Final Results

RNS Number : 9413W

JPMorgan Fleming Japanese Smllr Cos

17 June 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN FLEMING JAPANESE SMALLER COMPANIES INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST MARCH 2008

CHAIRMAN'S STATEMENT

Investment Performance

The year to 31st March 2008 has been another difficult one for investors in Japanese equities, particularly those investing in smaller companies. It is disappointing to report that, over the year to 31st March 2008, the Company's total return on net assets was -28.1%, which, when compared to the return of -19.1% from the Company's benchmark Index, the Citigroup Equity Index Japan Extended Market (in sterling terms), reveals an underperformance of 9.0%. Amongst our peer group of competitor funds, performance has been similarly weak, with three of the four returning worse results over the year. 

This period of underperformance has in part been influenced by our Manager's style of investment, which focuses principally on attractively priced growth stocks, and by the impact of gearing. The growth oriented section of the smaller companies market in particular has suffered. Over longer time periods, however, this style of investment has demonstrated that it can deliver substantial outperformance. The Investment Manager's Report, below, re-appraises the activity undertaken during the Company's financial year and looks forward to the prospects for the current year.  

Gearing

The Company has a Japanese Yen 6bn credit facility with The Royal Bank of Scotland plc which gives the Managers the ability to gear tactically. The facility is due to expire on 30th June 2008 and is in the process of being renewed. The Board has given the investment manager the flexibility to set gearing within the range of 90% to 120% invested.  At the time of writing, the Company was 107% geared, reflecting the Manager's optimism as to the prospects for the market.

Corporate Governance

Each year, the Board undertakes a formal review of the Investment Manager, JF Asset Management ('JFAM') and the Company Secretary, JPMorgan Asset Management ('JPMAM'). These reviews cover the investment management, company secretarial, administrative and marketing services provided to the Company and encompass the investment performance record, management processes, investment style, resources and risk control mechanisms. After full consideration, the Board concluded that the continued appointment of the Investment Manager on the terms agreed for the provision of its services is in the best interests of shareholders as a whole. 

The Board 

The Board has put in place procedures to ensure that the Company complies fully with the revised Combined Code and the AIC Code on Corporate Governance. 

In accordance with the Company's Articles of Association, the Directors retiring by rotation at this year's Annual General Meeting will be Bernard ('Ben') Grigsby and myself. Ben has proven to be a knowledgeable and well informed contributor and will seek re-election from shareholders. In my absence, the Nomination Committee met to discuss my own position and unanimously recommends my re-election to shareholders.

Share Repurchase and Treasury Facility

At the Annual General Meeting in 2007 shareholders gave the Directors authority to repurchase the Company's shares for cancellation. The Company bought back 100,000 (2007: nil) shares during the year and the Board believes that, given the volatile markets in which the Company invests, this facility is a valuable tool which can be utilised, when circumstances warrant it, to the benefit of shareholders as a whole. The Board is therefore seeking approval from shareholders to renew this authority at this year's Annual General Meeting.

At the Annual General Meeting in 2007 shareholders gave the Directors authority to buy shares into Treasury and to reissue them at a later date. Although no shares were bought into Treasury during the course of the year, the Board believes that the ability to hold and reissue shares from Treasury is in the interests of shareholders in assisting the Company in managing any imbalance between the supply and demand for the Company's shares and in reducing volatility. Accordingly, the Board will be seeking shareholders' approval to renew the authority at this year's Annual General Meeting. The Board is aware that this continues to be a controversial matter for certain groups of shareholders and, in view of this, the Board will maintain the criteria for the issuance of Treasury shares at the discount to net asset value, which was approved last year. Shares will only be reissued at a discount narrower than the weighted average of those then held in Treasury, and the aggregate dilution associated with any reissuance from Treasury will not exceed 0.5% of the net asset value over the one year period of the authority. This, in the Board's view, represents a balanced and considered approach to this matter.

Companies Act and new Articles of Association

It is proposed that the Company adopts new Articles of Association in order to comply with the provisions of the Companies Act 2006 that have been brought into effect already and those that will become effective from 1st October 2008. The new Act is being introduced in stages and is expected to be fully enacted by 1st October 2009. One of the principal changes will allow the Company to use electronic communications to send half year and annual reports to shareholders, although shareholders will have the right to opt to continue to receive hard copies if they wish and will continue to receive hard copy forms of proxy. The Board is also considering whether to take advantage of new regulations which allow companies not to post the half year report to shareholders, but instead direct shareholders to the Company's website. Both of these measures would reduce the Company's administrative expenses, but the Board would welcome shareholder feedback on these possible changes.

