Annual Financial Report

RNS Number : 5419K
JPMorgan Indian Invest Trust PLC
22 December 2022
 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN INDIAN INVESTMENT TRUST PLC
(the 'Company')

FINAL RESULTS FOR THE YEAR ENDED 30TH SEPTEMBER 2022

CHAIRMAN'S STATEMENT

Indian markets were not immune to the economic and geopolitical events which unfolded during the financial period, nor to the volatility they generated. However, Indian equities proved remarkably resilient. While other major markets sustained double-digit losses, the benchmark MSCI India was up 8.8% for the year ended 30th September 2022 (in GBP terms). The Company also made outright gains, but underperformed the market, returning 6.3% in net asset value (NAV). The share price increased by 0.6%, resulting in a wider discount to NAV. This was seen to be a common theme for single country and emerging markets funds in general. 

This underperformance, while disappointing, should be assessed in the context of past year's extreme volatility, and the Company's focus on long term investments. This year's performance follows returns of over 40% in both NAV and share price terms in the previous financial year ended 30 September 2021, and the Company has made an average annualised return of 9.5% on an NAV basis and 8.4% in share price terms over the ten years to end September 2022.

In their report which follows, the Investment Managers discuss recent portfolio performance in more detail. They also outline the reasons for their optimism about India's very favourable long term prospects, and the positive implications this has for the Company's ability to rebuild its strong performance track record over time. 

In September 2022 the Manager informed the Board that Rajendra ("Raj") Nair, the Company's joint portfolio manager, would be leaving JPMAM after 24 years' service. The Board has since worked closely with the Manager to determine the appropriate changes to the investment management team necessitated by Raj's departure. It was agreed that Ayaz Ebrahim, who has co-managed the Company's portfolio alongside Raj since June 2020 would continue managing the Company's investments, and with effect from 30 September 2022, he would be joined by Amit Mehta and Sandip Patodia as co-managers. Both Amit and Sandip have extensive investment management experience, and, in the Board's and the Manager's view, possess the necessary skills and knowledge to successfully manage the Company's investment portfolio. Amit is a London-based portfolio manager at JPMAM responsible for Global Emerging Markets portfolios. He has been a JPMAM employee since 2011, having previously worked at Prusik Investment Management and Atlantis Investment Management, where he was an Asian equities analyst and portfolio manager. Sandip is a country specialist, also based in JPMAM's London office. He is responsible for the India portfolios within the Emerging Markets and Asia Pacific (EMAP) Equities team. Sandip joined JPMAM in September 2022 from Fundsmith, where he was an assistant portfolio manager for Fundsmith's Emerging Markets fund, with primary responsibility for India.

I would like to assure shareholders that there has been no change to the Company's investment objectives or its investment policy as a result of these changes, and the portfolio managers continue to work closely with JPMAM's team of 40 highly experienced research analysts based around the world.

The Board would like to thank Raj for his long-standing contribution to the management of the Company's portfolio and it looks forward to working with Ayaz, Amit, Sandip and the other members of the Company's investment management team.



 

At the Annual General Meeting ('AGM') held in February 2022, shareholders gave approval for the Company to renew the Directors' authority to repurchase up to 14.99% of the Company's shares for cancellation or into Treasury on an ongoing basis.

The discount at which the Company's shares trade versus its NAV widened to 20.1% over the review period (2021: 15.5%). The Board constantly weighs the merits of buying back shares in order to manage the level and volatility of the discount and will buy back shares, in line with the Company's investment policy, if the discount is out of line with the peer group and markets are orderly. The Company repurchased 1,615,011 shares during the reporting period, and since the financial year end, a further 345,770 shares have been bought back at a cost of £ 2,845,822 and an average discount of 21.8 %. As shares are only re ‑ purchased at a discount to the prevailing net asset value, share buybacks increase the net asset value per share.

The Board believes that the share buyback facility is an important tool in the management of discount volatility and is, therefore, seeking approval from shareholders to renew the authority to repurchase the Company's shares at the forthcoming AGM in February 2023. The Board is optimistic that the discount will narrow once the economic outlook and market sentiment improve.

The Board regularly discusses gearing with the Investment Managers. At the beginning of the financial year, the Company had a fixed 2-year, £30m floating rate loan facility with ING Bank. This facility matured in August 2022 and the Board did not deem it appropriate to renew/replace the facility at this time given that the facility was not being utilised. As at 30th September 2022, the Company's portfolio held 5.7% net cash, i.e. was 94.3% invested. At the time of writing, the Company's portfolio is approximately 2.8 % net cash.

The Board reviews its composition on a regular basis, taking into account the need to refresh its membership and diversity, whilst also ensuring the necessary degree of continuity of Board experience. As previously announced, Hugh Sandeman retired from the Board at the conclusion of the Company's AGM held on 3rd February 2022 and Jeremy Whitley, who has served on the Board since 1st February 2020, succeeded him as the Senior Independent Director.

During the year, as part of its ongoing succession planning, and to fill the vacancy created by Hugh's retirement, the Board engaged an independent external recruitment consultant to assist in the search for a new non-executive Director to be appointed to the Board. Following a rigorous recruitment process, the Board was delighted to welcome Khozem Merchant as a non-executive Director of the Company. Khozem joined the Board on 3rd February 2022 and brings over thirty years of experience in business and the media. He has worked in very senior roles in India and in the UK. He launched and leads Brunswick's India practice, which specialises in Indian macro, corporate and public affairs, and provides advisory services to Indian businesses. I am confident that Khozem's extensive experience and deep ties to the Indian market will be of great benefit to the Company.

