Final Results to 30 September 2021
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN INDIAN INVESTMENT TRUST PLC
(the 'Company')
FINAL RESULTS FOR THE YEAR ENDED 30TH SEPTEMBER 2021
Legal Entity Identifier: 549300OHW8R1C2WBYK02
Information disclosed in accordance with the DTR 4.1.3
CHAIRMAN'S STATEMENT
Results
Following a recovery of the equity market in India this year, the Company produced a total return on net assets ('NAV') of +43.2%. The total return to shareholders was +45.4% for the period, reflecting the narrowing of the share price discount to net asset value over the year from 16.8% at the beginning of the year to 15.5% at the period end. The share price rose sharply from 571.5p to 831.0p over the year.
Although the absolute performance of the Company was positive over the 12 months to 30th September 2021, it underperformed the benchmark index by 3.6%. The Investment Managers comment in their report on this underperformance, which arose in large part from the strong recovery in lower-quality cyclical businesses which are more highly weighted in the benchmark than the Company's portfolio.
The Board has investigated in detail the reasons for the underperformance of the portfolio and after conducting a review of the Investment Managers' investment process and the resources of the team the Board believes that the changes put in place since Ayaz Ebrahim became co-manager need more time to deliver outperformance of the portfolio. The Board therefore considers that the continuing appointment of JPMAM for the provision of investment management services is in the best interests of shareholders. However, in view of the investment underperformance issues outlined above, the Board is keeping the manager's performance under constant scrutiny.
Investment Managers and Team Changes
Rajendra Nair continues to manage the Company's investments. With effect from 1st August 2020, Raj was joined as co-manager by another highly experienced investment professional, Ayaz Ebrahim, who is the co-head of the Asia Pacific Regional team within the JPMAM Emerging Markets and Asia Pacific ('EMAP') equities team. The appointment of Ayaz Ebrahim as joint Investment Manager last year provides greater oversight of the construction and risk metrics of the portfolio.
In their report which follows, the Investment Managers set out the key factors affecting the portfolio's performance as well as the Indian economy and equity market over the financial year and give their view of the prospects for the future.
Discount and Share Repurchases
The discount at which the Company's shares trade narrowed over the course of the year, from 16.6% to 15.5%.
At the AGM held in February 2021, 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 Company repurchased 452,605 shares into Treasury during the reporting period. Since the year end, 272,338 shares have been bought back for holding in Treasury.
The Board regularly considers the merits of buying back shares in order to manage the level and volatility of the discount and will buy back shares if the discount is out of line with the peer group and markets are orderly. As shares are only bought back at a discount to the prevailing net asset value, share buybacks benefit shareholders as they increase the net asset value per share.
The Board believes that such a 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.
Gearing
The Company has a floating rate loan facility to provide the Investment Managers with the flexibility to gear the portfolio when they think it is appropriate to do so. As at 30th September 2021, the Group's portfolio held 1.6% net cash, i.e. was 98.4% invested. At the time of writing, the Group's portfolio is approximately 3.5% net cash.
Management Fee
Following a review of the management fee in October 2020, the Board agreed a reduction in the management fee with the Manager, backdated to take effect from 1st February 2020. The current annual rate is 0.75% on the first £300million of gross assets and 0.6% on gross assets in excess of £300million. The fee is calculated and paid monthly.
Continuation Vote and Conditional Tender Offer
The Company's Articles require that at the Annual General Meeting 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, following consultation with the Company's advisers, 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. Any tender offer will also be conditional on shareholders approving the Company's continuation vote in 2024.
The Board
Nimi Patel retired from the Board at the AGM last February. As previously reported, Hugh Sandeman will step down from the Board at the conclusion of the AGM in February 2022. Therefore, in anticipation of his retirement, the Board started a recruitment process in the autumn and expects to announce the appointment of a new director in due course.
Jeremy Whitley will succeed Hugh as the Senior Independent Director upon his retirement.
In accordance with corporate governance best practice, all Directors, other than Hugh, will stand for reappointment at the forthcoming AGM.
On behalf of the Board, I would like to express our gratitude and appreciation to Hugh for the significant contribution he has made to the Board's work since he joined the Board in 2010 and wish him well for the future.
Mauritius Subsidiary and Taxation
As has been explained previously, the India-Mauritius tax treaty was amended with effect from May 2017 since when the advantages of investing in India via Mauritius have, to a large degree, been removed. The process to move the Company's assets to the UK parent company was accelerated during the year. All holdings except one delisted investment at nil value were transferred by the year end, leading to 100% of the Group's investments held directly by the parent company. Note 24 on pages 84 to 89 of the Annual Report explains the current position relating to the Mauritius Subsidiary.
