prominent part this year. In Russia a predictable election result saw Vladimir Putin returned for his third term as President, though with more popular opposition than was perhaps expected. India had a dreadful year; the economy was already experiencing an inflationary hangover after the boom of 2005-2007, but the last couple of years have added corruption scandals and political paralysis to the mix; one consequence has been a steep slide in the value of the rupee. As I write, the biggest emerging market of all, China, is about to embark on a transition to new leadership. In all cases, political change increases uncertainty, and at best defers or stalls decision-making; some element of recent market returns is probably attributable to these moments of hiatus.

'Activity is the enemy of investment'

As readers of previous reports will know, we tend to alter the portfolio relatively little. During this last year, we changed just under 15% of the investments by value, adding 11 new companies and selling out completely from four others.

The companies we added varied widely, but included Discovery Holdings, an innovative insurance company from South Africa, and Mahindra & Mahindra Financial Services, a consumer lending business serving rural India. We also bought Delta Electronics, a Taiwanese manufacturer, and Tiger Brands, the leading food company in Africa. There is no common thread in their activity or location, but these companies do share characteristics that we look for: good economics, a strong market position that is likely to last and management focused on building value for the benefit of all shareholders, all available at valuations that promise good returns in the future. The net effect of these changes was to change the distribution of the portfolio, notably an increase in the Company's South African investments and a decrease in exposure to Russia.

Future opportunities

Fundamental returns from equity markets are driven by dividends and by growth in dividends, which must stem from higher profits to be sustainable. On top of this, valuations can of course rise and fall and when investing in another country, currencies can also affect returns for investors.

As I write, emerging markets are well below long term averages as far as valuation is concerned; accordingly, this is one thing that we do not worry about. In fact a general improvement in investor confidence should allow valuations to rise from current levels.

Growth, on the other hand, is a more complex area. While revenue growth in emerging markets has comfortably exceeded that of the developed world in the last couple of years, profit growth has not. Corporate margins in emerging markets have been squeezed by a number of factors, some of which are cyclical (exchange rates, input costs), other less so. In some areas, company profitability has been very high and these cost increases are simply correcting it to more normal levels; in other places, government policy has been to push wage growth up. Finally, competition is increasing in many industries. This latter factor has been provoked both by the increased opening of markets and by greater interest from multinational corporations. The dismantling of protectionism has led to lower import tariffs and less restriction of ownership in key industries. While this has made it possible for international companies to grow into emerging markets, the dull economic outlook in the developed world has made them all the more keen to do so; accordingly they have become a much more significant factor in local competition than was the case a decade ago.

We expect that corporate revenues in emerging markets will continue to grow, reflecting the underlying growth in economies which will continue to exceed that of the developed world. But to translate that revenue growth into higher earnings per share and higher dividends per share, companies will need to increase productivity, withstand competition, invest their cash flow competently and avoid the dilution of shareholders' interests.

It is therefore more important than ever to judge companies' capabilities accurately, since their capacity to cope with future trends varies widely. Some companies in emerging markets are simply outstanding businesses, run to the highest standards and managed with skill and prudence to deliver long term returns to their owners. These companies stand comparison with any business from the developed world and we will own them unless their valuations are wholly unpalatable: Taiwan Semiconductor, the world's leading producer of semiconductor chips, and AIA, a life insurance business with a leading franchise across much of Asia, are just a couple of examples of large businesses which feature prominently in the Company's portfolio today. It also holds some smaller companies like Cafe de Coral, which opened its first restaurant in 1969 and over four decades has become the largest Chinese fast food restaurant chain in Hong Kong; and Top Glove, a Malaysian company which is the world's leading producer of latex gloves. In addition to businesses which have grown independently from emerging market roots, the portfolio contains several companies which are subsidiaries of multinational companies, listed locally within their area of operation: Unilever Indonesia and BAT Malaysia are two of the more obvious ones; Ambuja Cements and ACC are part of the Swiss Holcim group, while United Breweries, also in India, has Heineken as a large minority shareholder. All these businesses have just the kind of staying power that we are looking for.

But not all companies are like this; there are many others which do not stand out from the crowd and in some the risks borne by shareholders can become all too apparent: the competence and motives of owners and managers can vary enormously; not all owners understand that life is different as a listed company and not all managers have long experience, or good judgement. As long term investors in the asset class, it is vital for us to make judgements about which companies fall into which categories and this is the reason why our team of specialists puts such an emphasis on meeting the decision-makers and on visiting companies in person and conducts hundreds of such discussions with company managers every year. In the best cases, economics, staying power and governance all come into alignment; and then we need to be patient until valuations also do the same. If we can exercise our judgement consistently and invest in a well diversified portfolio of good businesses, then we should be confident that shareholders will capture the opportunity of emerging markets in the years ahead.