After much consideration, the Board has decided on its succession plans. In acknowledgement of the length of my tenure on the Board in the roles of Director and then Chair, I am delighted to report that the Board has selected Jeremy Whitley, the current Senior Independent Director, as my successor when I retire. To facilitate orderly succession planning and continuity, it has been recommended by the Nomination Committee and accepted by the Board that I will remain as Chairman of the Board until the AGM in February 2024. As part of its long-term planning, the Board will commence a formal recruitment search in 2023 for further Board refreshment.

The Board supports the annual appointment/reappointment for all Directors, as recommended by the AIC Code of Corporate Governance, and therefore all of the Directors will stand for appointment/reappointment at the forthcoming AGM in February 2023.



 

The Company's Articles require that at the AGM to be held in 2024, and at every fifth year thereafter, the Directors propose a resolution that the Company continues as an investment trust. In addition, as announced on 26th January 2021, a tender offer will be made to shareholders for up to 25% of the Company's outstanding share capital, at NAV less costs if, over the five years from 1st October 2020, the Company's NAV total return in sterling on a cum income basis does not exceed the total return of the benchmark index plus 0.5% per annum over the five year period on a cumulative basis. If the tender offer is triggered, it will be subject to shareholder approval at the relevant time.

The Company's Benchmark does not take any account of actual or potential tax on gains. In contrast, the Company is required to pay capital gains tax on long-term and short-term capital gains at the headline current rates of 10% and 15%, respectively, plus associated surcharges of approximately 1-1.5%. For the avoidance of doubt, in order to ensure that the terms of the conditional tender offer more correctly reflect the Investment Managers' performance in calculating whether the tender offer has been triggered, the NAV per share will be adjusted to add back all such taxes paid or accrued. The NAV performance without the impact of these taxes stands at 2.47% at the time of writing, and will be, going forward, published on a monthly basis to the market.

Any tender offer will also be conditional on shareholders approving the Company's continuation vote in 2024.

As reported during the last financial period, following the amendment to the India-Mauritius treaty, the Company had transferred its holdings from its Mauritius subsidiary to the parent company. A cash balance was maintained in the Mauritian subsidiary to fund its dissolution expenses. I am pleased to inform you that following the engagement of IQEQ (Mauritius) as liquidator, the Company's Mauritian subsidiary was placed into liquidation on 31st August 2022. Further details are provided in Note 24 supplemental information and reconciliations to provide shareholders with a fuller picture.

The Company's twenty ninth AGM will be held at 60 Victoria Embankment, London EC4Y 0JP on 2nd February 2023 at 12.00 p.m. 

We are delighted that this year we are once again able to invite shareholders to join us in person for the Company's AGM, to hear directly from the Investment Managers. Their presentation will be followed by a question and answer session. Shareholders wishing to follow the AGM proceedings but choosing not to attend in person will be able to view proceedings live and ask questions (but not vote) through conferencing software. Details on how to register, together with access details, will be available shortly on the Company's website at www.jpmindian.co.uk or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.

My fellow Board members, representatives of JPMorgan and I look forward to the opportunity to meet and speak with shareholders after the formalities of the meeting have been concluded.

Shareholders who are unable to attend the AGM are strongly encouraged to submit their proxy votes in advance of the meeting, so they are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting on pages 102 and 103 in the Annual Report .

If there are any changes to the above AGM arrangements, the Company will update shareholders through an announcement to the London Stock Exchange and on the Company's website.



 

Despite the numerous concerns - about inflation, rising interest rates, slower growth and geopolitical uncertainties - currently pervading global financial markets, the Board shares the Investment Managers' conviction that the long term prospects for the Indian market remain strong, supported by the country's demographics and huge potential for structural change and technological innovation.

Given this, and the managers' focus on good quality companies capable of benefiting most from India's promising future and thus outperforming over the long run, the Board is optimistic about the Company's prospects, and we share the managers' confidence in its ability to continue delivering attractive levels of capital growth to shareholders over the long term.

 

Rosemary Morgan
Chairman

21 December 2022



 

INVESTMENT MANAGER'S REPORT

After two years of a devastating pandemic, 2022 was expected to be a period of recovery and renaissance. Instead, the financial year has been a tumultuous period for the world economy and international capital markets, as the war in Ukraine exacerbated existing inflation pressures and drove geo-political tensions to multi-decade highs. Rising inflation triggered an unexpectedly aggressive response from the US Federal Reserve and other central banks, which in turn raised fears of a global growth slowdown and possible recession in the US, the UK and Europe.

Global equity markets sold-off sharply in response to these developments, led by technology and other high growth stocks whose valuations are adversely affected by higher interest rates, which diminish the value of long-term cash flows. Indian markets were not immune to this volatility but have displayed remarkable resilience. While the MSCI China Index dropped 21.9% in the year to end September 2022, the MSCI Emerging Markets index declined by 13.1% and the MSCI World fell 2.8%, the benchmark MSCI India was up 8.8% (in GBP terms) over the same period. Your Company also made a positive outright return of 6.3% in net asset value (NAV) terms, although it underperformed the benchmark.

Nonetheless the underperformance is disappointing. But our investment philosophy is built around well-managed businesses with a long-term horizon, within a disciplined valuation framework. Our view is that superior businesses with scope to grow will not only deliver strong absolute returns; they will outperform in the long run, rewarding patient investors.

In this report, we review the main drivers of recent performance and portfolio positioning and consider the long-term outlook for Indian equities.