IFRS 10
Consistent with the past four financial years, the financial statements of the Company contained in this Annual Report have been prepared in accordance with the amended IFRS 10. As a result, the financial statements do not consolidate our Mauritian subsidiary.
As a consequence of the non-consolidation of the Mauritian subsidiary's financial statements, it is the Board's view that these financial statements do not disclose the full cost of operating the enterprise or the total level of our liabilities. Therefore, we continue to seek to provide shareholders with a fuller picture of the combined operations of the Company and its subsidiary during the year, and their combined financial position as at 30th September 2021, by including in note 24 supplemental information and reconciliations to the statutory financial statements, i.e. figures which are comparable to those which were reported in years prior to 2017. As this information is within the notes to the financial statements it is audited. The Board again encourages shareholders to consider these figures if they want to judge how the Company has performed this year, alongside the statutory financial statements.
The transfer before 30th September 2021 of the remainder of the investment portfolio from the Mauritian subsidiary to the Company, as referred to above, will have the effect of simplifying the financial statements going forward. In time, the supplemental information shown in note 24 will be rendered unnecessary, although it will continue to be required in the next financial year as comparative figures will still be affected.
Annual General Meeting
A more familiar format for the AGM may be permissible for this year and, to that end, the AGM is scheduled to be held on Thursday, 3rd February 2022 at 12.00 noon at 60 Victoria Embankment, London EC4Y 0JP. The Board will continue to monitor COVID-19 developments closely and attendance at the physical meeting may be still restricted, depending on the Government's guidelines at the time.
We strongly advise all shareholders to consider their own personal circumstances before attending the AGM in person. For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register, together with access details, will be available shortly on the Company's website: www.jpmindian.co.uk or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
Shareholders viewing the meeting online will not be able to vote and we therefore encourage all shareholders to exercise their votes in advance by completing and submitting their proxy form. Shareholders are encouraged to send any questions ahead of the AGM via the Company Secretary.
If there are any changes to the above AGM arrangements, the Company will update shareholders through the Company's website and, as appropriate, through an announcement on the London Stock Exchange.
Outlook
While the pandemic has yet to run its course in India, we hope the situation can soon return to some normality. The Board and the investment managers remain confident about the prospects for generating positive shareholder returns from investing in Indian stocks based on the country's demographics, huge potential for infrastructure development, educated population and technological innovation.
Rosemary Morgan
Chairman
17th December 2021
INVESTMENT MANAGER'S REPORT
The year in review
2021 has been a year of extremes. A devastating second wave of the COVID-19 pandemic severely impacted the economy in the first half of the year, yet Indian equity markets looked beyond the country's immediate travails to reach all-time highs. In this environment of extreme dichotomy between real activity and financial market behaviour, your Company realised exceptionally high returns in absolute terms - its net asset value rose by 43.2% and its share price rose 45.4% over the financial year ended 30th September 2021. However, performance lagged the benchmark, the MSCI Indian Index (in GBP terms), which returned an even more impressive 46.8% over the period.
This underperformance arises in large part from the trust's focus on superior quality businesses, which we expect to grow profitably over the long term. This means that our portfolio will often differ markedly from the benchmark, which contains fewer premium and quality companies and more low quality, often structurally challenged, businesses. Our performance will therefore differ at times from the benchmark, as it has done over the past few years, which has impacted the long term performance. However, the Company's investment strategy adopts a long-term approach based on the view that superior quality companies, with scope to grow over many years, will outperform over the long run and reward investors for their patience.
In this report, we review recent performance and portfolio positioning in more detail and consider the outlook for Indian equity markets over the coming year and longer term.
Market Review
The financial year ending 30th September 2021 was a turbulent one for India, in which the pandemic continued to have a major impact on the country. The year began on a positive note, as the first wave of the pandemic passed, and economic activity began to recover rapidly. However, a vicious second wave significantly impacted the country between February and May 2021. To give context to the severity of the second wave, the number of cases peaked at just over 400,000 cases per day in May, four times higher than at the peak of the first wave in September 2020, making India the worst affected nation in terms of daily case numbers. In response to this crisis, Indian state governments imposed tight restrictions that severely disrupted the economy. However, economic activity began to normalise in the last few months of the financial year, as the second wave receded and restrictions were gradually eased.
Inflation was volatile over the financial year due to the economic disruption caused by the pandemic. It briefly crossed the upper end of the Reserve Bank of India's (RBI) 2-6% target range in late 2020 and mid-2021. However, the RBI's Monetary Policy Committee (MPC) maintained an accommodative stance to support growth, leaving rates unchanged throughout the year.
Indian corporate earnings broadly tracked the trajectory of economic activity, although globally oriented businesses were insulated to some extent from the pandemic-induced shock to the domestic economy. Rising input prices led to margin pressure across several sectors towards the end of the review period and near-term earnings forecasts were downgraded accordingly, although earnings are expected to rebound strongly over the next couple of years, as the economic recovery continues to gather momentum.
