Final Results

RNS Number : 2554E

JP Morgan Mid Cap Invest Trust PLC

24 September 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN MID CAP INVESTMENT TRUST PLC

UNAUDITED FINAL RESULTS FOR THE YEAR ENDED 30TH JUNE 2008

Chairman's Statement

Investment Performance

I have to report to you that over the twelve months to 30th June 2008, the Company saw a decline in net assets of 26.1%, underperforming our benchmark, which fell by 20.0%. The Company's return to shareholders (i.e. share price plus net dividends) was a fall of 27.7%, reflecting the widening of the discount on the Company's shares from 12.4% to 15.2% with debt at fair value and assuming the reissue of treasury shares. The underperformance recorded is disappointing and reflects a particularly difficult first half to the year. In the second half performance improved, helped by a significant contribution from stock selection. 

The objective we set our Manager is to achieve capital growth through investing in medium-sized UK companies. The main measurement of the Manager's performance we take as the FTSE 250 index (excluding investment trusts). The Investment Manager's Report reviews the year in detail and includes a performance attribution table. The Board thoroughly and regularly reviews the Manager's investment strategy and process. 

Revenue and Dividends

Net revenue after taxation for the year was £4,785,000 (2006: £4,689,000) and earnings per share were 17.64p (2007: 15.53p). In 2004 the Board established a policy to increase dividends annually at least in line with inflation, as long as

normal market conditions prevailed. The Company paid an interim dividend of 5.50p per share (2007: 5.00p) in April 2008 and, having raised the interim dividend in this way, the Board is pleased to recommend an increased final dividend of 11.00p per share (2007: 9.50p) making a total of 16.50p (2007: 14.50p). This represents a 13.8% rise in the total dividend. Since 2004 when the Company's dividend policy changed, the total dividend has increased by 69.2%. The dividend is payable on 12th November 2008 to shareholders on the register at the close of business on 3rd October 2008. 

Gearing

The Company has a £45 million loan facility with the Bank of Ireland and a £9.5 million debenture which give the Managers the ability to gear tactically. The Board of Directors sets the overall gearing strategy and guidelines and reviews these at each meeting. Early in the last financial year gearing was increased to around 116%, in the belief that the market turmoil of the late summer of 2007 would provide significant investment opportunities. As it became apparent that the market turndown was going to be deeper and longer lasting than initially anticipated, that decision was reversed and gearing was reduced to around 107% at the year end.

Share Buy-backs

It is the present intention of the board to continue its policy of buying back shares, whether for cancellation or into treasury, to assist in the maintenance of a stable discount and enhance net asset value per share. This policy will be reviewed regularly in the light of market conditions. During the year under review, the Company repurchased for cancellation 3,099,820 shares, representing 10.6% of the issued share capital at the start of the year, and 213,000 shares into treasury, representing 0.7% of the issued share capital at the start of the year. Over the course of the year this added 1.4% to the Company's net asset value.

Since 30th June 2008, the Company has repurchased a further 481,000 shares into treasury representing 1.9% of the issued share capital. The Directors continue to believe that this mechanism is of benefit to shareholders and therefore propose and recommend that powers to repurchase up to 14.99% of the Company's shares for cancellation be renewed for a further period. At last year's Annual General Meeting, shareholders approved the use of treasury shares to improve further the liquidity of the Company's shares. The ability to buy shares into treasury and then reissue them at a narrower discount to net asset value gives the Board a further tool to manage any imbalance between supply and demand. In seeking the renewal of shareholder approval for the reissue of shares from treasury at a discount, the Board will maintain its strict limit to the dilution associated with any reissue to a maximum of 0.5% of net asset value in any one year. The Board recommends that shareholders renew the Company's authority to reissue shares from treasury at a discount. 

VAT Case

In my statement in last year's accounts, I commented on the prospects of the Company obtaining a refund of some past payments of VAT. During the course of this year progress has been made in this regard and negotiations with JPMorgan Asset Management are at an advanced stage.Whilst we have not accrued for any prospective recovery in these accounts, it is our expectation that we will recover in the region of £1.5m. Once there is certainty on this issue the Company will make an announcement accordingly.

Board of Directors

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

In accordance with the Company's Articles of Association, the Director retiring by rotation at this year's Annual General Meeting is Alex Scott. During the course of the year, Alex indicated his intention to stand down as a director of the Company and, accordingly, will not be seeking re-election. I would like to thank Alex for his considerable contribution to the success of the Company over his twelve year tenure as a Director.