Performance Review

The Company's underperformance during the review period was primarily due to stock selection in two areas of the portfolio, although decisions on asset allocation at the sector level also detracted modestly, mainly as a result of underweight exposure to utilities, along with an overweight in Information Technology, the sector hit hardest by the global sell-off. These adverse influences on relative returns were partially offset by the favourable impact of stock selection decisions in several other areas of the portfolio.

At a stock level, the largest detractor to performance was an underweight position in Adani Group companies, which accounted for more than half of the total underperformance during the review period (-3.47%). Adani Group has diverse interests across commodity trading, energy generation and distribution, gas distribution, consumer staples and infrastructure assets such as ports and airports. The group has also announced significant investment plans in renewable energy. We are underweight this group of companies relative to the benchmark given the high capital intensity of the underlying businesses combined with significant levels of debt on the balance sheet. However, over the review period, the share price of these group companies defied the volatility in broader markets and surged, driven by a stream of new business announcements. 

The other significant negative impact on returns was our overweight position in financials such as HDFC Bank , Kotak Bank , HDFC Bank and HDFC Life Insurance , given the backdrop of rising rates and significant foreign outflows. Financials have the largest weight in the benchmark and are the portfolio's largest overweight. This sell-off occurred despite an improving operating environment that has been reflected in the strong recent results of the largest, best-run private banks. However, our overweight position in ICICI Bank was a positive contributor thanks to the company delivering strong operating performance over the year and starting from lower valuations.

Stock selection in several other areas of the portfolio made positive contributions to performance. In the consumer sector, a notable overweight in Maruti Suzuki , the leading passenger car maker, was among the largest contributors, along with our holdings in Zomato , a leading food delivery service which floated in July last year, and beauty retailer FSN E-Commerce (which runs the Nykaa branded online retail store), which listed in November 2021. Both Zomato and FSN E-Commerce possess strong long-term growth prospects. However, their valuations became overstretched following their listings, pricing in most of their growth potential over the next decade. We therefore exited both, realising decent profits.



 

Our overweight positions in Hindustan Unilever , a leading supplier of household and personal products, and Britannia Industries , India's largest biscuit producer, also added meaningfully to returns, as did our underweight exposure in Reliance Industries . Reliance's activities in various sectors including telecoms, omni-channel retail and renewable energy make it a proxy for India's growth, but we believe current valuations are excessive, as they do not fully capture the execution challenges the company faces in these new areas.

Elsewhere, our overweight exposure to several idiosyncratic opportunities such as Lemon Tree Hotels , a mid-tier hotel business, and Power Grid Corporation , a power transmission company, also enhanced returns. We opened an exposure to Lemon Tree Hotels over the past year on the view that it is particularly well-placed to benefit from the resumption of domestic travel, while Power Grid Corporation appeals to us given the long-term opportunity in transmission investment required by the country. Holdings in several small and mid-cap companies also performed well. These included L&T Technology Services , an engineering and IT company, the ratings agency CRISIL , and ABB India , which develops and sells specialist industrial machinery.

Gearing

Given current high valuations, we have maintained a cautious approach to gearing. As at 30 September 2022 the Company's net consolidated cash position stood at 5.7% which is more conservative than the net cash position of 1.6% at 30th September 2021.

Our investment strategy focuses on good quality, well-managed businesses with superior long-term growth prospects. Our view is that such businesses will not only deliver strong absolute returns; they will outperform in the long run, rewarding patient investors. While this approach tends to result in relatively low turnover, this year's volatility has generated some great opportunities to invest in interesting names, or top up existing positions, at especially attractive prices. These investments have also allowed us to improve the general quality of the portfolio (see further discussion below), although they have not resulted in any major shift in positioning at a sector level.

The most significant changes in the portfolio were new positions in:

1)  Financials - ICICI Prudential Life Insurance, given the attractiveness of the long-term opportunity in the Indian insurance industry (discussed further below);

2)  Consumer - Hero MotorCorp, India's leading motorbike manufacturer. As was the case with the purchase of ICICI, this is another play on the expected rise in middle class demand for consumer goods and services;

3)  Information Technology - HCL Tech, to complement our existing large positions in IT Services. We also initiated positions in Genpact and WNS, two business process outsourcing companies which we believe have very stable and predictable growth prospects;

4)  Healthcare - Dr Reddy's Lab, a leading pharmaceutical company, and Metropolis, among the leaders in India's growing diagnostics industry; and

5)  Small/Mid-Caps - In addition to or acquisition of Lemon Tree Hotels, mentioned above, we bought Aarti Industries, a well-run producer of speciality chemicals and pharmaceuticals,  Embassy Office Parks REIT, which we expect to benefit as workers return to the office, and Supreme Industries, a leading plastic processor that produces plastic pipes.

These purchases were funded by trims or outright sales of companies where either, following their strong absolute and relative performance over the past couple of years, the valuations looked less attractive, or where we have changed our view about the long term prospects of the business. Complete sales included:

1)  IT Services - L&T Technology Services, driven by low expected returns, and Wipro, given better opportunities elsewhere in the sector;

2)  Industrials - ABB India, due to low expected returns following its recent strong performance;

3)  Energy - Bharat Petroleum Corporation, an oil marketing company that has struggled with higher oil prices due to government policies limiting its capacity to pass on higher prices;

4)  Cement - Ambuja Cements and ACC Limited, which were both subject to open offers from the Adani Group; and

5)  Consumer - Alcoholic spirits maker United Spirits, and luxury goods manufacturer Titan, given low expected returns.

We also reduced our exposure to Reliance Industries, due to its high valuation, discussed above, and Larsen & Toubro, an engineering and construction company, whose long-term investment case has weakened.