As in other major markets, Indian equity investors looked beyond the immediate grim economic and social circumstances towards the prospect of a robust post-pandemic recovery. Share prices rose to all-time highs, supported by abundant liquidity and strong investment inflows, particularly from retail investors. The MSCI India Index's return of 46.8% during the financial year significantly outperformed Asian and emerging market indices. Mid and small cap companies outpaced large caps during this period, again thanks to strong retail demand. The market's exuberant mood encouraged a rise in initial public offerings (IPOs), and the high-profile listing of several internet businesses such as Zomato, a leading food delivery services, and Nykaa, an online cosmetics retailer, fuelled the general market euphoria. We participated in both these listings (see below for further discussion).
Spotlight on stocks and sectors
In the second half of 2020 and early 2021, before the onset of the pandemic's second wave, we selectively increased the portfolio's exposure to quality cyclicals that would benefit from the economic recovery we anticipated. Acquisitions included cement companies ACC Ltd, and Ambuja Cement, and financial names such as ICICI Bank and Shriram Transport Finance, which provides commercial vehicle financing. However, the pandemic's second wave delayed the projected recovery for many months. Companies reliant on the domestic recovery therefore lagged globally focused cyclicals, which benefited from the more decisive rebound experienced by other economies. This lag in the returns of domestically oriented cyclicals was the key reason for the Company's relative underperformance over the past year.
At a sector level, the portfolio's overweight allocation and stock selection in financials was the largest detractor from relative returns. Financials is our largest sectoral overweight and this sector was hit by concerns that the severe disruption to economic activity caused by the pandemic would undermine asset quality. However, these concerns have not materialised. After the second wave peaked in May 2021, risks to the sector subsided as activity began to recover. Stock selection also detracted from relative performance, due in large part to our underweight in Bajaj Finance group. This company is an expensive, but well-run wholesale lender, which escaped the sector's travails, and was re-rated further due to the perception as a quasi-fintech business.
The portfolio's lack of exposure to the commodities sector, the portfolio's second largest underweight, after energy also detracted from relative performance at the sectoral level during the year. The global rise in commodity prices drove strong absolute and relative performance from companies such as steelmakers Tata Steel and JSW Steel, Hindalco, an aluminium producer, and Vedanta, a metals and mining company. We do not hold any of these companies, as they do not meet our quality and growth criteria. At the stock level, the Company's overweight in Maruti Suzuki, an auto manufacturer, was another detractor, as the rise in input prices squeezed margins and demand for cars declined sharply during the pandemic.
These adverse influences on relative performance were partially offset by the positive impact of other positions, most notably our underweight in Reliance Industries, a leading conglomerate with interests in refining, petrochemicals, telecom and retail which was the largest positive contributor to relative performance. This stock lagged the market due to its expensive valuation, following significant outperformance in the preceding three years. The Company's holdings in several domestic cyclicals such as Ultratech Cement and Larsen & Toubro, an engineering and construction company, also enhanced returns, supported by expectations of a normalisation in economic activity.
The underweight in the healthcare sector was another key contributor to relative performance. The pharmaceuticals sector lagged due to persistent pricing pressure in the US generics business. Stock selection was also a positive contributor as the holdings in a couple of healthcare services names such as Apollo Hospitals and Dr. Lal Pathlabs did extremely well due to the pandemic.
The outperformance of mid and small cap stocks benefitted several portfolio positions, such as L&T Technology Services, which provides engineering and related research and development services, and Kajaria Ceramics, a supplier of building products. All these names boosted returns over the review period.
Portfolio positioning and recent investment activity
Despite recent underperformance, we have maintained our focus on superior companies with attractive valuations and positive long term growth prospects. At a sector level, there have not been any significant changes in positioning over the past year.
Financials remains the portfolio's largest exposure in absolute terms and relative to the benchmark. Holdings in this sector fall in three key categories:
1. Premium financials: Including core holdings in privately owned banks such as HDFC Bank, Kotak Bank and Housing Development Finance Corp (HDFC). These businesses will all benefit from the post-pandemic recovery, and in addition, their long-term growth prospects are attractive, as they have the capacity to gain market share from weaker, state-owned banks, which remain structurally challenged.
2. Cyclically oriented financials: Including names such as ICICI Bank, Axis Bank, IndusInd Bank and Shriram Transport Finance, which should do well as economic activity rebounds.
3. Individual businesses with strong long-term growth drivers, but not excessively dependent on a cyclical recovery: Including companies such as HDFC Life Insurance, India's largest life insurer, Multi Commodity Exchange, the leading commodity derivatives exchange, and CRISIL, a subsidiary of Standard & Poors ratings agency and the leading ratings agency franchise in India.
