Final Results

RNS Number : 6597V

JPMorgan Eur Fldglng Inv Trust PLC

30 May 2008

 



STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN EUROPEAN FLEDGELING INVESTMENT TRUST PLC

PRELIMINARY ANNOUNCEMENT OF FINAL RESULTS

The Directors of JPMorgan European Fledgeling Investment Trust plc announce the Company's results for the year ended 31st March 2008.

Chairman's Report 

Performance

The year to 31st March 2008 was characterised by highly volatile, at times turbulent, financial markets giving the Company's Investment Managers significant investment challenges. Their achievement of a performance marginally ahead of benchmark, albeit a decline in absolute terms, reflects their considerable experience which has given them the capability to deal effectively with sudden adverse market conditions. Over the year the Company's total return on net assets (i.e. with net income reinvested) was -8.4%, which compares with a return of -8.5% on the same basis from the Company's benchmark, the HSBC Smaller European Companies (ex UK) Index in sterling terms. 

We should set the current year in the context of longer term performance. Over the three, five and ten year periods to 31st March 2008, the Investment Managers have outperformed their benchmark in asset growth by aggregate amounts of 27%, 68% and 169% respectively, an outstanding track record. 

Along with many companies in the sector and reflecting the market conditions, the discount to asset value at which the Company trades widened significantly during the year. The discount to net asset value (assuming the shares held in Treasury had been reissued at the closing mid price as at 31st March 2008) widened from 8.0% to 15.1%. This resulted in a total return to shareholders of -15.5%.  The average weekly discount during the year was 12.7%. Reducing this discount again will be one of the Company's ongoing tasks.

Treasury Shares

At the previous three Annual General Meetings shareholders have approved a resolution to enable the Company to sell shares from Treasury at a discount to net asset value. The Board believes that there are benefits in having the ability to reissue, rather than cancel, shares bought in the market. Its use can improve liquidity in the Company's shares, help manage any imbalance between the supply and demand, reduce the volatility and absolute levels of the discount and enhance the net asset value by selling shares at a narrower discount than that at which they were purchased. 

During the year under review, the Board purchased a total of 2,579,875 shares to be held in Treasury. No shares were reissued from Treasury during the year and on 20th March 2008, 1,431,319 shares previously held in Treasury were cancelled. 

The Board is requesting that shareholders renew the authority for the use of Treasury shares at the forthcoming Annual General Meeting. It is important to note that, as previously, the Board will maintain its policy of restricting the Company's ability to sell Treasury shares, by imposing a strict limit to the dilution associated with the sale at a discount to a maximum of 0.5% of net asset value in any one year.

Board and Manager Evaluation

The Nomination Committee carried out its annual evaluation of the Board, its Committees, the individual Directors and the Chairman earlier this year. The Board takes this review seriously and views it as an effective means of evaluating the continuing efficacy of the Board. In accordance with the Company's Articles of Association, Anthony Davidson and Federico Marescotti will retire by rotation at this year's AGM. Both Directors will offer themselves for re-election. The Nomination Committee having considered their qualifications, performance and contribution to the Board and its committees, I confirm that both Directors continue to be effective and demonstrate commitment to the role and the Board recommends to shareholders that they be re-elected.

The Board also carried out a formal review of the Manager, JPMorgan Asset Management (UK) Limited ('JPMAM') during the year. This covered the investment management, company secretarial, administrative and marketing services provided to the Company by JPMAM and took into account their investment performance record, management processes, investment style, resources and risk control mechanisms. The Board is fully satisfied with the performance of the Manager and concluded that its continued appointment on the existing terms is very much in the interests of shareholders as a whole. 

Corporate Governance

The Company operates in accordance with corporate governance best practice and the Board is committed to the highest standards of corporate governance as applicable to investment trust companies. 

VAT

In June 2007, the European Court of Justice ruled in favour of the action brought by the Association of Investment Companies and JPMorgan Claverhouse that VAT should not be charged on management fees paid by investment trust companies. As a result, VAT has not been charged on the Company's management fees since 1st October 2007. This represents a cost saving to the Company and the Board will take steps to recover the VAT paid in previous years to the extent it can. However, the process is not straightforward and it may take some time for HM Revenue & Customs to make repayments and for the Company to recover the amounts due. 

Outlook

The Board remains cautious on the outlook for the market in general until earnings visibility improves and particularly in the small cap asset class. However, it has considerable confidence that the Investment Managers will continue to add value over the long term through their investment management process.