In addition to the absolute sales we also reduced our overall exposure to Infosys and Tata Consultancy Services driven by lower expected returns. We still remain positive about the businesses over the long term but our assessment of valuations combined with potential risks from a global slowdown resulted in us reducing the overall position sizes.

We would like to take this opportunity to thank Raj Nair, a valued colleague within JPMAM's Emerging Markets and Asia Pacific team, for his many years of dedication to your company. 

As a new team assumes responsibility for the management of the portfolio, we want to reassure investors that this change is part of the inevitable evolution of any long-established investment company. There will be no change to the trust's investment strategy, and management continuity is assured by the ongoing presence in the team of Ayaz Ebrahim, who co-managed the portfolio alongside Raj since June 2020. We, your new investment management team, also have the ongoing support of JPMAM's large and experienced team of analysts, which we believe strikes a winning balance between sector specialists and local knowledge, putting the Company in a great place to identify attractive investment opportunities.  Your company has had a long-standing preference for investing in businesses that are of high quality with strong management/promotor groups running them and which we see to have a natural alignment of interests with shareholders.  There will be no change in this.

Portfolio Objectives

Taking a step right back, it is always useful to remind ourselves of the objectives of our investment process. What we are trying to achieve appears relatively simple - to buy great businesses with a margin of safety on valuations, and own them for a long period of time, until their potential to create intrinsic value is fully realised. We find the Indian equity markets to be a fertile ground for discovering such great businesses, with long durations and sound governance practices. However, there are challenges, and our biggest is finding such businesses at valuations which will allow us to make attractive returns over the long-term.

Investment process

The strategic Classification judgement is a decision to label a company under one of four categories - Premium, Quality, Trading or Structurally Challenged. Not surprisingly given our quality bias, we want to own more premium and quality businesses, rather than trading or structurally challenged businesses. Your company has traditionally had a tilt towards these types of businesses, but our aim going forward is to allocate a larger portion of the portfolio to these two categories. To this end, we have started gradually positioning the portfolio more in this direction, including some of the recent trades discussed above.

Our investment process is also intended to identify companies/industries we would like to avoid. In our opinion, if we want to succeed in generating superior investment returns, identifying losers is as important as the steps we take to identify winners. 

Your company is unlikely to have exposure to companies subject to problems in the following areas:

1.  Governance : Companies where we have question marks over corporate governance. There are many different things that come under this category, for example corporate cultures which lack honesty and transparency, boards without sufficient independence, and compensation schemes which fail to align the interests of management and shareholders. Our biggest investment mistakes have mainly been the result of getting the governance call wrong in some way, so we emphasise the importance of governance above everything else, and it is a key pillar in our strategic classification framework;

2.  Leverage : Companies that choose to take on excessive debt to grow. There may be short periods where these types of companies do well, but their stories usually end the same way;

3.  Profitability : Companies that don't make money today. While it is always necessary for us to make informed judgements about a company's prospects based on extensive research, we believe for these types of companies the range of outcomes and the timing of these outcomes are too wide to accurately value; and

4.  Turnarounds : Companies that are going through restructuring/turnarounds. As with companies which are not already profitable, companies whose potential success hangs on the unpredictable results of restructurings often require many pillars to drive success and therefore again this makes the predictability and range of outcomes very wide. Our experience here is that investors tend to be over-optimistic on these types of business with rare successes.

This is not an exhaustive list but hopefully gives an idea of the areas where we will, and will not, invest.

Finally, we wrote earlier about a clear decision hierarchy. So, it's only after we identify "businesses we want to own" that we consider the potential return from that investment. And it is at this point that it is essential to be able to make considered, well-informed judgements about the businesses most likely to make attractive returns over the long term. We accept that in certain areas of India's equity markets, some stocks look expensive, but as mentioned above, market volatility over the past year has helped to bring the return potential for certain businesses down to more palatable levels, and the trades highlighted above were made in response to this shift to lower, more attractive valuations. Our focus for your company remains on identifying great businesses where we think we can make attractive long-term returns.

It is, however, important to note that valuations are only a reflection of the time horizon under consideration. The further into the future the investment horizon, the less need there is to worry about short term multiples and the more the valuation is influenced by a company's ability to deploy capital to deliver high rates of return over this longer timeframe. India's enormous long term growth potential (discussed further below) should underpin the long-term valuations of many high quality, sustainable Indian businesses. So, while volatility is something that we must be aware of, and can, at times such as the present, use to our advantage, we remain cautiously optimistic about the market's long-term prospects.

As Benjamin Franklin once said, "nothing in life is guaranteed except death and taxes". As long-term investors in Emerging Markets, we would add volatility to this. However, with every period of volatility comes opportunities and most often it allows you to invest in great franchisees at more attractive valuations. Although we invest in companies, it is also important to consider the environment in which these companies operate. There are many reasons why we believe India will be an attractive and supportive environment over the next decade and beyond. Below we lay out just some of the secular trends which should drive the markets:

1)  Economic growth - As many economies around the world slow or go into recession, India still has the potential to continue achieving high levels of GDP growth. As dangerous as it is to draw comparisons, if we look at China in 2007 when it had nominal GDP and GDP per capita comparable to India today, over the next four years, we saw China's GDP as measured by both these metrics more than double. While we don't expect India to grow as quickly as China over such a short time frame, we do see scope for it to double its nominal GDP and GDP per capita over the next decade, which underpins the long-term market opportunity.

2)  Rising consumer spending - We have written in the past about how rising GDP per capita will significantly boost consumer spending. India has an aspirational middle class which is increasingly confident and assertive. This, coupled with the second largest population in the world, and one that is still growing relatively rapidly, has the potential to drive demand for discretionary goods such as cars and household appliances. Rising incomes also inspire consumers to spend more on everyday staples, a trend known as premiumisation, which will add an additional impetus to consumer spending.

