Half Yearly Report

RNS Number : 3949T

JPMorgan Glb Emerging Mkts Inc Tst

29 March 2016

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN GLOBAL EMERGING MARKETS INCOME TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS

ENDED 31ST JANUARY 2016

Chairman's Statement

Performance

For the six months ended 31st January 2016, the Company reported a 12.9% decrease in net assets per share. This compares with a decrease of 8.7% from the MSCI Emerging Markets Index (in sterling, with net dividends reinvested). The Investment Managers' Report reviews the Company's disappointing performance and comments on the investment strategy.

The Company's share price has now moved to a discount to Net Asset Value.  For the six months to 31st January 2016, the total return to shareholders was -21.3%.

Dividends

In the Company's current financial year, the Board has declared first and second interim dividends of 1.0p each, in line with the same period last year.

As the Investment Managers' Report makes clear, company dividends are under pressure in local currency terms. In addition, emerging market currencies have weakened against sterling and are likely to remain volatile. The Company does not hedge currency exposures.

At 31st January 2016, the Company held a revenue reserve of £5.0 million. This compares with £4.5 million at 31st January 2015. For the fiscal year ended 31st July 2015, the Company paid dividends to shareholders of £14.1 million. The Board will consider drawing on the revenue reserve for future dividend payments if appropriate.

Share Repurchases

In the six months to 31st January 2016, the Board did not carry out any share repurchases. However, subsequent to the period end, on 5th February 2016, the Company bought back 199,277 shares at a cost of £161,698 representing a discount to the capital-only Net Asset Value of 7.3%. These shares are now held in treasury. The Board will continue to monitor closely imbalances between the supply of and demand for the Company's shares and is prepared to buy back shares where appropriate and where such purchases are accretive to Net Asset Value.

Continuation Vote

The Company received strong support from the shareholders in its continuation vote at the AGM in November 2015.

Outlook

The many and serious risks besetting emerging markets are on the front pages. The opportunities are not. In the Board's view, the risks are now largely discounted in valuations.  This is not to say that the worst is behind us; but, in our opinion, the outlook for future returns is good - and for two reasons:

First, history suggests that, from current valuation levels, these markets have more often than not generated strong subsequent returns.

Second, despite difficult operating conditions for businesses in these markets, the portfolio has some noteworthy strengths including an above average dividend yield and stronger than average balance sheets.

Andrew Hutton

Chairman                                                                                                                                         29th March 2016

Investment Managers' Report

Emerging markets faced continued challenges in the six months under review, with currency weakness, China worries and uncertainty over US monetary policy continuing to drive sentiment. Against this backdrop, the Company's net asset value fell by 12.9%, while the share price was down 21.3%. This compared to a decline of 8.7% for the benchmark, the MSCI Emerging Markets Index (in sterling, with net dividends reinvested).

Performance

It was a disappointing six months for the Company. By nature the strategy should prove defensive, with downside protection coming from the yield cushion, a beta below one and the quality bias; however, in the period under review, this was not the case.

The style headwinds the strategy faced in the period resulted from a meaningful downturn in the performance of yield as a style, with stocks offering high dividend yields underperforming while those with low yields outperformed. Similarly, stocks combining a high yield with high forecast growth struggled, contrary to long-term performance patterns.

The drivers of the weak performance of high yield stocks included currency exposure, with high yielding stocks concentrated in markets that faced currency weakness, and rising bond yields ahead of the first interest rate rise from the Federal Reserve. Investors have also been nervous about the resilience of dividends given the weak growth backdrop.

At the country level, an underweight allocation to South Korea was the biggest detractor from relative performance, while stock selection in that market was also detrimental. The portfolio has a long-held underweight to South Korea due to the poor payout ratio (in the teens, compared to 35% for emerging markets overall), which means that yields are relatively unattractive. However, in the period, market heavyweight Samsung Electronics announced a change to its shareholder return policy, indicating that it would now aim to return a higher percentage of free cash flow to shareholders, through both dividends and buybacks. We added the stock to the portfolio following this announcement. Beyond Samsung, there is - as yet - little sign of other South Korean companies altering their dividend policies, meaning yields remain low and we maintain our underweight position for the time being.

Stock selection and an overweight position in South Africa also proved negative for performance. The positive case for South Africa primarily reflects the strength of the listed companies, many of which offer high returns on capital, decent management and healthy dividend payout ratios. But a secondary factor has been the strength of the institutional framework, with the treasury and central bank seen as credible institutions in an economy that undoubtedly faces macro challenges. This secondary factor was undermined in the period by President Jacob Zuma's surprise decision to remove the finance minister. Markets reacted very badly to this announcement, and both equities and the currency collapsed. Zuma then performed a U-turn, reinstating a previous finance minister, which restored some credibility.