Elisabeth Airey

Chairman 

30th May 2008

Investment Managers' Report 

European Stockmarkets

The twelve months to 31st March 2008 has been one of the most challenging periods in recent history with the markets swinging from extreme optimism to extreme pessimism. The reporting season for the first quarter of 2007 was very strong and representative of the optimism with which the year started. 

Robust economies in Western Europe were sustained by strong demand for infrastructure by the new members of the European Union as well as Brazil, Russia, India, China and the Middle East. Western European industrial companies, as the predominant producers of many infrastructure products such as cranes, trains and power plants, were leading beneficiaries. Moreover, the trend to set up offshore manufacturing facilities in low cost countries continued, fuelling a virtuous cycle of non inflationary growth with ever growing profitability. As we wrote in last year's annual report, valuation was a concern at the time, which is why we reduced our gearing, but newsflow and momentum remained very strong.

The first cracks in the financial system emerged over the summer of 2007 and were initially limited to sub-prime loans. Following falls in US residential property values, defaults and foreclosures rose sharply, leading to mounting losses for the banking system. It became increasingly difficult for banks to finance themselves and those more dependent on short term wholesale financing, such as Northern Rock, had to be rescued. Banks tightened lending standards aggressively the world over, resulting in skyrocketing risk premia on all types of credit instruments. Ultimately, this made it more difficult and expensive for consumers and corporates to borrow money. The end of 'easy' credit naturally resulted in slowing consumer demand towards the end of the year.

The flight away from assets perceived as risky led to the first year since 2000 where large caps outperformed small caps. Over the year, the blue-chip FTSE World Europe (ex UK) Index returned +2.5 per cent while the HSBC Smaller European Companies (ex UK) Index returned -8.5 per cent. The net asset value of the Company performed in line with the index, returning -8.4 per cent.

As economies slowed, the sectors that had been the best performing, such as construction and industrials, went into sharp reversal. Therefore it was not surprising that the investment style factors which worked best in smaller companies were holding stocks with earnings upgrades and high price momentum, i.e. growth stocks. Unusually, buying cheap stocks relative to the market did not contribute significantly to performance this year.

Investment Process

The objective of the Company is to achieve capital growth from a portfolio of quoted smaller companies in Europe, excluding the United Kingdom. The investment universe is defined at the time of purchase by the countries and market capitalisation range of the constituents of the benchmark index which, at the end of March 2008, consisted of 1,000 companies with a market value of between £63m and £2.6bn across 15 countries. 

The investment process is driven by bottom-up stock selection, focusing on a combination of growth companies with strong operational momentum and value companies with a catalyst for re-rating. The large universe of potential investments is screened using a proprietary multi-factor model to the results of which we apply extensive fundamental analysis. 

The portfolio is constructed within a framework where risk is managed in terms of investment style factors relative to the benchmark index. Investments are sold when there is a fundamental negative change in business prospects, the valuation is regarded as excessive or the market capitalisation has outgrown significantly the benchmark index. The policy is not to hedge the currency exposure of the portfolio's assets. The Board has set a liquidity range of 10 per cent cash to 20 per cent gearing within which the Managers may invest. 

Portfolio Performance

While the Company had benefited the preceding year from being geared, the biggest contributor to performance this year was our cautious approach, which led us to run with 10 per cent cash for much of the year. Due to the volatility of the market, good sector performance came from both defensives and cyclicals at the same time. Successful stock selection in defensive names included Grifols in Spain, a medical products provider and Nutreco, a Dutch producer of fish and animal feed, while top selections amongst global infrastructure suppliers included Dutch maritime services provider Smit Internationale, Swiss farm equipment group Bucher and Italian oil drilling equipment manufacturer and operator Trevi. The biggest negative contributors to performance were companies exposed to the consumer cycle such as luxury goods companies IT Holding and Aeffe in Italy. The market significantly de-rated the value of both companies ahead of any real downgrades materialising. 

Portfolio Positioning

The portfolio ended the year with a total of 80 holdings, compared with 52 the previous year. Of these, approximately 90% is invested in 45 holdings. 

The remainder is held in relatively small microcap holdings. During the year, the Company exited its investment in the JPM Europe Micro Cap Fund, also managed by the Managers. In October 2007, this fund became pan-European (to include the UK) and was deemed an inappropriate investment vehicle for the Company, which invests in Continental Europe only. However, given that over time microcaps tend to outperform, we have maintained approximately 10 per cent of the portfolio invested directly in microcaps. Perceived as high risk, microcaps have performed poorly in the last twelve months.