3)  Deepening financial penetration - In our view, India will see greater opportunities across the whole financial spectrum as its growing middle classes demand banking, investment and insurance services. We also expect the availability of credit to continue expanding. All these trends will be given further momentum by the rapid digitalisation of financial services, which offers access to a broad range of products to anyone with a mobile phone.

4)  Increased Offshoring/Manufacturing - The post pandemic world, combined with geopolitical events, have created opportunities on two fronts for India. Firstly, the pandemic proved the efficacy, and popularity, of remote working. So, the decades-long trend towards employing Indian workers to do jobs such as IT services and telemarketing based outside the country, is likely to continue, and support growth in areas such as business process outsourcing, which subcontracts various business operations to remote, third party vendors. Secondly, the recent escalation of geopolitical risks is likely to encourage companies to diversify their manufacturing bases to increase supply-chain resilience. India, again, stands to benefit from this trend, as foreign companies build manufacturing facilities in India and employ Indian workers to operate them.

Putting all this together, it should be no surprise that your Company's largest exposures are clustered in three sectors - Consumer, Financials, and IT. This is where we find the most compelling businesses, set to benefit most from the long-term secular and structural changes underway in India. On the other hand, we tend to avoid sectors such as commodities, utilities, and real estate, as they generally have lower growth/higher capital intensity/significant leverage and so generate lower long term returns on capital, and thus fail to meet our investment criteria.



 

While we believe in giving investments time to realise their full potential, there are potential risks along the way that may destabilise markets and possibly adversely affect the investment cases of some portfolio holdings. They therefore merit close monitoring. Foremost amongst near-term risks for India are the twin headwinds of the war in Ukraine and US monetary policy tightening impacting:

1)  Inflation - As a large net consumer of commodities, and an energy importer, the Indian economy has always been vulnerable to rising (imported) commodity prices, particularly oil and gas prices. Inflationary pressures will squeeze margins, as many companies lack the pricing power to pass on rising costs. Rising import prices will also widen the current account deficit, weakening the rupee and compounding price pressures.

2)  Interest rates - the Reserve Bank of India is likely to follow other central banks and continue to raise rates. Bond yields have already started pricing in monetary tightening.

3)  Growth - Higher inflation and rising interest rates could slow the pace of recovery, and earnings growth, just as momentum was building after the pandemic.

Despite these risks, we remain optimistic. India is an early-stage growth economy, with an annual per capita GDP just exceeding $2,000. As we discussed above, the potential for this to rise further, while also expanding the base of wealth creation, has immense implications. As digitisation spreads and deepens, encouraged by government initiatives, so too will its positive impact on productivity and on the economy.

We agree with Albert Einstein that "compounding is the eighth wonder of the world". But the benefits of compounding only accrue by staying invested, being patient and holding one's nerve at times of market turmoil. Nobody knows what the short term will bring, but in our view the Indian equity story remains in its infancy and while there will undeniably be volatility along the way, we see this as an opportunity rather than a risk. In our view volatility is the friend of the patient investor and we believe that at points of maximum volatility, investment opportunities can be at their most attractive. To close with one example of how patience, even in the face of bouts of extreme volatility, can and does pay off - a $10,000 investment in HDFC Bank in 1992 would today be worth $1,000,000. The intervening decades included the Asian financial crisis, the bursting of the technology bubble, the global financial crisis, taper tantrums, and a pandemic.

We believe we have the skills, experience, and resources to keep identifying other such long-term outperformers, and this leaves us confident of the Company's ability to continue delivering attractive levels of capital growth to patient investors, over the long-term. 

We thank shareholders for their ongoing support.



 

Performance Attribution

 

 

12 mths to 30th September 2022

 

%

%

Benchmark Total Return

 

8.8

 Stock and sector allocation

(3.0)


 Currency Effect

0.1


 Gearing/cash

0.3


 Residual

0.2


Investment Manager contribution


(2.4)

Impact of Capital Gains Tax1


0.3

Portfolio Total Return

 

6.7

Management Fees/ Other Expenses


(0.8)

Share Buy-Back


0.4

Net Asset Value Total Return

 

6.3

Ordinary Share Price Total Return

 

0.6

1 See note 8 and 14 for the reduction the Capital Gains Tax Provison which has had a positive impact on performance.

Source: Factset, JPMAM and MorningStar. All figures are on a total return basis.

Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.

A glossary of terms and alternative performance measures is provided on pages 104 and 105 of the Annual Report .

 

Amit Mehta

Sandip Patodia

Ayaz Ebrahim

Investment Managers

21 December 2022



 

PRINCIPAL AND EMERGING RISKS

The Board has overall responsibility for reviewing the effectiveness of the Company's system of risk management and internal control. The Board is supported by the Audit and Risk Committee in the management of risk. The risk management process is designed to identify, evaluate, manage, and mitigate risks faced. Although the Board believes that it has a robust framework of internal controls in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of the Manager, the Audit and Risk Committee has drawn up a risk matrix, which identifies the principal and emerging risks to the Company. These are reviewed and noted by the Board through the Audit and Risk Committee, which includes the ways in which these risks are managed or mitigated.

The Board considers that the risks detailed below are the principal risks facing the Company currently. These are the risks that could affect the ability of the Company to deliver its strategy.