Austin Forey-

Investment Manager                                                                                                   

5th October 2012

Principal Risks

With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following categories:

•   Investment Underperformance: An inappropriate investment strategy, for example asset allocation, the level of gearing or the degree of portfolio risk, could lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments and through a set of investment restrictions and guidelines which are monitored and reported on by the Manager. JPMorgan Asset Management (UK) Limited ('JPMAM') 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 all Board meetings, and reviews data which show statistical measures of the Company's risk profile.

•   Political, Economic and Governance: Administrative risks, such as the imposition of restrictions on the free movement of capital. These risks are discussed by the Board on a regular basis.

•   Loss of Investment Team or Investment Manager: A sudden departure of the investment manager or several members of the 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, as well as special efforts to retain key personnel.

•   Discount: A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow.

•   Change of Corporate Control of the Manager: The Board holds regular meetings with senior representatives of JPMAM in order to obtain assurance that the Manager continues to demonstrate a high degree of commitment to its investment trusts business through the provision of significant resources.

•   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'). 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 JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure and Transparency Rules ('DTRs'). A breach of the Companies Act 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 Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules and DTRs.

•   Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance section of the annual report.

•   Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report.

•   Financial: The financial risks faced by the Company include market price risk, interest rate risk and credit risk. Further details are disclosed in note 22 of the annual report.

Related Parties Transactions

During the financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the year.

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that:

a)         the financial statements have been prepared in accordance with applicable UK accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b)         the Annual Report, to be published shortly, 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 they face.

For and on behalf of the Board

Alan Saunders

Chairman

5th October 2012

Income Statement

for the year ended 30th June 2012

		2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments   held at fair value through profit   or loss		-	(95,669)	(95,669)	-	138,790	138,790
Net foreign currency    (losses)/gains		-	(673)	(673)	-	372	372
Income from investments		16,477	-	16,477	15,905	-	15,905
Other interest receivable and   similar income		3	-	3	7	-	7
Gross return/(loss)		16,480	(96,342)	(79,862)	15,912	139,162	155,074
Management fee		(7,070)	-	(7,070)	(7,394)	-	(7,394)
Performance fee		-	(1,786)	(1,786)	-	(1,941)	(1,941)
Other administrative expenses		(1,164)	-	(1,164)	(1,182)	-	(1,182)
Net return/(loss) on ordinary   activities before finance costs   and taxation		8,246	(98,128)	(89,882)	7,336	137,221	144,557
Finance costs		(3)	-	(3)	(6)	-	(6)
Net return/(loss) on ordinary   activities before taxation		8,243	(98,128)	(89,885)	7,330	137,221	144,551
Taxation		(970)	-	(970)	(1,132)	-	(1,132)
Net return/(loss) on ordinary   activities after taxation		7,273	(98,128)	(90,855)	6,198	137,221	143,419
Return/(loss) per Ordinary   share - undiluted (note 3)		6.36p	(85.77)p	(79.41)p	5.43p	120.28p	125.71p
Return/(loss) per Ordinary   share - diluted (note 3)		6.22p	(83.94)p	(77.72)p	5.26p	116.52p	121.78p

A dividend of 4.5p (2011: 3.5p) per Ordinary share has been proposed in respect of the year ended 30th June 2012, totalling £5,164,000 (2011: £4,003,000). Further details are given in note 2.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The 'Total' column of this statement is the Profit and Loss Account of the Company, and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up		Capital
	share	Share	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30th June 2010	28,010	74,138	1,665	69,939	450,604	7,539	631,895
Exercise of Subscription shares into
Ordinary shares	(32)	32	-	-	-	-	-
Issue of Ordinary shares on exercise of Subscription shares	793	12,611	-	-	-	-	13,404
Net return on ordinary activities	-	-	-	-	137,221	6,198	143,419
Dividends appropriated in the year	-	-	-	-	-	(3,658)	(3,658)
At 30th June 2011	28,771	86,781	1,665	69,939	587,825	10,079	785,060
Repurchase of shares into Treasury	-	-	-	-	(877)	-	(877)
Exercise of Subscription shares into Ordinary shares	(6)	6	-	-	-	-	-
Issue of Ordinary shares on exercise of Subscription shares	142	2,465	-	-	-	-	2,607
Net (loss)/return on ordinary activities	-	-	-	-	(98,128)	7,273	(90,855)
Dividends appropriated in the year	-	-	-	-	-	(4,004)	(4,004)
At 30th June 2012	28,907	89,252	1,665	69,939	488,820	13,348	691,931

Balance Sheet

at 30th June 2012

		2012	2011
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		664,803	744,489
Investment in liquidity fund held at fair value through profit or loss		25,200	22,439
Total investments		690,003	766,928
Current assets
Debtors		1,674	2,294
Cash and short term deposits		2,492	18,350
		4,166	20,644
Creditors: amounts falling due within one year		(452)	(2,512)
Net current assets		3,714	18,132
Total assets less current liabilities		693,717	785,060
Provision for liabilities and charges
Performance fees		(1,786)	-
Net assets		691,931	785,060
Capital and reserves
Called up share capital		28,907	28,771
Share premium		89,252	86,781
Capital redemption reserve		1,665	1,665
Other reserve		69,939	69,939
Capital reserves		488,820	587,825
Revenue reserve		13,348	10,079
Total shareholders' funds		691,931	785,060
Net asset value per Ordinary share (note 4)
Undiluted		602.9p	686.4p
Diluted		584.1p	655.7p

Company registration number: 2618994.