Annual General Meeting

The Directors and I very much look forward to welcoming shareholders to the Company's Annual General Meeting which will be held on 24th July 2008 at 1.30pm. As in previous years, the venue will be The Library, JPMorgan, 60 Victoria Embankment, London EC4Y 0JP. 

Outlook

The short term prospects for the Japanese markets are far from clear, but what is clear is that in valuation terms Japanese smaller companies are attractively priced. As operating performance improves and the economic cycle turns, investors, we believe, will return to this asset class. The conditions for a rally in the sector are in place, what is needed is a catalyst to stimulate that recovery.

Alan Clifton

Chairman    

17th June 2008

INVESTMENT MANAGER'S REPORT

The Japanese smaller company market had another dreadful year with already cheap valuations being compressed even further. There has been a downwards trend for these stocks for over two years now and it seems appropriate to set out where we believe we are in terms of the investment cycle and what our strategy is. The simple answer is that on a multi year basis we are very bullish and that our position is reinforced by compelling market valuations.

Firstly, the market is trading on a low price to book level. At the beginning of 2007, the TSE2 Index, which comprises the majority of smaller stocks quoted on the Japanese stock market, was trading on a ratio of around 1.15x price to book ('P/B') - a rather low level - and ended the year at only 0.8x P/B. This compares with the 2006 peak of 1.8x P/B, and the 2002/3 low of 0.65x P/B. In short the market has retraced in valuation terms almost all of the bull market seen since 2002/3 - having tripled in valuations terms on the way up it has collapsed to the 'bottom of the bear market lows' valuation levels. The bad news is that the market has experienced a brutal de-rating that has pummelled stock prices, the good news is that, on almost any measure, smaller companies in Japan trade on cheap valuations. Our strategy is to start moving towards a more aggressive portfolio with more cyclical elements and one that is anticipating the recovery in the market. This is especially the case if there is any shorter term pullback. 

Our stance is that the next major direction of the market is up and that we need to be positioned accordingly. As those shareholders who have been investors in the Company for a number of years will know, the market exhibits strong cyclicality and there is potential for some of the smaller companies to perform very strongly as the cycle picks up and valuations move from the current unusually cheap levels towards the top of their valuation ranges. 

The reason behind our multi year bullishness lies in this longer term valuation and performance cycle that smaller companies as a whole 'enjoy'. Right now stocks have become beaten down and ignored by many investors - there is a distinct sense of revulsion towards smaller companies from analysts and investors. As in 2003, brokerage firms based in Japan are reducing their commitment towards smaller company stocks with cuts being made at many of the leading houses. This capitulation by brokerage firms is just a reflection of a wider spread negative sentiment towards these stocks. It is this revulsion and despair that creates the opportunities to acquire stock at bargain prices - with investors willing to sell positions at almost any price. 

As companies show stronger operating performance and the economic cycle turns around, investors should be tempted by the cheapness and the improving outlook to buy these stocks once again. The attractiveness of the smaller company market should be aided by the fact that both the Japanese financial system and corporate balance sheets are significantly stronger, whilst areas such as corporate governance, dividend payout ratios and share buybacks have all shown significant improvement. Downside is limited whilst the upside of higher earnings and higher valuation seems rather attractive. Just now we have a good opportunity to invest in these stocks - cheap valuations, very depressed sentiment and significant upside potential.

How then are we positioned and why?

The Company currently comprises several different themes - some cyclical and some secular. The overriding intention is to have exposure to those areas that offer dramatic upside through growth or by valuation adjustment over the next several years. Using some specific stocks as examples we will illustrate our thought process and how that fits into the investment philosophy. 

In the cyclical basket - where investment flows are particularly directed - we are seeking companies that trade at the very low end of their historical valuation ranges and where the upside potential as their business cycle strengthens is large.

Innotech is a stock positioned as a growth cyclical. Innotech supplies Toshiba and other semiconductor memory makers with testing equipment. Business has shown consistent growth and the company's business structure has been shifting towards higher value added products - in a bear market investors don't care - but we see that there has been renewed interest and believe that as the company shows healthy growth it will be re-rated in line with its other semiconductor equipment related peers. As investors, the risk reward relationship seems firmly skewed in our favour as we have a disliked stock, cheap valuation, good underlying business performance with substantial upside potential. 

