Final Results
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN OVERSEAS INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 30TH JUNE 2008
Chairman's Statement
The year under review has been extremely difficult for investment managers generally, with the global stock markets experiencing some of the biggest challenges seen in recent times. Apart from Emerging markets, which posted a small positive rise, a negative return was seen across all developed stock markets. This is reflected in the Company's portfolio returns for the year. The Company returned a negative total return on net assets of 8.7% for the year ended 30th June 2008, which was better than the Company's benchmark, the MSCI World Index (expressed in Sterling terms) which recorded a negative total return of 9.9% for the same period.
Dividends
The Directors are proposing, subject to shareholders' approval at the Annual General Meeting ('AGM'), to pay a final dividend of 11.5 pence per share (2007: 10.0 pence) on 28 November 2008 to shareholders on the register at the close of business on 7 November 2008. The Company's principal aim is to maximise capital growth so as to give shareholders the advantage of the more benign tax rate on capital gains. This increase in dividend takes into account some of the VAT recoverable as explained below.
Share Buybacks
The Board remains committed to maintaining the discount at which the share price trades relative to its net asset value at around 5% by means of repurchases of the Company's shares in the market. By the year end, the Company had repurchased 3,548,500 shares at an average discount of 6%. The total cost of these repurchases was £22.3 million and this activity enhanced the net asset value by approximately 5 pence per share to the continuing shareholders. A resolution to renew the authority to permit the Company to continue to repurchase shares will be submitted to the AGM.
Benchmark Index
Following a review of the composition of relevant indices, the Board has decided to change the Company's benchmark to the MSCI AC World Index (expressed in Sterling terms) with effect from 1st July 2008. Unlike the MSCI World Index, the MSCI AC World Index includes Emerging markets, which is more relevant to where the Company's assets are invested.
Investment Process
As shareholders will be aware, over the past few years we have worked with the Company's Manager to focus the Company's investment strategy. This has led to a gradual reduction in the number of stocks in the Company's portfolio to around 80 and a higher degree of conviction where the investment manager will only hold shares in those stocks that he believes to be the best, without regard to sector, country of listing or benchmark weighting.
As part of this evolution of strategy the Board has decided that, Jeroen Huysinga should succeed Ed Walker as the investment manager. Jeroen is a highly experienced senior fund manager within JPMorgan's global equities team and has responsibility for the management of their similar global focus portfolios. The Board would like to thank Ed Walker for his stewardship over the Company's portfolio during the past five years during which performance has been ahead of the Company's benchmark. We very much look forward to introducing Jeroen to the Company's shareholders over the coming months and you will also have an opportunity to meet him at this year's AGM.
The immediate outlook for the global economy remains difficult for the coming months as markets absorb the double blow of slower economic growth and surging inflationary pressures globally. However, action taken by the governments of the United States, the United Kingdom and other leading countries of the world should stabilise the situation and lead to a recovery in financial markets. Although this has been a difficult period for the Company and stock markets generally, I would urge shareholders to consider the longer term perspective. The Investment Manager's Report describes the events of the year and outlook for the future in greater detail.
Total Expense Ratio
The Board maintains a close watch on the costs of operating the Company to ensure that they are kept to a minimum. The Company's total expense ratio, (the proportion that its management expenses represent the average of opening and closing net assets) was 0.61% for the year ended 30th June 2008. While some of the Company's expenses will vary with its size, there are, nevertheless, other expenses that are fixed. High levels of share buybacks could, over time, have a detrimental effect on the total expense ratio and the Board will continue to monitor this figure to ensure that it remains within acceptable parameters.
VAT recoverable on management fees
In 2007 the European Court of Justice ruled that VAT should not be levied on the management and performance fees of investment trust companies. Consequently, with effect from 1st October 2007, VAT has not been paid on these fees. The Company also has the right to reclaim VAT it has paid on these fees in respect of most years since 1990. Following discussions with JPMorgan Asset Management, the Board has concluded that the recovery of £1.5m of this VAT is sufficiently certain that it can be recognised in the Company's accounts for the year to 30th June 2008. However, the timing of its receipt remains uncertain. There may be further small sums of VAT recoverable and interest, which cannot be quantified at this stage.
Gearing
A £10 million borrowing facility is currently in place with Lloyds TSB. This facility is highly flexible and can be used tactically as investment opportunities present themselves, with the aim of enhancing returns. As at 30th June 2008, £6 million had been drawn on the facility.
Annual General Meeting
My fellow Directors and I invite you to attend the Company's Annual General Meeting which will be held at Trinity House, Tower Hill, London EC3N 4DH on Tuesday, 4th November 2008 at 12 noon. An investment presentation will be made at the meeting by Jeroen Huysinga.