Cash Flow Statement

for the year ended 30th June 2012

	2012	2011
	£'000	£'000
Net cash inflow from operating activities	5,916	4,452
Returns on investments and servicing of finance
Interest paid	(3)	(6)
Net cash outflow from returns on investments and servicing
of finance	(3)	(6)
Taxation
Taxation recovered	8	-
Capital expenditure and financial investment
Purchases of investments	(162,438)	(145,788)
Sales of investments	143,692	149,332
Other capital charges	(86)	(227)
Net cash (outflow)/inflow from capital expenditure and
financial investment	(18,832)	3,317
Dividend paid	(4,004)	(3,658)
Net cash (outflow)/inflow before financing	(16,915)	4,105
Financing
Issue of Ordinary shares on exercise of Subscription shares	2,607	13,404
Repurchase of shares into Treasury	(877)	-
Net cash inflow from financing	1,730	13,404
(Decrease)/increase in cash in the year	(15,185)	17,509

Notes to the Accounts

for the year ended 30th June 2012

1.          Accounting policies

            Basis of accounting

            The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the AIC in January 2009.

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

            The accounts have been prepared on a going concern basis under the historical cost convention as modified by the revaluation of investments at fair value through profit or loss.

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

2.         Dividends

		2012	2011
		£'000	£'000
	Dividends paid and proposed
	Dividend paid
	2011 Final dividend of 3.5p (2010: 3.2p)1	4,004	3,658
	Dividend proposed
	Final dividend proposed of 4.5p (2011: 3.5p)	5,164	4,003

            ¹The final dividend declared in respect of the year ended 30th June 2011 amounted to £4,003,000 (2011: £3,530,000). However, the amount paid amounted to £4,004,000 (2011: £3,658,000) due to shares issued after the balance sheet date but prior to the share register record date.

The final dividend proposed in respect of the year ended 30th June 2012 is subject to approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ending 30th June 2013.

3.         Return/(loss) per Ordinary share

		2012	2011
		£'000	£'000
	Return/(loss) per Ordinary share is based on the following:
	Revenue return	7,273	6,198
	Capital (loss)/return	(98,128)	137,221
	Total (loss)/return	(90,855)	143,419
	Weighted average number of Ordinary shares in issue during the year used for the purpose of the undiluted calculation	114,405,899	114,086,175
	Weighted average number of Ordinary shares in issue during the year used for the purpose of the diluted calculation	116,905,369	117,768,751
	Undiluted
	Revenue return per share	6.36p	5.43p
	Capital (loss)/return per share	(85.77)p	120.28p
	Total (loss)/return per share	(79.41p	125.71p
	Diluted
	Revenue return per share	6.22p	5.26p
	Capital (loss)/return per share	(83.94p	116.52p
	Total (loss)/return per share	(77.72)p	121.78p

            The diluted return per Ordinary share represents the return on ordinary activities after taxation divided by the weighted average number of Ordinary shares in issue during the year as adjusted in accordance with the requirements of Financial Reporting Standard 22 'Earnings per share'.

4.         Net asset value per Ordinary share

		2012	2011
	Undiluted
	Ordinary shareholders funds (£'000)	691,931	785,060
	Number of Ordinary shares in issue	114,762,153	114,365,583
	Net asset value per Ordinary share (pence)	602.9	686.4
	Diluted
	Ordinary shareholders funds assuming exercise of Subscription   shares (£'000)	772,115	867,851
	Number of potential Ordinary shares in issue	132,193,525	132,363,525
	Net asset value per Ordinary share (pence)	584.1	655.7

            The diluted net asset value per Ordinary share assumes that all outstanding Subscription shares were converted into Ordinary shares at the prevailing price of 460p at the year end.

5.         Status of results announcement

2011 Financial Information

The figures and financial information for 2011 are extracted from the published Annual Report and Accounts for the year ended 30th June 2011 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.

2012 Financial Information

The figures and financial information for 2012 are extracted from the Annual Report and Accounts for the year ended 30th June 2012 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.

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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.hemscott.com/nsm.do

The annual report will shortly be available on the Company's website at www.jpmemergingmarkets.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 ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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