Information technology services companies such as Tata Consultancy Services and Infosys Technologies are another key position. These are well-run businesses with favourable long-term growth runways, as they are well-placed to benefit from growing global demand for technology services. However, we have trimmed our exposure recently, taking some profits following strong performance over the past year.
We have also maintained our exposure to domestic cyclical sectors such as industrials (Larsen & Toubro) and building materials (ACC Ltd, Ambuja Cement and Ultratech Cement), which should benefit from the economic recovery.
Conversely, the Company is underweight the commodity sector. As noted above, this hurt relative performance over the past year; however, we believe that the valuations of commodity companies have run ahead of fundamentals, and some businesses in the sector are poorly run. As such, they do not align with our quality/growth-oriented approach.
Energy is another notable underweight mainly manifested in our below-index exposure to Reliance Industries. This company is undergoing a very interesting metamorphosis from a refining and petrochemical giant into a collection of technology oriented businesses straddling telecom, online retail and green energy. However, we remain cautious about its prospects. Despite the stock's recent underperformance, valuations are still factoring in a lot of positives, while ignoring the execution risks intrinsic to its newer ventures.
We are also increasingly cautious about the outlook for mid and small cap stocks, as absolute and relative valuations are near lifetime highs. As a result, we have trimmed our exposure to some of these holdings.
The portfolio's main thematic driver is the significant and sustained growth in domestic consumption likely over the coming decades. This offers many opportunities for investors with a long-term horizon. The trust has an exposure to this theme through a variety of businesses in several sectors, including automotives (Maruti Suzuki and Bajaj Auto). While this sector has struggled over the past year due to squeezed margins and constrained demand, it is well placed to benefit from the near-term recovery, while longer term demand will be supported by the continued growth of India's middle class. Furthermore, the transition to electric vehicles should generate significant opportunities (as well as some threats) over the next decade.
The consumption theme is also the motivating factor in the trust's position in United Spirits, an alcoholic drinks company, which is a subsidiary of Diageo. The consumption of alcoholic beverages is low in India and is likely to grow steadily over the long term. In addition, this business is effectively a duopoly, as Diageo and Pernod Ricard account for bulk of the spirits market. Other consumption focused positions include Titan Company, India's largest commercial jeweller, and Jubilant Foodworks, the master franchisee of Domino's Pizza in India.
Recent portfolio acquisitions inspired by the consumption theme include Britannia Industries, India's largest biscuits brand. This is a well-run business with a promising growth outlook, but its performance lagged over the past year. As a result, valuations have become attractive from a long-term perspective, although the business faces some near-term challenges due to margin pressure from rising input prices. We also participated in the initial public offerings (IPOs) of two consumer-oriented tech businesses - Zomato, a food delivery business and Nykaa, an online retailer of beauty products. These businesses are both at an early stage of development, with very good prospects of becoming significantly larger over the next decade and beyond, as demand for their services increases.
Gearing
Given the high valuation of the current Indian equity market, we continue to maintain a cautious approach to gearing. The Group currently has a net cash position of 1.6%, which is more conservative than its net cash position of 1.1% as at 30th September 2020.
PERFORMANCE ATTRIBUTION
YEAR ENDED 30TH SEPTEMBER 2021
|
% |
% |
|
|
Contributions to total returns |
|
|
|
Benchmark return |
46.8 |
|
|
Stock and Sector allocation |
(0.2) |
|
|
Gearing/(net cash)1 |
(3.0) |
|
|
Investment Manager contribution |
(3.2) |
|
|
Portfolio returnA |
43.6 |
|
|
Management fee/other expenses |
(0.5) |
|
|
Share buybacks/issuance |
0.1 |
|
|
Return on net assetsA |
43.2 |
|
|
Return to shareholdersA |
45.4 |
|
Source: Factset, J.P. Morgan and Morningstar. All figures are on a total return basis.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
1 Includes impact of CGT provision of -1.6%.
A Alternative performance measure ('APM').
A glossary of terms and alternative performance measures is provided on pages 97 and 98 of the Annual Report.
Outlook
Following the exceptional performance of Indian equity markets over the past year, some near-term volatility is possible. This could be triggered by any one of several potentially adverse influences. For instance, valuations, on both a price to earnings and price to book basis, are now at 10-year highs in absolute terms and relative to Asian indices and emerging markets more broadly. This implies a limited margin of safety, particularly if high global inflation proves more than transitory and interest rates begin to rise. The Indian economy has always been prone to bouts of high inflation and under such a scenario, the market could be vulnerable to a correction, especially if higher interest rates dampen recovery momentum. Higher than expected inflation could also put pressure on companies' margins in instances where businesses are unable or unwilling to pass on higher costs to consumers. In fact, this is already happening, causing some downgrades in near-term earnings forecasts, although earnings are nonetheless expected to recover strongly over the next couple of years.