George Paul
Chairman 26th September 2008
Investment Manager's Report
Review of the Year
After enjoying an almost uninterrupted rise over the previous five years, Global equity markets suffered in the 12 month period ended 30 June 2008, with the MSCI World falling 9.9%, measured in Sterling terms. This negative return was consistent across all developed markets. However, Emerging markets posted a small positive rise, led by markets such as Brazil and Russia due to their high exposures to energy and basic materials.
Financial markets experienced high levels of volatility for most of the review period. The financial market turmoil, now widely known as the 'credit crisis', can be said to have begun in July 2007 as the decline in bond values related to sub-prime mortgages began to accelerate. Although the genesis of this crisis can be traced to the sub-prime issue, it is clear that leverage rose to excessive levels more generally and institutions, corporates and individuals have in many cases been forced to reduce the size of outstanding debts. This has had knock-on effects on the price of many other assets.
Central banks took varying actions during the period in an effort to prevent a financial and economic meltdown. The US Federal Reserve cut interest rates by 3.25%. The Bank of England embarked on an easing cycle from December, cutting the base rate by 0.75% over the period. In contrast, the European Central Bank kept interest rates constant throughout the twelve-month period, but supplied ample liquidity to the banking system.
During the period several large investment banks announced extremely large losses, some high profile hedge funds blew up, and US investment bank, Bear Stearns, nearly became bankrupt. Meanwhile, commodity prices increased significantly and the high price of agricultural products caused widespread concern. Crude oil reached new highs in June; breaking $140 a barrel and continues to drive inflation higher. This constrained the ability to cut interest rates in many countries.
At the beginning of 2008, negative economic data in the US and concerns of a broader slowdown in global economic activity continued to feed investors' nervousness and increase speculation of recession. While the Financials sector continued to be a weak performer, other sectors with cyclical exposure have also performed poorly more recently as fears that global growth will decline in response to these events.
The performance of the Company's portfolio of investments during the year was negative in absolute terms, but marginally better than the decline in the MSCI World Index, the Company's performance comparator. Performance in Emerging market holdings were very strong in both absolute and relative terms, led by Petrobras, Vale and Femsa. Stock selection in Europe and the US was negative, principally in the Healthcare and Materials sectors. Stock selection in both Financials and Energy (down 30% and up 20% respectively) added over 1% each to performance, without taking major sector bets in our weightings to these sectors.
With hindsight it would have been possible to take more risk given the wide variance of sector returns. Valuation has not been a good guide to sector performance, with both Energy and Financials appearing low throughout the year.
Investment Process
Holdings continue to be selected on the basis of the merits of the individual company fundamentals and valuations, rather than targeting a particular weighting by region or by sector.
The most significant changes to portfolio allocations were increases in Japan and UK, both markets that had not been favored for a long period, at the expense of reductions in Emerging markets and Europe. By sector the portfolio remains well diversified, but the weighting in Energy rose substantially due to both net positive flow into the sector, and through outperformance of those stocks. The other main change was an increase in weightings in the Telecommunication and Utilities sectors, from very low exposures previously. Financials were reduced, through selling investment banking exposure, before the main damage was inflicted on the sector from January 2008 onwards.
Outlook for the Future
Further volatility can be expected in financial markets until confidence is fully restored in the Western banking system when those financial institutions that need to raise capital have done so. This scenario is complicated by a rise in bad debts at banks when economic growth slows. However, it is our view that we are a long way through this crisis and that many financial stock prices are discounting a very negative scenario, including the potential for further dilution of equity holders. It is, however, likely that equity prices will anticipate better newsflow from the sector well before the turn is visible and hence we will look to re-build holdings in this sector when the downside is perceived to be limited, but very substantial upside exists.
The comments above relating to financials are also quite applicable for other cyclical stocks, across a range of industries. Equity markets have been swift to price in a substantial cut in profit margins for businesses as diverse as cement, aerospace and advertising agencies. Low valuation, even on much lowered earnings, have proved no barrier to further stock price falls in companies perceived to be vulnerable to a slowdown, particularly those operating in developed markets. Stocks across a range of sectors are offering compelling valuation in high quality businesses, where we see no risk of financial distress, but in fact sound and defendable franchises that can continue to earn solid profit margins. Again, whilst uncertainty persists these stocks may not get rewarded in the short term, but will in the long term and should offer very attractive investment opportunities.
As investors we do not seek to call the bottom in these situations, but position the portfolio for the future, in a manner that seeks to limit the downside whilst markets remain focused on the challenging current conditions. This should though lead to very attractive returns from the portfolio when either fundamentals are expected to improve or even perhaps in cases where the attractive valuations of these high quality companies is recognised by the market.