On the positive side, stock selection and an overweight position in Taiwan worked well in the period. In particular, an overweight position in Siliconware Precision was beneficial as the semiconductor packaging and testing company was subject first to a tender offer and then a full takeover bid by larger rival Advanced Semiconductor Engineering. An overweight position in Vanguard Semiconductor also worked well as the company benefited from increased restocking demand and announced that it would maintain its dividend for 2015. We increased our position in Vanguard during the period and also took the opportunity presented by volatility to add to other positions in Taiwan.

Dividends

The Company's approach, which is to invest in a diversified portfolio of relatively high-yielding stocks to receive dividends from across sectors and countries, remained unchanged in the review period. However, emerging market dividends are under pressure. Even if payout ratios are held steady, a company's dividends ultimately depend on its profits and it is clear we are in a weak part of the earnings cycle for emerging markets. In addition, the ongoing weakness of emerging market currencies against sterling represents a further headwind to dividends from the point of view of the UK investor. This suggests caution when considering the near term dividend receipts from the Company's holdings.

Portfolio changes

The recent weakness in emerging markets has prompted a few position shifts in the portfolio.

We have been reducing our risk to China financials as the continuing build-up of debt in the system causes concern. Given market declines, there are more opportunities for attractive dividend yields across emerging markets, from South Africa to United Arab Emirates, the Czech Republic to Brazil. Sales have funded additions to Chinese consumer exposure, such as Midea and Fuyao Glass, as well as to positions in Taiwan, Brazil and South Africa, where we took advantage of market weakness. We sold out of a Brazilian toll road operator given a lower-than-expected payout. We also sold our position in Radiant, the Taiwanese backlight unit producer. This company has successfully expanded into the smartphone area, but our latest meeting with the company left us with more concern over the long-term durability of the cash flow and dividend due to technological change.

Outlook

China worries look set to remain a key theme in 2016. China's slowing growth has certainly been an issue for equity investors in emerging markets, and it poses risks not present in prior cycles, considering the accumulation of debt in the municipal and corporate sectors. However, it is important to recall that the structure of the Chinese economy and the closed capital account give China a degree of influence over its fate not enjoyed by other countries. There is still room for monetary easing (through cuts in reserve requirements), and the country's USD 3 trillion-plus reserve pile, while smaller than it was a year ago, remains an important backstop against a more significant slowdown or liquidity event.

The pressure on emerging market dividends overall continues to be evident. Latest numbers show 2015 dividends falling by 12% in US dollar terms, broadly in line with earnings. The biggest driver of this decline is clear: Brazil, where dividends fell an astounding 44% as a result of the dividend cancellation from Petrobras (not owned by the Company) and the sharp decline in the real. In contrast, Taiwan, Mexico and Turkey have been areas of relative strength in dividend growth.

Even in this challenging environment, we are still finding many opportunities in stocks with attractive dividend yields. We will maintain our philosophy and our disciplined approach, looking for dividend-paying stocks with decent profitability, strong cash generation, and clear and understandable dividend policies. Overall, our positioning from a country and sector perspective has not changed materially. From a sector perspective, we favour telecoms and consumer companies (both discretionary and staples), while we maintain underweights to industrials and energy. By country, we are still overweight Taiwan and South Africa, and underweight Korea and China. As always, these country and sector positions are the result of bottom-up stock decisions

Within this difficult period for emerging markets, one thing to remind ourselves is that valuations do look relatively low compared to historical valuations. For example, the price-to-book ratio for emerging markets is at 1.3x. This is certainly towards the lower end of the historical range we have seen (which has varied between crisis-type valuations of 1x and optimistic points of 3x). We need to see fundamentals improve across the asset class for a serious rerating to occur but it does appear that a pessimistic view is being reflected in valuation levels.

Finally, it is worth highlighting certain positive characteristics of the portfolio that we think look attractive and that distinguish it from the market. Firstly there is the higher dividend yield of the underlying stocks compared to the market. Secondly, the return on equity of the portfolio shows a meaningful premium compared to that of the market (15% for portfolio versus 11% for market). The portfolio's underlying companies are more profitable and offer higher reinvestment returns than the market which bodes well for cash generation (and also for growth when the cycle does turn more positive). The last point to mention is that this higher return on equity is being achieved with companies that hold a lower level of balance sheet debt compared to the market. We consider this an important feature in an asset class where we recognise there are concerns around debt levels that have risen over the years.

Omar Negyal

Investment Manager

Richard Titherington

Investment Manager

Amit Mehta

Deputy Investment Manager                                                                                                           29th March 2016

Interim Management Report

The Company is required to make the following disclosures in its interim report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company have not changed and fall into the following broad categories: investment strategy; income; foreign currency; going concern; financial; and accounting, legal and regulatory. Information on each of these areas is given in the Business Review within the Company's Annual Report for the year ended 31st July 2015.