There is also the risk of a third wave of COVID-19 inflections, particularly in the wake of the festive season. However, our base case remains that the economic impact of another wave is likely to be limited and short-lived, as a significant part of the adult population is likely to be vaccinated by early next year, and we are looking forward to a year in which the domestically oriented cyclical stocks in our portfolio, including financials, industrials, building materials and auto manufacturers, perform well as economy activity rebounds.
Whatever the possible trigger, long term investors will appreciate that episodes of volatility are inevitable in emerging markets like India, and, in fact, should be welcomed to the extent that they generate attractive entry points to interesting investment opportunities. History shows that such patient investors have been rewarded handsomely - the Company has delivered compound annual returns of almost 9.5% and 14% (in GBP) over the past 10 and 20 years respectively.
While India's economic recovery should support performance in the near-term, there are several reasons why we expect the portfolio's record of strong returns to continue over the longer term:
1. With an annual per capita GDP of only around $2,000, India remains an early-stage growth economy, with the potential to continue to expand rapidly over coming decades.
2. India's equity markets offer a large, diverse and growing investable universe. The attractive long-term macro backdrop offers many of these companies the opportunity to become significantly larger businesses over the next decade.
3. The technology revolution, which has transformed most major economies over the past decade, is at an embryonic stage in India. As the adoption of technology increases, the impact on every facet of India's economy will be profound. For example, new and innovative financial technology (fintech) startups are beginning to change the way Indians make payments, invest and borrow.
Our research process is oriented towards identifying the opportunities created by these mega trends playing out in India, and we believe our quality/growth investment approach remains appropriate given that India is only in the early stages of development. We are therefore confident of the Company's ability to continue delivering attractive levels of capital growth over the long-term.
We sincerely thank shareholders for their ongoing support.
Rajendra Nair , CFA
Ayaz Ebrahim
Investment Managers
17th December 2021
PRINCIPAL AND EMERGING RISKS
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. The risks identified, including emerging risks, and the ways in which they are managed or mitigated are summarised as follows. The impact of the COVID-19 pandemic is inherent in all of these risks and is discussed by the Board on a regular basis. The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below.
With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. In assessing risks and how they can be mitigated, the Board has given particular attention to those risks that might threaten viability.
These key risks fall broadly under the following categories:
• Investment and 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 Manager. JPMF also 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 Managers, who attend all Board meetings, and review data which show statistical measures of the Company's risk profile.
The Board is monitoring investment performance closely for improved results.
The Investment Managers employ gearing within a strategic range set by the Board.
• Environmental and 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 and profitability of individual investee companies, and indeed, whole sectors. Investors can no longer ignore the impact that the world's changing climate will have on their portfolios, with the impact of climate change on returns now inevitable. 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. In the Company's and Manager's view, companies that successfully manage climate change risks will perform better in the long-term. Consideration of climate change risks and opportunities is an integral part of the investment process. The 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.
Climate change could have a varying but significant impact on different regions, sectors and companies within India. The Investment Managers have set out the way in which environmental, social and governance issues are incorporated into their investment process on pages 14 to 19 of the Annual Report and this is discussed with the Board.
• Market
The emergence of COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. While current hopes that vaccination programmes will control the virus appear well-placed, there is the risk that emergent strains may not respond to current vaccines and may be more lethal and that they may spread as global travel opens up again.
The response to the Pandemic by the governments may potentially fail to mitigate the economic damage created by the Pandemic and public health responses to it, or may create new risks in their own right. The emergence of a number of vaccines gives hope that the world will be able eventually to live with the COVID-19 pandemic. Meeting the costs of support measures across the globe may see an increase in taxation which could be detrimental to investee companies, the appeal of savings and investment products (such as the Company) and to shareholders themselves. The support measures could also result in either significant levels of inflation in the medium term with a knock on effect on valuations and/or growth; or if they are not sufficient, they could lead to continued depressed levels of demand and deflation. Deflation would make the real price of the Company's debt rise and increase the effective debt burden.
The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have 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. The Board seeks to manage these risks through: a broadly diversified equity portfolio, appropriate asset allocation, reviewing key economic and political events and regulatory changes, active management of risk and the application of relevant policies on gearing and liquidity.
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 monitors performance regularly as set out in the 'Investment Strategy' section above.
• Legal and Regulatory
In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Business of the Company' above. Were the Company to breach Section 1158, it would lose its investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 1158 qualification criteria are continually monitored by the Manager and the results reported to the Board each month.
The Company must also comply with the provisions of the Companies Act and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules and Disclosure Guidance and Transparency Rules ('DTRs'). A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158.
The Board relies on the services of its Company Secretary and its professional advisers to ensure compliance with the Companies Act and the UKLA Listing Rules and DTRs.