Although inflationary pressures have dominated the headlines over the last few months, curtailing the ability of central banks to respond to slowing growth through lower interest rates, these forces appear to be transitory and related to the sharp rises in commodity prices over the last 2 to 3 years. However, we have reached a point where substitution or demand destruction has occurred and further rises from the highs recently seen seem unlikely. That is not say that we are expecting significant falls in either energy or commodity prices.
Against this background growth may well slow in the months ahead, but interest rates are likely to be able to be lowered in markets outside the US offering stimulus to growth over the next year or two. This relatively benign view supports the case for selectively owning financial and cyclical stocks that appear to have compelling valuations in their own right.
The Company retains a portfolio with a bias to stocks that in aggregate are expected to grow faster than the market with a lower valuation, and with higher returns on equity and invested capital. In the last year not all these factors have been rewarded, but it is our firm expectation that over time this will prove beneficial. Our efforts continue to focus on finding individual company ideas that we believe are fundamentally mis-priced. It is likely that in order to build a portfolio of such ideas the Company will hold a very different portfolio from the benchmark, and hence deliver returns that are also different from the index. Over time this offers the opportunity for the Company to meet its objective, and offer attractive returns for you as shareholders.
Ed Walker
Investment Manager 26th September 2008
Principal Risks and Uncertainties
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 and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to under-performance 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 through its investment restrictions and guidelines which are monitored and reported by the Manager. 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. The Investment Manager employs the Company's gearing within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.
Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss that the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines, which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Manager.
Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under 'Business of the Company' above. Where the Company to breach Section 842, it might lose investment trust status and, as a consequence, gains within the Company's portfolio could be subject to Capital Gains Tax. The Section 842 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 Acts and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Acts could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from listing, which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM to ensure compliance with the Companies Acts and The UKLA Listing Rules.
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 report found in the Annual Report.
Operational: Loss of key staff by JPMAM, such as the Investment manager, could affect the performance of the Company. 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.
Financial: The financial risks faced by the Company include market price risk, interest rate risk, liability risk and credit risk. Additional disclosures are provided this year for the first time in accordance with FRS29.
A detailed explanation of principal risks and uncertainties can be found in the Annual Report and Accounts for the year ended 30th June 2008, which will be available on the Company's website shortly.
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 period.
Directors' Responsibilities
The Directors each confirm to the best of their knowledge that:
a) the condensed set of financial statements contained within the annual report have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
b) the Directors' Responsibilities in Respect of the Accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
For and on behalf of the Board
George Paul
Chairman
26th September 2008
Please note that up to date information on the Company, including daily NAV and share prices, fact sheets and portfolio information can be found at www.jpmoverseas.co.uk.
For further information please contact:
Divya Amin
For and on behalf of
JPMorgan Asset Management (UK) Limited, Secretary
020 7742 6000
Income Statement
For the year ended 30th June 2008
(Audited) (Audited)
2008 2007
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains from investments held at
fair value through profit or loss - (20,552) (20,552) - 15,433 15,433
Net foreign currency losses - (19) (19) - (68) (68)
Income from investments 4,453 - 4,453 4,429 - 4,429
Other interest receivable
and similar income 131 - 131 156 - 156
Gross return/(loss) 4,584 (20,571) (15,987) 4,585 15,365 19,950
Management fee (374) (374) (748) (457) (457) (914)
Performance fee - (401) (401) - 1,287 1,287
Other administrative expenses (389) - (389) (439) - (439)
VAT recoverable 713 794 1,507 - - -
Net return/(loss) on ordinary activities
before finance costs and taxation 4,534 (20,552) 16,018 3,689 16,195 19,884
Finance costs (156) (156) (312) (10) (10) (20)
Net return/(loss) on ordinary activities
before taxation 4,378 (20,708) (16,330) 3,679 16,185 19,864
Taxation (779) 371 (408) (458) - (458)
Net return/(loss) on ordinary activities
after taxation 3,599 (20,337) (16,738) 3,221 16,185 19,406
Return/(loss) per share (note 3) 12.62p (71.32)p (58.70)p 9.69p 48.68p 58.37p
Dividends proposed in respect of the financial year ended 30th June 2008 total 11.5p per share (2007: 10.0p per share) costing £3,098,000 (2007: £3,049,000).
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 be presented.