 

Principal Risk

Description

Mitigation/Control

Movement in risk status in year to 30th September 2022

Investment and Strategy

Appropriateness and effective execution of strategy

 

An inappropriate investment strategy, or poor execution of that strategy, for example stock selection, asset allocation or the level of gearing, may lead to under-performance against the Company's benchmark index and competitor funds.

 

The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported by the Investment Manager.

The Investment Manager adheres to the investment risk appetite and parameters, including gearing and the use of derivatives set by the Board and 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 where appropriate, challenges the results of the investment process with the Investment Manager, who attend all Board meetings, and review data which show statistical measures of the Company's risk profile.

 

 

 

 

 

ESG Requirements from investors

The Company's policy on ESG may be out of line with ESG practices which investors are looking to invest in accordance with.

The Manager's investment process integrates consideration of environmental, social and governance factors into decisions on which stocks to buy, hold or sell. The Investment Managers have set out the way in which environmental, social and governance issues are incorporated into their investment process on pages 19 to 24 in the Annual Report and this is regularly discussed with the Board.

 

 

 

 

 

Regulatory Risks

Legal and Regulatory

Loss of its investment trust status and, as a consequence, gains within the Company's portfolio could be subject to Capital Gains Tax.

A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings.

Breach of the FCA Listing Rules or Disclosure, Guidance & Transparency Rules ('DTRs') could result in the Company's shares being suspended from listing which in turn would breach Section 1158.

The Section 1158 qualification criteria are continuously monitored by the Manager and the results reported to the Board at each Board meeting.

The Board relies on the services of its Company Secretary, the Manager and its professional advisers to ensure compliance with the Companies Act 2006, the FCA Listing Rules, DTRs and the Alternative Investment Fund Managers' Directive.

 

 

 

 

 

Corporate Governance & Shareholder Relations

Share Discount

Investment trust shares often trade at discounts to their underlying NAVs. Discounts can fluctuate considerably leading to volatile returns for shareholders.

The Board monitors the Company's discount to NAV daily and compare to peers/sector. The Board reviews sales and marketing activity designed to increase demand for the Company's shares.

The Company also has authority to buy back its existing shares to enhance the NAV per share for remaining shareholders and to reduce the absolute level of discount and discount volatility.

 

 

 

 

 

Operational

Cyber Crime

The threat of cyber-attack is regarded as at least as important as more traditional physical threats to business continuity and security. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares

The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard.

 

 

 

 

 

Broadscale external factors

Pandemics and geographically extensive weather conditions etc. put at risk the Managers' and/or other suppliers' ability to operate

The Board receives reports on the business continuity plans of the Manager and other key service providers.

The effectiveness of these measures has been assessed throughout the course of the COVID-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics.

 

 

 

 

 

Taxation

As a result of the amendment to the India/Mauritius Double Tax Treaty in May 2016, in June/July 2021, the Company sold down all of its listed investments held through the Mauritian subsidiary company and bought them back in the UK parent company's portfolio leading to 100% of the Group's investments being held directly by the parent company. The Company is subject to risks, such as increased tax liability and incorrect calculation of Capital Gains Tax, as a result of the re-structuring of the parent company/Mauritian subsidiary.

The Board has taken external specialist advice and adequate processes have been established to move assets to the parent company. Capital Gains Tax is calculated by specialist advisors and verified by the Manager.

On the 31st August 2022, the Mauritian subsidiary was put into liquidation, formally completing the re-structuring exercise and mitigating the risks associated.

 

 

 

 

 

 

Financial

Market and geopolitical tensions

The investments of the Company and their pricing are subject to the risk of changes in market prices and/or macroeconomic factors, including those factors arising as a result of the current conflict in Ukraine which, in addition to its impact on human lives and livelihoods, is beginning to have an impact on the global economy, ranging from decreases to supply (and/or increases to the costs) of goods to increases (and increased volatility) in oil and gas prices and inflation. In addition, the Company's investments are subject to risks arising from inflation driven by the knock-on effects of ongoing COVID-19 related disruptions to global supply chains, central bank stimulus and/or underinvestment in critical industries and services.

These risks represent the potential loss the Company might suffer through holding investments in the face of negative market movements.

This risk is managed to some extent by diversification of investments and by regular communication with the Manager on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board receives regular reports from the Manager regarding market outlook and gives the Investment Managers discretion regarding acceptable levels of gearing and/or cash. The Board monitors the implementation and results of the investment process with the Manager.

 

 

 

 

 

 

 

 

 

 

Monetary

The Company is faced by such risks as, market price risk, currency risk, interest rate risk, liability risk, credit risk and borrowing default risk. The intensity of these risks have been heightened by the current volatile market caused by factors like the geopolitical conflict in Russia and Ukraine and the sudden sharp rise in interest rates in the US, UK and Europe.

Details of how the Company mitigate and control these risks are disclosed in note 21 on pages 87 to 93 in the Annual Report .

 

 

 

 

Environmental




 Climate Change

Climate change is one of the most critical issues confronting asset managers and their investors today. Climate change may have a disruptive effect on the business models, sustainability and even viability of individual companies in India, and indeed, whole sectors. Perception of risk associated with climate change may adversely affect the valuation of the Company's holdings. India in particular is prone to severe weather conditions, including extreme heat, changing rainfall patterns and droughts 

The Board is also mindful of the risk posed by the direct impact of climate change on the operations of the Manager and other major service providers.

The Manager's investment process integrates consideration of environmental, social and governance factors into decisions on which stocks to buy, hold or sell. This includes the approach investee companies take to recognising and mitigating climate change risks.