• Taxation
Since the Company's launch, it used to hold the majority of its investments through its Mauritius based subsidiary company, thereby benefitting from the India/Mauritius Double Tax Treaty (the 'Treaty').
In May 2016 the Treaty was amended and the advantage of investing in India via Mauritius, whereby gains made on investments held for less than 12 months were not previously subject to capital gains tax, was removed. As a result, gains on the sale of investments held for less than 12 months are now taxed at the rate of 15%. In 2018, the Indian government announced the introduction of a 10% capital gains tax on realised gains from investments held for more than 12 months. Therefore, since May 2017, the advantages of investing in India via Mauritius have, to a large degree, been removed. 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 held directly by the parent company.
• Corporate Governance and Shareholder Relations
If the Company's share price lags the NAV by a significant level, this will result in lower returns to shareholders. The Board seeks to manage the volatility and absolute level of the discount by judicious use of its share repurchase authority, taking account of market conditions and the discount of companies in its peer group.
Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement on pages 38 to 42 of the Annual Report.
• Operational, including Cyber Crime
Loss of key staff of the Manager, such as the Investment Managers, could affect the performance of the Company. In this respect the Board receives information on contingency and succession planning from JPMF. Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Depositary's or 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 the Manager and its associates and the key elements designed to provide effective internal control are included in the Risk Management and Internal Control section of the Corporate Governance Statement on pages 40 and 41 of the Annual Report.
The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Board has received a summary of the cyber security policies of its key third party service providers and JPMF has confirmed that the Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by independent review and reported on every six months against the Audit and Assurance Faculty 01/20 ('AAF') standard.
The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company. The Audit and Risk Committee receives independently audited reports on the Manager's and other service providers' internal controls, as well as a report from the Manager's Compliance function. The Company's management agreement obliges the Manager to report on the detection of fraud relating to the Company's investments and the Company is afforded protection through its various contracts with suppliers, including the Depositary's indemnification for loss or misappropriation of the parent Company's assets held in custody. The Company's Mauritian subsidiary company is not subject to the Alternative Investment Fund Managers Directive and therefore it has not appointed a depositary, but has its own custody agreement with similar indemnity provisions.
• Financial
The financial risks faced by the Company include market price risk, currency risk, interest rate risk, liability risk, credit risk and borrowing default risk. Further details are disclosed in note 21 on pages 77 to 83 of the Annual Report. The Company has exposure to foreign currency as part of the risk reward profile inherent in a company that invests overseas. The income and capital value of the Company's investments are affected by exchange rate movements.
• Environmental, Social and Governance
Underperformance as a result of environmental, social and governance risks. The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a responsible manner and, therefore, it ensures that the Manager takes account of environmental, social and governance factors as part of the investment process.
• Political and Economic
The Company faces risks from possible policy changes including the imposition of restrictions on the free movement of capital. The Board has been assured by the Manager that appropriate business continuity plans are in place, which are tested on a regular basis, to deal with such eventualities. The Board has identified border tensions in the region, leading to extreme market volatility and de-rating, as an emerging risk.
Emerging Risks
The Board considers the following as emerging risks facing the Company:
• Global Pandemics
COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. While current hopes that vaccination programmes will control the virus appear well-placed, there is the risk that emergent strains may not respond to current vaccines and may be more lethal and that they may spread as global travel opens up again.
The response to the Pandemic by the Indian government may fail to mitigate the economic damage created by the Pandemic and public health responses to it, or may create new risks in their own right.
The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have 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. The Board seeks to manage these risks through: a broadly diversified equity portfolio, appropriate asset allocation, reviewing key economic and political events and regulatory changes, active management of risk and the of relevant policies on gearing and liquidity.
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 27 and 29.
The Board has taken account of the Company's current position, the principal and emerging risks that it faces, including climate change and the Covid-19 pandemic and their potential impact on its future development and prospects, and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience and business continuity. Equity markets across the world initially fell significantly due primarily to concerns around the scale of the pandemic's impact on the global economy. Although the total cost of Covid-19 is currently hard to predict with any certainty, the Board does not believe that it calls into question the long term viability of the Company, particularly as the Company has no loan covenants or liabilities that cannot be readily met. 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. The Directors have assessed the prospects of the Company, to the extent that they are able to do so, over the next five years. They have made that assessment by considering those principal and emerging risks, the Company's investment objective and strategy, the investment capabilities of the Manager and the current outlook for the Indian economy and equity market.
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 Annual General Meeting 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.
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the Group and the subsidiary's transactions with the Manager and related parties are given in note 24 on page 89 of the Annual Report.
Details of the management contract are set out in the Directors' Report on page 36 of the Annual Report.