John Emly retires on grounds of tenure (having served as a Director for twelve years) and seeks re-election. In addition, Michael Hughes and Margaret Littlejohns, who were identified as suitable Directors and appointed to the Board during the course of the year, retire and stand for election. The Nomination Committee has met to consider the attributes of the individuals concerned and, following this review, has no hesitation in recommending their re-election and elections at the forthcoming Annual General Meeting. 

Investment Manager

The Board has reviewed the investment management, secretarial and marketing services provided to the Company by JPMorgan Asset Management (UK) Limited ('JPMAM'). This annual review has included their performance record, management processes, investment approach, resources and risk control mechanisms. In the light of the disappointing investment performance in the first half of the year, the Board, in its review, paid particular attention to the investment management process. It was observed that over the medium term the process worked well, delivering outperformance of the benchmark. However, at times of high volatility or around market value inflection points, the process was less successful. As a result, the Board will continue to pay close attention to the performance of the process. Overall, the Board was satisfied with the results of the review and therefore in the opinion of the Directors, the continuing appointment of JPMAM for the provision of these services is in the best interests of shareholders. 

Companies Act 2006 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 enacted fully by 1st October 2009.More details on the proposed changes to the Articles are given in the Directors' Report. 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, not to mention its carbon footprint, but the Board would welcome shareholder feedback on these possible changes before reaching any decision.

Annual General Meeting

This year's Annual General Meeting will be held on 11th November 2008 at 12.00 noon at The Library, 60 Victoria Embankment, London EC4Y 0JP. 

Prospects

UK equity markets remain volatile and investor sentiment depressed, but in the view of the Managers, the price falls we have witnessed have led to the emergence of significant value amongst mid cap stocks. Although there will doubtless be further bouts of turbulence, the Company will continue to attempt to identify attractively valued stocks with the potential to outperform over the medium term.

Andrew Barker

Chairman

24th September 2008

Investment Managers' Report

Market Background

After four straight years of substantial gains the latest financial year for the JPMorgan Mid Cap Investment Trust, the 12 months to 30th June 2008, has been a tough period for investors, with an abrupt return to the bear market conditions of the early part of this decade. The period covered by the Company's financial year corresponds very closely with the onset of the financial market and economic woes triggered by the credit crisis that first began to emerge last summer.What appeared initially to be an arcane and somewhat distant problem emanating out of poor lending decisions by US home loan providers to subprime borrowers, quickly spread across the Atlantic, and into the wider global economy. In the UK banks stopped lending, firstly to one another, causing Northern Rock to collapse, then to consumers and corporates, leading to the collapse in housing transactions and mortgage lending, which has pushed a number of house builders close to bankruptcy.Where 12 months ago the UK economy was growing at a healthy 2.7%, the latest data released for the second quarter of 2008 recorded no growth, with the prospect of a recession currently looming large. Across swathes of the domestic economy (that is so important for mid cap companies), from retailers to property companies, from pub operators to builders merchants, growth forecasts have been slashed and share prices dramatically reduced. To make matters worse, this collapse in domestic activity has taken place against a backdrop of high and rising oil and commodity prices (the price of oil almost doubled in the period under review), which has kept inflation in the UK substantially above target levels, and constrained the ability

of the Bank of England to provide support to the domestic economy through interest rate cuts. Over the 12 months to June 2008 the FTSE 250 Index fell from 11528 to 9146, a capital only decline of 20.7%.Mid caps underperformed large caps in this period with the FTSE 100 index, with its much larger exposure to oil and commodity companies, only declining by 14.9%; this also marked a change in the pattern of the previous four years in which mid caps outperformed large caps.

Portfolio

It is our investment philosophy that cheap companies, and fast growing companies, with improving fundamentals, will outperform the overall market over the long term.We therefore aim to build consistently a portfolio for the Company that is overweight in both the best of value companies and the best of growth companies, whilst also ensuring that the management of the companies selected for the portfolio demonstrate capital discipline. Overall the portfolio should therefore be more lowly valued than the FTSE 250 Index, have more growth expected of it, and have better fundamentals. 