The Board ensures that consideration of climate change risks and opportunities is an integral part of the Investment Manager's investment process. It recognises that given the portfolio stocks are all quoted investments, the relevant environmental risks are reflected in their share price over time by the market. Where appropriate, the Board challenges the Investment Manager on the investment process considerations and investment decisions, and receives updates from the Investment Manager on the evolution of its ESG work and policies. The Investment Manager aims to influence the management of climate related risks through engagement and voting and is a participant of Climate Action 100+ and a signatory of the United Nations Principles for Responsible Investment.

 

 

 

 

 

 

 

 

 

 

 

The AIC Code of Corporate Governance also requires the Audit and Risk Committee to put in place procedures to identify emerging risks. Emerging risks, which are not deemed to represent an immediate threat, are considered by the Audit and Risk Committee as they come into view and are incorporated into the existing review of the Company's risk register. However, since emerging risks are likely to be more dynamic in nature, they are considered on a more frequent basis, through the remit of the Board when the Audit and Risk Committee does not meet. The Board considers the following to be an emerging risk:

Political and Economic - an exacerbation of the geopolitical tensions/conflicts between China and Taiwan and Ukraine and Russia could lead to extreme market volatility and de-rating.

Long Term Viability

The UK Corporate Governance Code and the AIC Code of Corporate Governance require the Board to assess the prospects of the Company over a longer period than the 12 months required by the 'Going Concern' provision.

The Company's current position and prospects are set out in the Chairman's Statement, the Investment Managers' Report and the Strategic Report. The principal and emerging risks are set out on pages 33 to 38 in the Annual Report .

The Board has assessed the prospects of the Company, to the extent that they are able to do so, over the next five years. In conducting the assessment, the Board has taken account of the Company's current position, its investment objective and strategy, the investment capabilities of the Manager, the principal and emerging risks that it faces, including the potential volatility of the Indian economy and equity market as a result of the aftermath of COVID-19, the geopolitical uncertainties arising from the Russia-Ukraine conflict which has heightened macroeconomic uncertainty, inflation and the impact of climate change, and has considered the potential impact of these on the Company's future development and prospects. In addition, the Board has assessed the mitigation measures which key service providers, including the Manager have in place to maintain operational resilience and business continuity. It also noted that as an investment company with a relatively liquid equity portfolio being capable of being realised fairly quickly and largely fixed ongoing charges which equate to a very small proportion of net assets, it would easily be able to meet its ongoing operating costs as they fall due. Furthermore, the Board considered the Company's gearing and recognised that the Company does not have any loan covenants or liabilities that cannot be readily met.

In addition to the above, the Company carried out stress testing in connection with the Company's principal risks. The stress tests and scenarios considered the impact of severe market volatility on shareholders' funds. This included modelling substantial market falls, and significantly reduced market liquidity. The scenarios assumed that there would be no recovery in asset prices. The results demonstrated the impact on the Company's NAV, its expenses and its ability to meet its liabilities. In even the most stressed scenario, the Company was shown to have sufficient cash, or to be able to liquidate a sufficient portion of its listed holdings, in order to meet its liabilities as they fall due.

The Board has also taken into account the fact that the Company has a continuation vote at the 2024 AGM and, with input from the Company's major shareholders and its brokers, the expectation is that the shareholders will vote in favour of continuation. Based on that information the Directors do not think that the continuation vote will impact on the Company's long term viability.

In determining the appropriate period of assessment the Directors had regard to their view that, given the Company's objective of achieving long term capital growth from investments in India, shareholders should consider the Company as a long term investment proposition. This is consistent with advice provided by investment advisers, that investors should consider investing in equities for a minimum of five years. Thus the Directors consider five years to be an appropriate time horizon to assess the Company's viability.

The Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

 

By order of the Board
Divya Amin, for and on behalf of
JPMorgan Funds Limited
Company Secretary

21 December 2022



 

TRANSACTION WITH THE MANAGER AND RELATED PARTIES

Details of the management contract are set out in the Directors' Report on page 45 in the Annual Report .

The management fee payable to the Manager for the year was £4,920,000 (2021: £2,587,000) of which £nil (2021: £nil) was outstanding in the financial statements at the year end.

Included in other administration expenses in note 6 on page 79 in the Annual Report are safe custody fees payable to JPMorgan Chase Bank, N.A. as custodian of the Company amounting to £584,000 (2021: £256,000) of which £129,000 (2021: £128,000) was outstanding at the year end.

The Manager carries out some of its dealing transactions through group subsidiaries. These transactions are carried out at arms' length. The commission payable to JPMorgan Securities for the year by the Company was £51,000 (2021: £18,000) of which £nil (2021: £nil) was outstanding in Company's financial statements at the year end.

Handling charges payable on dealing transactions undertaken by overseas sub custodians on behalf of the Company amounted to £18,000 (2021: £7,000) during the year, of which £4,000 (2021: £1,000) was outstanding at the year end.

The Company also holds units in the JPMorgan Sterling Liquidity Fund. At 30th September 2022, the holding in JPMorgan Sterling Liquidity Fund was valued at £44,000,000 (2021: £20,600,000). During the year, the Company made purchases in this fund amounting to £164,700,000 (2021: £126,100,000) and sales on this fund amounting to £141,300,000 (2021: £129,500,000). Income receivable from this fund amounted to £139,000 (2021: £6,000) of which £nil (2021: £nil) was outstanding at the year end. JPMorgan earns no management fee on this fund.

At the year end, the Company held bank balances of £13,247,000 with JPMorgan Chase Bank, N.A. (2021: £5,766,000). A net amount of interest of £nil (2021: £nil) was receivable by the Company during the year, of which £nil (2021: £nil) was outstanding at the year end.