The management fee rate for the Company and subsidiary was reduced in October 2020, but deemed effective from February 2020. The excess paid between February 2020 to October 2020 was treated as a prepayment and credited against later management fee invoices. The management fee payable to the Manager for the year was £2,587,000 (2020: £1,408,000).
Included in other administration expenses in note 6 on page 68 of the Annual Report are safe custody fees payable to JPMorgan Chase Bank, N.A. as custodian of the Company amounting to £256,000 (2020: £185,000) of which £128,000 (2020: £35,000) 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 £18,000 (2020: £17,000) of which £nil (2020: £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 £7,000 (2020: £13,000) during the year, of which £1,000 (2020: £2,000) was outstanding at the year end.
The Company also holds cash in the JPMorgan Sterling Liquidity Fund. At 30th September 2021, the holding in JPMorgan Sterling Liquidity Fund was valued at £20,600,000 (2020: £24,000,000). During the year, the Company made purchases in this fund amounting to £126,100,000 (2020: £164,600,000) and sales on this fund amounting to £129,500,000 (2020: £159,300,000). Income receivable from this fund amounted to 6,000 (2020: £47,000) of which £nil (2020: £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 £5,766,000 with JPMorgan Chase Bank, N.A. (2020: £3,392,000). A net amount of interest of £nil (2020: £nil) was receivable by the Company during the year, of which £nil (2020: £nil) was outstanding at the year end.
During the year, the subsidiary bought back 2,709,304 shares from the Company (see note 10c of the Annual Report for details).
Details of the Directors' shareholdings and the remuneration payable to Directors are given in the Directors' Remuneration Report on pages 45 and 46 of the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
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 International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board (IASB). 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 IFRSs as issued by the International Accounting Standards Board (IASB) 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 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 34 and 35, confirms that, to the best of his or her knowledge the financial statements, which have been prepared in accordance with IFRS 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
17th December 2021
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH SEPTEMBER 2021
|
| 2021 | 2020 |
| |||
| Notes | Revenue | Capital | Total | Revenue | Capital | Total |
Gains/(losses) from investments held at fair |
| - | 247,654 | 247,654 | - | (107,444) | (107,444) |
Net foreign currency losses |
| - | (702) | (702) | - | (363) | (363) |
Income from investments |
| 6,336 | - | 6,336 | 3,051 | - | 3,051 |
Interest receivable and similar income |
| 6 | - | 6 | 47 | - | 47 |
Total income/(loss) |
| 6,342 | 246,952 | 253,294 | 3,098 | (107,807) | (104,709) |
Management fee |
| (2,587) | - | (2,587) | (1,408) | - | (1,408) |
Other administrative expenses |
| (745) | - | (745) | (911) | - | (911) |
Profit/(loss) before finance costs and taxation |
| 3,010 | 246,952 | 249,962 | 779 | (107,807) | (107,028) |
Finance costs |
| (231) | - | (231) | (608) | - | (608) |
Profit/(loss) before taxation |
| 2,779 | 246,952 | 249,731 | 171 | (107,807) | (107,636) |
Taxation |
| (989) | (18,833) | (19,822) | (359) | (1,118) | (1,477) |
Net profit/(loss) |
| 1,790 | 228,119 | 229,909 | (188) | (108,925) | (109,113) |
Earnings/(loss) per share | 2 | 2.31p | 293.72p | 296.03p | (0.21)p | (124.40)p | (124.61)p |
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30TH SEPTEMBER 2021
| Called up | Share | Other | Exercised | Capital redemption reserve | Capital | Revenue reserve | Total |
At 30th September 2019 | 31,404 | 97,316 | 41,929 | 5,886 | 6,362 | 698,869 | (24,137) | 857,629 |
Shares bought back and cancelled | (6,536) | - | (41,929) | - | 6,536 | (168,073) | - | (210,002) |
Repurchase of shares into Treasury | - | - | - | - | - | (1,817) | - | (1,817) |
Loss for the year | - | - | - | - | - | (108,925) | (188) | (109,113) |
At 30th September 2020 | 24,868 | 97,316 | - | 5,886 | 12,898 | 420,054 | (24,325) | 536,697 |
Repurchase of shares into Treasury | - | - | - | - | - | (2,693) | - | (2,693) |
Profit for the year | - | - | - | - | - | 228,119 | 1,790 | 229,909 |
At 30th September 2021 | 24,868 | 97,316 | - | 5,886 | 12,898 | 645,480 | (22,535) | 763,913 |
STATEMENT OF FINANCIAL POSITION
AT 30TH SEPTEMBER 2021
Notes | 2021 | 2020 | |
Non current assets |
|
|
|
Investments held at fair value through profit or loss |
| 752,037 | 267,416 |