Reconciliation of Movements in Shareholders' Funds
For the year ended 30th June 2008
(Audited)
Called up Capital
share redemption Capital Revenue
capital reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000
At 30th June 2006 9,064 24,881 175,693 17,941 227,579
Shares bought back and cancelled (1,442) 1,442 (35,040) - (35,040)
Net return on ordinary activities - - 16,185 3,221 19,406
Dividends appropriated in the year - - - (4,202) (4,202)
At 30th June 2007 7,622 26,323 156,838 16,960 207,743
(Audited)
Called up Capital
share redemption Capital Revenue
capital reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000
At 30th June 2007 7,622 26,323 156,838 16,960 207,743
Shares bought back and cancelled (887) 887 (22,250) - (22,250)
Net (loss)/return on ordinary activities - - (20,337) 3,599 (16,738)
Dividends appropriated in the year - - - (2,949) (2,949)
At 30th June 2008 6,735 27,210 114,251 17,610 165,806
Balance Sheet
As at 30th June 2008
(Audited) (Audited)
2008 2007
£'000 £'000
Fixed assets
Equity investments at fair value through profit or loss 167,565 208,170
Investments in liquidity funds at fair value through profit or loss 3,470 -
Total investments 171,035 208,170
Current assets
Debtors 2,224 1,813
Cash and short term deposits 304 84
2,528 1,897
Creditors: amounts falling due within one year (6,740) (1,707)
Derivative financial instruments: forward currency contract
at fair value through profit or loss - (1)
Net current (liabilities)/assets (4,212) 189
Total assets less current liabilities 166,823 208,359
Creditors: amounts falling due after more than one year (200) (200)
Provisions for liabilities and charges (817) (416)
Total net assets 165,806 207,743
Capital and reserves
Called up share capital 6,735 7,622
Capital redemption reserve 27,210 26,323
Capital reserve 114,251 156,838
Revenue reserve 17,610 16,960
Shareholders' funds 165,806 207,743
Net asset value per share (note 4) 615.4p 681.4p
Cash Flow Statement
For the year 30th June 2008
(Audited) (Audited)
2008 2007
£'000 £'000
Net cash inflow from operating activities 2,713 2,250
Returns on investments and servicing of finance
Interest paid (295) (20)
Net cash outflow from returns on investments
and servicing of finance (295) (20)
Taxation recovered 34 8
Capital expenditure and financial investment
Purchases of investments (111,780) (126,272)
Sales of investments 129,184 159,471
Other capital charges (22) (38)
Net cash inflow from capital expenditure
and financial investment 17,382 33,161
Dividends paid (2,949) (4,202)
Net cash inflow before financing 16,885 31,197
Financing
Draw down of short term loan 6,000 -
Repurchase of shares (22,644) (34,788)
Net cash outflow from financing (16,644) (34,788)
Increase/(decrease) in cash for the year 241 (3,591)
Notes to the Accounts
1. Accounting policies
The accounts are prepared in accordance with the Companies Act 1985, United Kingdom Generally Accepted Accounting Practice and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' issued by the AIC in December 2005.
All of the Company's operations are of a continuing nature.
The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 3oth June 2008 or 2007. The statutory accounts for the year ended 30th June 2008 have not been delivered to the Registrar of Companies, nor have the auditors yet reported on them. The statutory accounts for the year ended 3oth June 2008 will be finalised on the basis of the information presented by the directors in this announcement and will be delivered to the Registrar of Companies following the approval of the accounts by the Board of Directors.
|
2. Dividends |
2008 |
2007 |
|
|
£'000 |
£'000 |
|
Dividends paid |
|
|
|
2007 final dividend of 10.0p (2006: 8.5p) |
2,949 |
2,857 |
|
2006 special dividend of 4.0p |
- |
1,345 |
|
Total dividends paid in the year |
2,949 |
4,202 |
|
Dividends proposed 2008 final dividend proposed of 11.5p (2007: 10.0p) |
3,098 |
3,049 |
3. Return/(loss) per share
The revenue return per share is based on the earnings attributable to the ordinary shares of £3,599,000 (2007: £3,221,000) and on the weighted average number of shares in issue during the year of 28,515,890 (2007: 33,247,679).
The capital loss per share is based on the capital losses attributable to the ordinary shares of £20,337,000 (2007: £16,185,000 gains) and on the weighted average number of shares in issue during the year of 28,515,890 (2007: 33,247,679).
The total loss per share is based on the total losses attributable to the ordinary shares of £16,738,000 (2007: £19,406,000 gains) and on the weighted average number of shares in issue during the year of 28,515,890 (2007: 33,247,679).
4. Net asset value per share
Net asset value per share is based on funds attributable to ordinary shareholders and on 26,940,948 (2007: 30,489,448) shares in issue at the year end.
JPMORGAN ASSET MANAGEMENT (UK) LIMITED
26TH SEPTEMBER 2008
This information is provided by RNS
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