During the year, we moved away from the construction and engineering sectors, which have served us well over the last few years. Included amongst these sales were long time favourites such as JM, the Swedish house-builder, Cementos Portland, a Spanish cement producer, and Andritz, an Austrian manufacturer of paper making machinery. The proceeds mostly have been invested in growth sectors that should be able to offset the worst of an economic slowdown such as business software or defensive sectors with visible earnings growth such as food and support services. With large software investments last made at the time of the 'millennium bug', many companies are once again in the process of updating their systems, benefiting companies such as Unit 4 and Exact in Holland and Temenos in Switzerland. An example of investments in support services is the Spanish security services provider Prosegur. Food investments include animal feed producer Nutreco in Holland and seed producer Vilmorin in France. 

Outlook

Thanks to unprecedented injections of liquidity by central banks, disaster in the financial system has been averted and there have been no major banks going bankrupt. Moreover, most large financial institutions, such as Citigroup, UBS and RBS, have refinanced themselves. Credit spreads are still high but appear to be trending downwards. Small cap valuations relative to their large cap peers have reverted to their long term average, absolute valuation levels are supportive and interest rates have fallen sharply in the US. Despite the ECB remaining reluctant to lower rates, it has substantial room for cutting rates to ease any sharp decline in economic activity. 

However, since the bank problems persisted for so long and have attracted so much publicity, consumer confidence has suffered and at this time it is difficult to estimate the length and depth of any downturn. Moreover high oil and food prices have reduced consumer spending power and European corporates have to contend with an ever appreciating Euro. So while earnings expectations are more realistic than they were six months ago, they are likely still too high and until that gap is closed it is difficult for markets to mount a sustained rally.

In summary, the balance of risks is more evenly weighted than it has been since the sub-prime crisis started: valuations are becoming more attractive but the earnings outlook is deteriorating. We remain cautious, awaiting improved visibility on earnings.

Jim Campbell 

Francesco Conte 

Investment Managers 

30th May 2008 

For further information please contact:

Jonathan Latter 

For and on behalf of

JPMorgan Asset Management (UK) Limited

020 7742 6000

   JPMorgan European Fledgeling Investment Trust plc

Audited figures for the year ended 31st March 2008

Income Statement  

	Year ended 31st March 2008			Year ended 31st March 2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains from investments held at fair value through profit or loss	-	(39,175)	(39,175)	-	82,133	82,133
Net foreign currency gains	-	2,107	2,107	-	234	234
Income from investments	5,890	-	5,890	7,660	-	7,660
Other interest receivable and similar income	259	-	259	107	-	107
	_______	________	_______	_______	________	_______
Gross return/(loss)	6,149	(37,068)	(30,919)	7,767	82,367	90,134
Management fee	(4,992)	-	(4,992)	(4,372)	-	(4,372)
Other administrative expenses	(617)	-	(617)	(613)	-	(613)
	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities before finance costs and taxation	540	(37,068)	(36,528)	2,782	82,367	85,149
Finance costs	(394)	-	(394)	(924)	-	(924)
	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities before taxation	146	(37,068)	(36,922)	1,858	82,367	84,225
Taxation	(522)	-	(522)	(579)	-	(579)
	______	_______	_______	______	_______	_______
Net (loss)/return on ordinary activities after taxation	(376)	(37,068)	(37,444)	1,279	82,367	83,646
	=====	=====	=====	=====	=====	=====
(Loss)/return per share	(0.75)p	(73.57)p	(74.32)p	2.49p	160.58p	163.07p
	=====	=====	=====	=====	=====	=====

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 published 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.  

JPMorgan European Fledgeling Investment Trust plc

Audited figures for the year ended 31st March 2008

Reconciliation of Movements in Shareholders' Funds 

	Called up share capital £'000	Share  premium £'000	Capital redemption reserve £'000	Other reserve  £'000	Capital reserve  £'000	Revenue reserve £'000	Total £'000
At 31st March 2006	13,195	91	2,441	26,851	339,075	(8,683)	372,970
Repurchase of shares into treasury	-	-	-	(11,195)	-	-	(11,195)
Sale of shares from treasury	-	1,221	-	3,602	-	-	4,823
Total return on ordinary activities	-	-	-	-	82,367	1,279	83,646
	_______	________	________	_______	_______	_______	________
At 31st March 2007	13,195	1,312	2,441	19,258	421,442	(7,404)	450,244
Repurchase of shares into treasury	-	-	-	(18,843)	-	-	(18,843)
Cancellation of shares held in treasury	(358)	-	358	-	-	-	-
Total loss on ordinary activities	-	-	-	-	(37,068)	(376)	(37,444)
	_______	________	________	_______	_______	_______	________
At 31st March 2008	12,837	1,312	2,799	415	384,374	(7,780)	393,957
	=====	=====	=====	=====	=====	=====	=====