Over the latest financial year the Company's net assets per share (NAV) fell to 582.2p, giving a negative total return of 26.1% with net income reinvested, 6.1% behind the negative total return of 20.0% on the FTSE 250 ex IT Index, the Company's investment benchmark. The total return in share price terms was a little behind the NAV return, at -27.7% as the shares fell from 695.5p in June 2007 to 488.0p in June 2008, and as the share price discount widened over the financial year from 12.4% to 15.2%. Overall this was a disappointing result, both in absolute and in relative terms, and one in which the investment managers take no pride. The under-performance that we are reporting on over the 12 months to June 2008 was presaged in the Interim Report, when we highlighted a very difficult end to 2007 for the Company and our investment approach. In the first six months of the year under review, we reported a negative contribution of 6.7% from stock selection, as cheap companies within the portfolio were sold off sharply by the market on credit crunch/slowdown fears. In the second six months of the year our philosophy of picking a combination of cheap and fast growing companies, with good newsflow, has reverted to delivering positive stock selection returns. Stock/sector selection returns in this second six month period were a positive 2.4%, leaving stock/sector selection for the year as a whole still negative, at 3.5%, but less so. Performance for the whole period was also impacted by your investment managers' decision to remain geared during a period when mid cap stocks in general fell in share price terms. Tactically we misinterpreted the initial market volatility in the summer of 2007 as a buying opportunity, and increased portfolio gearing in August 2007 ahead of the run on Northern Rock.Whilst in recent months we reversed that tactical move, and have kept gearing at lower levels than has typically been the norm for the Company over the last decade, the overall decision to be even modestly geared reduced overall returns by 3.0% for the year.

The investment management approach of the managers is to target performance at the stock level, and to use predominantly sector exposure to mitigate risk within the portfolio. Among the stocks held in the portfolio that benefited stock selection in the last financial year, the top five were Game Group, Petrofac, Aggreko, Stagecoach, JKX Oil & Gas. Amongst these names both Petrofac, the oil services company, and Aggreko, the mobile power generation company, also featured last year. Both companies continued to report strong growth in profits, and continued to exceed market expectations for their growth during the latest period; they also represent good examples of our belief that good share price returns are earned from running 'winners' within the portfolio. Of the other large positive contributors, Game Group, the specialist computer games retailer, continued to report strong sales and profits growth, which was in part the result of the success of the Nintendo Wii in attracting a new audience to the world of computer games. Stagecoach, the bus and rail operator, reported steady profits growth through the period, with rail profits in particular leading to a number of share price upgrades. JKX Oil & Gas reported surging profits growth, as crude oil prices surged. Among the stocks which cost the portfolio performance, the worst five were Savills, Sthree, Investec, Michael Page International and Hays. All five holdings within the portfolio were cheap, economically sensitive companies, which saw their share prices reduced much more aggressively than any change to their growth prospects would have normally suggested. Three of the companies, SThree, Michael Page and Hays, are recruitment companies where investors took the view from mid 2007 onward that profits would be wiped out in a downturn in the UK economy, and sold/shorted the shares accordingly; in fact trading performance over the last 12

months for all three has proven resilient. Investec, the boutique South African Investment Bank and UK private client stockbroker, suffered a severe share price decline, partly as market sentiment turned firmly against financial companies in general, and partly as investors decided that the company's foray into the buy-to-let mortgage market would adversely impact returns. Savills, the estate agency and property fund management business, was sold off by investors in anticipation of a UK property market crash. In each case investor sentiment to these economically sensitive names, and to other similar situations, has been apocalyptic for most of the last 12 months, when in most cases the reality has been much less severe. This has created a real dichotomy between valuation and sentiment for a large swathe of cheap companies in the UK market.

Future Outlook

It has been a torrid period for UK stock market investors, with the mid cap market down nearly 30% from its May 2007 peak and sentiment towards domestically focused UK equities remains extremely downbeat. Share prices implicitly are factoring in very steep declines in earnings and profits, on the assumption that a recession in the UK economy will hit UK companies hard. From this perspective, company profits forecasts are simply regarded as hopelessly optimistic, with stock market analysts being too slow to recognise the bad news from the economy in their projections. However, one of the supposed attributes of equity markets is that they are forward looking, and discount the expected future flow of profits, so current investor despondency and the likely pressure on corporate profits should therefore already be largely reflected in current share prices. Over the last twelve months the mid cap index has become significantly cheaper, as a result of the fall in share prices and the downgrading of core profit expectations. The increased cheapness of the mid cap market can also be seen in the yield on the FTSE 250 ex IT Index, which is currently around 4%, and which compares favourably with a yield on 10 year Gilts of 4.5%. If UK mid cap stocks continue to report earnings and profits broadly in line with current expectations, the next few months of 2008 may prove to be a good time to go bargain hunting for stocks that will deliver significant growth on a medium term view.

Jeremy Wells

Christopher Llewelyn

Investment Managers

24th September 2008

Principle Risks 

The principal risks faced by the Company fall into six broad categories:

• Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to under-performance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount. The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on. JPMAM provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, who attend all Board meetings, and review data which shows statistical measures of the Company's risk profile. The Investment Managers employ the Company's gearing tactically, within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year.