There are also some names that are delivering steady secular growth but where the valuation has become far too cheap and the company has become caught in the small cap downswing even though the business is performing strongly. Quite a few of our holdings fall into this structural growth company category - particularly in the service sector. Their business models tend to be additive where success one year leads to a new, higher business base for the next year. In contrast to some cyclicals, where each year represents a new challenge.

Trancom is one such structural growth company. A player in the logistics industry, Trancom is benefiting from the trend for companies to outsource their logistics operations to specialists. In Japan this trend is still quite new unlike in Europe or the US where it is well established. Earnings have grown at a very healthy rate as its logistics business continues to attract more customers as it can cut costs and improve efficiency. The company expects almost 20% per annum growth over the next few years and, given the highly profitable business and strong execution capability we feel that Trancom is capable of delivering substantial upside scope over the next few years. 

A new addition has been a shift into financials and especially some market volume related stocks reflecting our bullish posture for the medium term. Whilst previously we have held some regional banks due to their valuation and stable performance it seems extremely likely that when the market picks up there will also be a return of domestic investors. Currently trading by Japanese retail investors has declined by around 90% since the peak in 2006. As such operating performance at almost every brokerage firm looks poor - it is hard to see how already extremely low volumes could fall much further. New stock offerings and other activity have also almost completely dried up. As such we think this provides an opportunity to add some cyclical growth that relates to individual investors. When Japan returns to a bull market then we will see big flows towards stocks and a resurgence in new listings (we dream of an active mergers and acquisition market!). To some extent it is a chicken and egg investment - when valuations are cheap and attractive the earnings are low and market activity is weak, when earnings are high the market is already strong and valuations are expensive. We are buying before the business picks up, with low valuations and waiting for a market improvement - as the conditions improve we will likely increase exposure further. 

There are also some deep value holdings that we are persisting with, expecting a catalyst to unlock substantial 'hidden value'. One of our longer term holdings is Showa Aircraft. This company has legacy land holdings that have a great potential to be redeveloped into a civilian airfield operation. These land holdings are held on the company's books at only a nominal valuation and the stock is valued at approximately a fifth of this asset value. With strong upside such as this we are prepared to be patient. Recent signs of faster progress in developing the land site offer some expectation that we may see some of this value unlocked - or at least begin to be reflected in the share price more fully. 

We are keen to run some of our existing structural growth stories such as Trancom and hope that we can finally enjoy growth in the share price of these companies. We are moving away from some of the defensive names we have been holding and moving that money into new holdings at the beginning of a new stock performance cycle. This should increase the overall upside potential for the portfolio at this low point in the cycle. This increased aggression is also reflected by a recent increase in the gearing level towards the 110% level. 

The overall strategy is quite simply to find a diversified basket of stocks where we feel that downside is quite limited but where we can see substantial medium term upside potential. Our strategy now is to shift from a cautious positioning in some names towards a more aggressive one that anticipates the cyclical upturn and the improvement in stock market sentiment.  The portfolio is beginning to reflect this, with the cyclical and growth names complementing the deep value and structured growth stocks already held. 

The last few years have amply demonstrated that Japan is a market that is cyclical both in its earnings and in the valuation ranges. In both cases it seems that we are close to the bottom of these cycles and that the next few years should offer much better conditions with both a cyclical upturn and a cyclical positive re-rating waiting to be enjoyed. As such we are bulls on both Japan and especially on her smaller companies which magnify the swings in sentiment, valuation and the cycle.

David Mitchinson

Investment Manager

17th June 2008

For further information please contact:

Andrew Norman, JPMorgan Asset Management (UK) Limited………………020 7742 6000

www.jpmfjapanesesmallercompanies.co.uk  JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Audited figures for the year ended 31st March 2008

Income Statement  

	Year ended 31st March 2008			Year ended 31st March 2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Losses from investments held at fair value through profit or loss	-	(28,224)	(28,224)	-	(54,956)	(54,956)
Net foreign currency (losses)/gains	-	(1,102)	(1,102)	-	2,149	2,149
Income from investments	1,215	-	1,215	1,282	-	1,282
Other interest receivable and similar income	189	-	189	165	-	165
Gross return/(loss)	1,404	(29,326)	(27,922)	1,447	(52,807)	(51,360)
Management fee	(1,321)	-	(1,321)	(1,714)	-	(1,714)
Other administrative expenses	(320)	-	(320)	(331)	-	(331)
Net loss on ordinary activities before finance costs and taxation	(237)	(29,326)	(29,563)	(598)	(52,807)	(53,405)
Finance costs	(186)	-	(186)	(154)	-	(154)
Net loss on ordinary activities before taxation	(423)	(29,326)	(29,749)	(752)	(52,807)	(53,559)
Taxation	(85)	-	(85)	(90)	-	(90)
Total loss on ordinary activities after taxation	(508)	(29,326)	(29,834)	(842)	(52,807)	(53,649)
Loss per share (note 2)	(1.29)p	(74.50)p	(75.79)p	(2.14)p	(133.99)p	(136.13)p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

The 'Total' column of this statement is the Profit and Loss Account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance published by the Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.  

 JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

 Audited figures for the year ended 31st March 2008

 Reconciliation of Movements in Shareholders' Funds  

 For the year ended 31st March 2008

	Called up share capital £'000	Other reserve £'000	Capital redemption reserve  £'000	Capital  reserve    £'000	Revenue  reserve  £'000	Total £'000
At 31st March 2006	3,940	315,620	1,784	(152,028)	(9,364)	159,952
Net loss from ordinary activities	-	-	-	(52,807)	(842)	(53,649)
At 31st March 2007	3,940	315,620	1,784	(204,835)	(10,206)	106,303
Shares bought back and cancelled	(10)	(193)	10	-	-	(193)
Net loss from ordinary activities	-	-	-	(29,326)	(508)	(29,834)
At 31st March 2008	3,930	315,427	1,794	(234,161)	(10,714)	76,276

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Audited figures for the year ended 31st March 2008

BALANCE SHEET	31st March 2008	31st March 2007
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	83,522	122,977
Current assets
Debtors	1,723	676
Cash at bank and in hand	1,161	1,789
	______	______
	2,884	2,465
Creditors : amounts falling due within one year	(10,130)	(19,139)
	______	______
Net current liabilities	(7,246)	(16,674)
	______	______
Total assets less current liabilities	76,276	106,303
	______	_______
Total net assets	76,276	106,303
	=====	=====
Capital and reserves
Called up share capital	3,930	3,940
Other reserve	315,427	315,620
Capital redemption reserve	1,794	1,784
Capital reserve	(234,161)	(204,835)
Revenue reserve	(10,714)	(10,206)
	_______	_______
Shareholders' funds	76,276	106,303
	=====	=====
Net asset value per share (note 3)	194.0p	269.7p

JPMorgan Fleming Japanese Smaller Companies Investment Trust plc

Audited figures for the year ended 31st March 2008

CASH FLOW STATEMENT
	31st March 2008	31st March 2007
	£'000	£'000
Net cash outflow from operating activities	(355)	(797)
Returns on investments and servicing of finance
Interest paid	(201)	(138)
	_______	_______
Net cash outflow from returns on investments and servicing of finance	(201)	(138)
Capital expenditure and financial investment
Purchases of investments	(173,973)	(128,791)
Sales of investments	185,055	137,765
Other capital charges	(17)	(22)
	_______	_______
Net cash inflow from capital expenditure and financial investment	11,065	8,952
	_______	_______
Net cash inflow before financing	10,509	8,017
Financing
Net repayment of loans	(11,473)	(4,731)
Net overdraft repayment	-	(1,298)
Repurchase of ordinary shares	(193)	-
	_______	_______
Net cash outflow from financing	(11,666)	(6,029)
	_______	_______
(Decrease)/increase in cash for the year	(1,157)	1,988
	====	====

Notes to the Accounts

1. Accounting policies 

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

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31st March 2007. 

2. Loss per share

	31st March 2008	31st March 2007
	£'000	£'000
Loss per share is based on the following:
Revenue loss	(508)	(842)
Capital loss	(29,326)	(52,807)
Total loss	(29,834)	(53,649)
Weighted average number of shares in issue	39,361,346	39,409,423
Revenue loss per share	(1.29)p	(2.14)p
Capital loss per share	(74.50)p	(133.99)p
Total loss per share	(75.79)p	(136.13)p

3. Net asset value per share

The net asset value per share is based on the net assets attributable to shareholders of £76,276,000 (2007: £106,303,000) and on the 39,309,423 (2007: 39,409,423) shares in issue at the year end.

4. Status of preliminary announcement

The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31st March 2007 or 2008 but is derived from these accounts. The statutory accounts for the years ended 31st March 2007 and 31st March 2008 have been reported on by the Company's auditors. The auditors' reports for both years were unqualified, did not draw attention to any matters by way of emphasis and contained no statement under s237(2) or s237(3) of the Companies Act 1985. The statutory accounts for the year ended 31st March 2007 have been delivered to the registrar of Companies and statutory accounts for the year ended 31st March 2008 will be delivered following the Company's Annual General Meeting. 

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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