Related Parties Transactions

During the first six months of the current 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.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i) the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS 104 'Interim Financial Reports' and gives a true and fair view of the state of the affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 31st January 2016, as required by the UK Listing Authority Disclosure and Transparency Rules ('DTR') 4.2.4R; and

(ii)     the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

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 the 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.

For and on behalf of the Board

Andrew Hutton

Chairman                                                                                                                                          29th March 2016

Statement of Comprehensive Income

For the six months ended 31^st January 2016

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st January 2016			31st January 2015			31st July 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss
	-	(39,436)	(39,436)	-	7,640	7,640	-	(39,147)	(39,147)
Net foreign currency losses	-	(2,517)	(2,517)	-	(2,826)	(2,826)	-	(1,857)	(1,857)
Income from investments	4,737	-	4,737	6,988	-	6,988	21,351	-	21,351
Interest and similar income	2	-	2	2	-	2	4	-	4
Gross return/(loss)	4,739	(41,953)	(37,214)	6,990	4,814	11,804	21,355	(41,004)	(19,649)
Management fee	(458)	(1,070)	(1,528)	(507)	(1,184)	(1,691)	(1,025)	(2,391)	(3,416)
Other administrative expenses	(378)	-	(378)	(401)	-	(401)	(799)	-	(799)
Net return/(loss) on ordinary activities before finance costs and taxation
	3,903	(43,023)	(39,120)	6,082	3,630	9,712	19,531	(43,395)	(23,864)
Finance costs	(113)	(264)	(377)	(114)	(267)	(381)	(242)	(565)	(807)
Net return/(loss) on ordinary activities before taxation
	3,790	(43,287)	(39,497)	5,968	3,363	9,331	19,289	(43,960)	(24,671)
Taxation	(394)	-	(394)	(582)	(75)	(657)	(2,316)	373	(1,943)
Net return/(loss) on ordinary activities after taxation
	3,396	(43,287)	(39,891)	5,386	3,288	8,674	16,973	(43,587)	(26,614)
Return/(loss) per share (note 4)	1.15p	(14.71)p	(13.56)p	1.88p	1.15p	3.03p	5.85p	(15.01)p	(9.16)p

All revenue and capital items in the above statement derive from continuing operations.

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 AIC.

Statement of Changes in Equity

	Called up	Capital
	share	redemption	Share	Other	Capital	Revenue
	capital	reserve	premium	reserve	reserves	reserve1	Total
Six months ended 31st January 2016 (Unaudited)
At 31st July 2015	2,943	13	218,497	101,276	(22,358)	10,165	310,536
Net (loss)/return on ordinary activities	-	-	-	-	(43,287)	3,396	(39,891)
Dividends appropriated in the period	-	-	-	-	-	(8,535)	(8,535)
At 31st January 2016	2,943	13	218,497	101,276	(65,645)	5,026	262,110
Six months ended 31st January 2015 (Unaudited)
At 31st July 2014	2,785	13	199,593	101,276	21,229	7,321	332,217
Issue of ordinary shares	133	-	15,943	-	-	-	16,076
Share issue expenses	-	-	(46)	-	-	-	(46)
Net return on ordinary activities	-	-	-	-	3,288	5,386	8,674
Dividends appropriated in the period	-	-	-	-	-	(8,243)	(8,243)
At 31st January 2015	2,918	13	215,490	101,276	24,517	4,464	348,678
Year ended 31st July 2015 (Audited)
At 31st July 2014	2,785	13	199,593	101,276	21,229	7,321	332,217
Issue of ordinary shares	158	-	18,956	-	-	-	19,114
Share issue expenses	-	-	(52)	-	-	-	(52)
Net (loss)/return on ordinary activities	-	-	-	-	(43,587)	16,973	(26,614)
Dividends appropriated in the year	-	-	-	-	-	(14,129)	(14,129)
At 31st July 2015	2,943	13	218,497	101,276	(22,358)	10,165	310,536

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

Statement of Financial Position

At 31^st January 2016

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	282,575	362,236	327,817
Investments in liquidity funds held at fair value
through profit or loss	4,653	8,087	2,806
	287,228	370,323	330,623
Current assets
Derivative financial assets	-	6	-
Debtors	1,905	1,524	3,476
Cash and short term deposits	1,841	4,295	2,400
	3,746	5,825	5,876
Creditors: amounts falling due within one year	(664)	(14,154)	(13,145)
Derivative financial liabilities	(2)	-	(1)
Net current assets/(liabilities)	3,080	(8,329)	(7,270)
Total assets less current liabilities	290,308	361,994	332,353
Creditors: amounts falling due after more than one year	(28,198)	(13,316)	(12,817)
Net assets	262,110	348,678	310,536
Capital and reserves
Called up share capital	2,943	2,918	2,943
Capital redemption reserve	13	13	13
Share premium	218,497	215,490	218,497
Other reserve	101,276	101,276	101,276
Capital reserves	(65,645)	24,517	(22,358)
Revenue reserve	5,026	4,464	10,165
Total equity shareholders' funds	262,110	348,678	310,536
Net asset value per share (note 5)	89.1p	119.5p	105.5p

Company registration number: 7273382

Notes to the Financial Statements for the six months ended 31^st January 2016

1.  Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditor.