Prior to being put into Liquidiation on 31 August 2022, the subsidiary bought back 22,561 shares from the Company (see note 10c for details).

Details of the Directors' shareholdings and the remuneration payable to Directors are given in the Directors' Remuneration Report on page 58 in the Annual Report .



 

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the financial statements in accordance with UK-adopted international accounting standards and the requirements of the Companies Act 2006. Under company law the Directors must not approve the accounts unless they are satisfied that, taken as a whole, the annual report and accounts provide the information necessary for shareholders to assess the Company's performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors must be satisfied that, taken as a whole, the annual report and accounts are fair, balanced and understandable; and 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-adopted international 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.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The annual report and accounts are published on the www.jpmindian.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that have occurred to the Annual Report since they were initially presented on the website. The Annual Report is prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed on pages 43 and 44 in the Annual Report , confirms that, to the best of his or her knowledge the financial statements, which have been prepared in accordance with UK-adopted international accounting standards and applicable law, give a true and fair view of the assets, liabilities, financial position and return or loss of the Company.

The Board confirms that it is satisfied that the annual report and financial statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the position and performance, business model and strategy of the Company.

 

For and on behalf of the Board
Rosemary Morgan
Chairman

21 December 2022

 



 

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30TH SEPTEMBER 2022

 

 

2022

2021

 


Total income

 

 9,542

 36,965

 46,507

 6,342

246,952

 253,294

Profit before finance costs and taxation

 

 3,489

 36,965

  40,454

 3,010

 246,952

 249,962

Profit before taxation

 

 3,347

 36,965

  40,312

 2,779

 246,952

 249,731

Net profit

 

 1,278

 42,832

 44,110

 1,790

 228,119

 229,909

Earnings per share

2

1.66p

55.73p

57.39p

2.31p

293.72p

296.03p

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30TH SEPTEMBER 2022

 

At 30th September 2020

 24,868

 97,316

 5,886

 12,898

 420,054

 (24,325)

 536,697

At 30th September 2021

 24,868

 97,316

 5,886

 12,898

 645,480

 (22,535)

 763,913

At 30th September 2022

 24,868

 97,316

 5,886

 12,898

 675,538

 (21,257)

 795,249

 



 

STATEMENT OF FINANCIAL POSITION

AT 30TH SEPTEMBER 2022

Non current assets





 

 

 749,959

 757,056

Current assets






Current liabilities




Net current assets

 

 55,085

 27,906

Total assets less current liabilities

 

 805,044

 784,962

Non current liabilities




Net assets

 

 795,249

 763,913

Amounts attributable to shareholders

 

 

 

Total shareholders' funds

 

795,249

763,913

Net asset value per share

1,045.8p

983.7p

The 30 September 2022 total includes £58,000 residual debtor balance from the liquidation of the subsidiary JPMorgan Indian Investment Company (Mauritius) Limited.



 

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30TH SEPTEMBER 2022

 

Operating activities












Net cash outflow from operating activities before interest and taxation

 

 (6,074)

(3,092)






Net cash inflow from operating activities

 

  (2,953)

 1,108

Investing activities






Net cash inflow from investing activities

 

 46,510

 32,407

Financing activities







Net cash outflow from financing activities

 

 (12,774)

 (34,249)

Increase/(decrease) in cash and cash equivalents

 

 30,783

(734)



Cash and cash equivalents at the end of the year

 

57,255

 26,374

 



 

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30TH SEPTEMBER 2022

1.  Basis of Preparation

  Basis of accounting

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. The Company transitioned to UK-adopted International Accounting Standards in its company financial statements on 1 January 2021. This change constitutes a change in accounting framework. However, there is no impact on recognition, measurement or disclosure in the period reported as a result of the change in framework. The financial statements of the Company have been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.

The financial statements have been prepared on the going concern basis. The disclosures on going concern in the Directors' Report on page 54 of the Annual Report form part of these financial statements. The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies ('AIC') in July 2022 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP.

In preparing these financial statements the Directors have considered the impact of climate change risk as a principal risk as set out on page 37 of the Annual Report, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing.

The Company's share capital is denominated in sterling and this is the currency in which its shareholders operate and expenses are generally paid. The Directors have therefore determined the functional currency to be sterling.

2.  Earnings per share

 

2022

£'000

2021

£'000

Earnings per share is based on the following:



Revenue profit

1,278

1,790

Capital profit

42,832

228,119

Total profit

44,110

229,909

Weighted average number of shares in issue

76,852,573

77,666,181

Revenue earnings per share

1.66p

2.31p

Capital earnings per share

55.73p

293.72p

Total earnings per share1

57.39p

296.03p

1 Represents both the basic and diluted earnings per share and excludes shares held in Treasury.



 

 

2022

2021

Net assets (£'000)

795,249

763,913

Number of shares in issue excluding shares held in Treasury

76,039,849

77,654,860

Net asset value per share

1,045.8p

983.7p

 

4.  Status of results announcement

2020 Financial Information

The figures and financial information for 2020 are extracted from the Annual Report and Accounts for the year ended 30th September 2020 and do not constitute the statutory accounts for the year. The Annual Report and Accounts include 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.

 

2021 Financial Information

The figures and financial information for 2021 are extracted from the published Annual Report and Accounts for the year ended 30th   September 2021 and do not constitute the statutory accounts for that year. The Annual Report and Accounts include 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. 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.

 

For further information, please contact:

 

Divya Amin

For and on behalf of JPMorgan Funds Limited,

Company Secretary

020 7742 4000

 

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 FUNDS LIMITED

 

ENDS

A copy of the annual report will be submitted to the FCA's National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

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

 

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