JPMorgan European Fledgeling Investment Trust plc

Audited figures for the year ended 31st March 2008

Balance sheet

	31st March 2008	Restated- see note 1    31st March 2007
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	387,581	433,219
Investment in liquidity fund at fair value through profit or loss	9,750	12,736
	_______	_______
Total investments	397,331	445,955
Current assets
Debtors	6,582	9,924
Cash and short term deposits	2,456	305
Derivative financial instrument:
Forward currency contract at fair value through profit or loss	2	-
	_______	_______
	9,040	10,229
Creditors: amounts falling due within one year	(12,414)	(5,939)
Derivative financial instrument:
Forward currency contract at fair value through profit or loss	-	(1)
	_______	_______
Net current (liabilities)/assets	(3,374)	4,289
Total assets less current liabilities	393,957	450,244
	_______	_______
Total net assets	393,957	450,244
	=====	=====
Capital and reserves
Called up share capital	12,837	13,195
Share premium	1,312	1,312
Capital redemption reserve	2,799	2,441
Other reserve	415	19,258
Capital reserve	384,374	421,442
Revenue reserve	(7,780)	(7,404)
	_______	_______
Shareholders' funds	393,957	450,244
	=====	=====
Net asset value per share	807.8p	876.8p
	=====	=====

  JPMorgan European Fledgeling Investment Trust plc

Audited figures for the year ended  31st  March 2008

Cash Flow Statement

	31st March 2008	31st March 2007
	£'000	£'000
Net cash (outflow)/inflow from operating activities	(1,083)	1,848
Returns on investments and servicing of finance
Interest paid	(395)	(925)
Net cash outflow from returns on investments and servicing of finance  Taxation  Overseas tax recovered	(395) 216	(925) 124
Capital expenditure and financial investment
Purchases of investments	(1,021,420)	(781,633)
Sales of investments	1,040,421	796,336
Other capital charges	(49)	(53)
	_______	_______
Net cash inflow from capital expenditure and financial investment	18,952	14,650
	_______	_______
Net cash inflow before financing	17,690	15,697
Financing
Net drawdown/(repayment) of loans	99	(10,241)
Repurchase of shares into treasury	(18,843)	(11,195)
Sale of shares from treasury	1,200	3,623
	_______	_______
Net cash outflow from financing	(17,544)	(17,813)
	_______	_______
Increase/(decrease) in cash for the year	146	(2,116)
	=====	=====

Notes to the Accounts

1. Accounting policies 

The accounts are prepared in accordance with the Companies Act 1985, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' (the 'SORP') issued by the AIC in December 2005. All of the Company's operations are of a continuing nature.

The accounting policies applied in these accounts are consistent with those applied in the accounts for the year ended 31st March 2007, except for the following: 

Short term forward currency contracts are classified as derivative financial instruments and the net unrealised gain or loss is included in debtors or creditors respectively. This represents a change in accounting policy from the prior year where the amount receivable under these contracts and the amount payable was included separately in debtors and creditors respectively. The prior year accounts have been restated, however this adjustment has no effect on the net assets of the Company. 

	Year ended	Year ended
	31st March 2008	31st March 2007
	£'000	£'000
Return per share is based on the following:
Revenue (loss)/return	(376)	1,279
Capital (loss)/return	(37,068)	82,367
	_______	______
Total (loss)/return	(37,444)	83,646
	======	=====
Weighted average number of shares in issue	50,380,312	51,293,172
Revenue (loss)/return per share	(0.75)p	2.49p
Capital (loss)/return per share	(73.57)p	160.58p
	_______	______
Total (loss)/return per share	(74.32)p	163.07p
	======	=====

2. Return per share

3. Net asset value per share

Net asset value per share is based on the net assets attributable to the ordinary shareholders of £393,957,000 (2007: £450,244,000) and on the 48,770,323 (2007: 51,350,198) shares in issue at the year end, excluding shares held in treasury.

4. Status of preliminary announcement

The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31st March 2007 or 2008. The statutory accounts for the years ended 31st March 2007 and 2008 have been reported on by the Company's auditors. The auditors reports for both years were unqualified and contained no statement under s237(2) or s237(3) of the Companies Act 1985. The statutory accounts for the year ended 31st March 2007 have been delivered to the Registrar of Companies and statutory accounts for the year ended 31st March 2008 will be delivered in due course.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

30TH MAY 2008

 

END

 

 

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