Investment in subsidiary held at fair value through profit and loss |
| 5,019 | 274,780 |
|
| 757,056 | 542,196 |
Current assets |
|
|
|
Financial assets: Derivative financial instruments |
| 8 | - |
Other receivables |
| 1,759 | 483 |
Cash and cash equivalents |
| 26,366 | 27,810 |
|
| 28,133 | 28,293 |
Current liabilities |
|
|
|
Other payables |
| (227) | (2,138) |
Net current assets |
| 27,906 | 26,155 |
Total assets less current liabilities |
| 784,962 | 568,351 |
Non current liabilities |
|
|
|
Provision for capital gains tax |
| (21,049) | (1,654) |
Bank loan |
| - | (30,000) |
|
| (21,049) | (31,654) |
Net assets |
| 763,913 | 536,697 |
Amounts attributable to shareholders |
|
|
|
Called up share capital |
| 24,868 | 24,868 |
Share premium |
| 97,316 | 97,316 |
Exercised warrant reserve |
| 5,886 | 5,886 |
Capital redemption reserve |
| 12,898 | 12,898 |
Capital reserves |
| 645,480 | 420,054 |
Revenue reserve |
| (22,535) | (24,325) |
Total shareholders' funds |
| 763,913 | 536,697 |
Net asset value per share | 3 | 983.7p | 687.1p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 30TH SEPTEMBER 2021
| 2021 | 2020 | |
Operating activities |
|
|
|
Profit/(loss) before taxation |
| 249,731 | (107,636) |
Deduct dividends received |
| (6,336) | (3,051) |
Deduct interest received |
| (6) | (47) |
Add interest paid |
| 231 | 608 |
(Deduct gains)/add losses on investments held at fair value through profit or loss |
| (247,654) | 107,444 |
Decrease/(increase) in prepayments, VAT and other receivables |
| 181 | (219) |
Increase/(decrease) in other payables |
| 58 | (4) |
Net cash outflow from operating activities before interest and taxation |
| (3,795) | (2,905) |
Interest paid |
| (257) | (635) |
Tax (paid)/recovered |
| (764) | 58 |
Dividends received |
| 5,215 | 2,871 |
Interest received |
| 6 | 47 |
Net cash inflow/(outflow) from operating activities |
| 405 | (564) |
Investing activities |
|
|
|
Purchases of investments held at fair value through profit or loss |
| (387,431) | (251,421) |
Sales of investments held at fair value through profit or loss |
| 419,838 | 440,931 |
Settlement of foreign currency contracts |
| (7) | - |
Net cash inflow from investing activities |
| 32,400 | 189,510 |
Financing activities |
|
|
|
Repurchase of shares for cancellation |
| - | (210,002) |
Repurchase of shares into Treasury |
| (4,249) | (261) |
Drawdown of loan |
| 20,000 | 30,000 |
Repayment of loan |
| (50,000) | - |
Net cash outflow from financing activities |
| (34,249) | (180,263) |
(Decrease)/increase in cash and cash equivalents |
| (1,444) | 8,683 |
Cash and cash equivalents at the start of the year |
| 27,810 | 19,127 |
Cash and cash equivalents at the end of the year |
| 26,366 | 27,810 |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH SEPTEMBER 2021
1. Accounting policies
Basis of accounting
The Company's financial statements have been prepared in accordance with the Companies Act 2006 and International Financial Reporting Standards ('IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), the International Accounting Standards and Standing Interpretations Committee and interpretations approved by the International Accounting Standards Committee ('IASC').
The financial statements have been prepared on the going concern basis. In forming this opinion, the directors have considered any potential impact of the COVID-19 pandemic on the going concern and viability of the Company. In making their assessment, the Directors have reviewed income and expense projections and the liquidity of the investment portfolio, and considered the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience particularly in light of COVID-19. The disclosures on going concern in the Directors' Report on page 44 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 October 2019 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.
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/(loss) per share
|
| 2021 | 2020 |
|
| £'000 | £'000 |
Earnings/(loss) per share is based on the following: |
|
| |
Revenue profit/(loss) |
| 1,790 | (188) |
Capital profit/(loss) |
| 228,119 | (108,925) |
Total profit/(loss) |
| 229,909 | (109,113) |
Weighted average number of shares in issue | 77,666,181 | 87,558,783 | |
Revenue earnings/(loss) per share |
| 2.31p | (0.21)p |
Capital earnings/(loss) per share |
| 293.72p | (124.40)p |
Total earnings/(loss) per share |
| 296.03p | (124.61)p |
3. Net asset value per share
|
| 2021 | 2020 |
|
| £'000 | £'000 |
Net assets (£'000) |
| 763,913 | 536,697 |
Number of shares in issue excluding shares held in Treasury |
|
77,654,860 |
78,107,465 |
Net asset value per share |
| 983.7p | 687.1p |
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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