The figures and financial information for the year ended 31st July 2015 are extracted from the latest published financial statements of the Company and do not constitute statutory financial statements for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditor which was unqualified and did not contain a statement under either Section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', 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 revised 'SORP') issued by the Association of Investment Companies in November 2014.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 31st January 2016.

As a result of the first time adoption of FRS 102 and the revised SORP, comparative numbers and presentational formats have been restated where required. The Company has elected not to prepare a statement of cash flows for the current period on the basis that substantially all of its investments are liquid and carried at market value.

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

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st July 2015 with the following amendments:

Finance costs

Finance costs are accounted for on an accruals basis using the effective interest method and in accordance with the provisions of FRS 102.

Financial instruments

Cash and cash equivalents may comprise cash (including demand deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents.

Derivative financial instruments, including short term forward currency contracts, are valued at fair value, which is the net unrealised gain or loss, and are included in current assets or current liabilities in the statement of financial position in accordance with FRS 102.

Foreign currency

In accordance with FRS 102 the Company is required to identify its functional currency, being the currency of the primary economic environment in which the Company operates. The Board, having regard to the currency of the Company's share capital and the predominant currency in which its shareholders operate, has determined that sterling is the functional currency. Sterling is also the currency in which the accounts are presented.

Taxation

Current tax is provided at the amounts expected to be received or paid.

Dividends payable

In accordance with FRS 102 the final dividend is included in the financial statements in the year in which it is approved by shareholders.

Only the relevant section of the applicable policies from the last year end financial statements which have changed as a result of the application of the 2014 AIC SORP and FRS 102 have been reproduced above - all other aspects of those policies remain the same. The impact of the changes is substantially in relation to presentation and disclosure.

3.  Dividends paid¹

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
2015 fourth interim dividend of 1.90p (2014 final: 1.90p)	5,592	5,324	5,324
First interim dividend paid of 1.00p (2015: 1.00p)	2,943	2,919	2,919
Second interim dividend paid of n/a (2015: 1.00p)	n/a	n/a	2,943
Third interim dividend paid of n/a (2015: 1.00p)	n/a	n/a	2,943
Total dividends paid in the period	8,535	8,243	14,129

¹     All dividends paid and declared in the period have been funded from the Revenue Reserve.

A second interim dividend of 1.00p per share, amounting to £2,941,000 has been declared payable in respect of the six months ended 31st January 2016.

4.  Return/(loss) per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st January 2016	31st January 2015	31st July 2015
	£'000	£'000	£'000
Return/(loss) per share is based on the following:
Revenue return	3,396	5,386	16,973
Capital (loss)/return	(43,287)	3,288	(43,587)
Total (loss)/return	(39,891)	8,674	(26,614)
Weighted average number of shares in issue during
the period	294,339,438	286,613,345	290,335,671
Revenue return per share	1.15p	1.88p	5.85p
Capital (loss)/return per share	(14.71)p	1.15p	(15.01)p
Total (loss)/return per share	(13.56)p	3.03p	(9.16)p

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	31st January 2016	31st January 2015	31st July 2015
Net assets attributable to ordinary shareholders (£'000)	262,110	348,678	310,536
Number of ordinary shares in issue	294,339,438	291,839,438	294,339,438
Net asset value per ordinary share (pence)	89.1	119.5	105.5

6.  Fair valuation of investments

The fair value hierarchy analysis for investments held at fair value at the period end is as follows:

	(Unaudited)		(Unaudited)		(Audited)
	Six months ended		Six months ended		Year ended
	31st January 2016		31st January 2015		31st July 2015
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Quoted prices for identical instruments in
active markets1	287,228	-	370,323	-	330,623	-
Valuation techniques using observable market data2	-	(2)	6	-	-	(1)
Total value of investments	287,228	(2)	370,329	-	330,623	(1)

¹     Includes liquidity funds.

²     Includes foreign currency contracts.

JPMORGAN FUNDS LIMITED

29^th March 2016

For further information, please contact:

Juliet Dearlove

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

ENDS

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

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

 

END

 

 

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