• Market: Market risk arises from uncertainty about the future prices of the Company's investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by JPMAM. The Board monitors the implementation and results of the investment process with the Investment Managers. 

• Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under 'Business of the Company' above. Should the Company breach Section 842, it may lose investment trust status and as a consequence capital gains within the Company's portfolio would be subject to Capital Gains Tax. The Section 842 qualification criteria are continually monitored by JPMAM and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 1985 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the UKLA Listing Rules may result in the Company's shares being suspended from listing which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 1985, the relevant amendments in the Companies Act 2006 and the UKLA Listing Rules.
• Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance report.

• Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records may prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report.

• Financial: The financial risks faced by the Company are disclosed in note 21.

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that: 

a) the financial statements have been prepared in accordance with applicable UK accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b) the Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

Andrew Barker

Chairman

24th September 2008

   For further information please contact:

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

   Please note that up to date information on the Company, including daily NAV and share prices, factsheets and

   portfolio information can be found at www.jpmmidcap.co.uk

Income Statement

for the year ended 30th June 2008

			2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
		£’000	£’000	£’000	£’000	£’000	£’000
(Losses)/gains from investments held at
fair value through profit or loss		—	(61,675)	(61,675)	—	46,400	46,400
Income from investments		5,938	—	5,938	5,984	—	5,984
Other interest receivable and similar income		25	—	25	19	—	19
Gross return/(loss)		5,963	(61,675)	(55,712)	6,003	46,400	52,403
Management fee		(270)	(631)	(901)	(360)	(840)	(1,200)
Other administrative expenses		(306)	—	(306)	(298)	—	(298)
Net return/(loss) on ordinary activities before
finance costs and taxation		5,387	(62,306)	(56,919)	5,345	45,560	50,905
Finance costs		(602)	(1,405)	(2,007)	(656)	(1,530)	(2,186)
Net return/(loss) on ordinary activities before
taxation		4,785	(63,711)	(58,926)	4,689	44,030	48,719
Taxation		—	—	—	—	—	—
Net return/(loss) on ordinary activities
after taxation		4,785	(63,711)	(58,926)	4,689	44,030	48,719
Return/(loss) per share		17.64p	(234.86)p	(217.22)p	15.53p	145.85p	161.38p

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

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

  Reconciliation of Movements in Shareholders' Funds

for the year ended 30th June 2008

	Called up	Capital
	share	redemption	Capital	Revenue
	capital	reserve	reserve	reserve	Total
	£’000	£’000	£’000	£’000	£’000
At 30th June 2006	7,777	2,223	184,165	7,231	201,396
Shares bought back and cancelled	(469)	469	(12,385)	—	(12,385)
Net return on ordinary activities	—	—	44,030	4,689	48,719
Dividends appropriated in the year	—	—	—	(4,079)	(4,079)
At 30th June 2007	7,308	2,692	215,810	7,841	233,651
Shares bought back and cancelled	(775)	775	(18,594)	—	(18,594)
Repurchase of shares into Treasury	—	—	(1,140)	—	(1,140)
Net (loss) return on ordinary activities	—	—	(63,711)	4,785	(58,926)
Dividends appropriated in the year	—	—	—	(4,079)	(4,079)
At 30th June 2008	6,533	3,467	132,365	8,547	150,912

  Balance Sheet

at 30th June 2008

		2008	2007
		£’000	£’000
Fixed assets
Equity investments at fair value through profit or loss		161,155	263,573
Investments in liquidity funds at fair value through profit or loss		700	350
Total investments		161,855	263,923
Current assets
Debtors		701	983
Cash and short term deposits		225	292
		926	1,275
Current liabilities
Creditors: amounts falling due within one year		(2,395)	(22,081)
Net current liabilities		(1,469)	(20,806)
Total assets less current liabilities		160,386	243,117
Creditors: amounts falling due after more than one year		(9,474)	(9,466)
Total net assets		150,912	233,651
Capital and reserves
Called up share capital		6,533	7,308
Capital redemption reserve		3,467	2,692
Capital reserve		132,365	215,810
Revenue reserve		8,547	7,841
Shareholders’ funds		150,912	233,651
Net asset value per share		582.2p	799.3p

 Cash Flow Statement

for the year ended 30th June 2008

		2008	2007
		£’000	£’000
Net cash inflow from operating activities		4,500	4,890
Returns on investments and servicing of finance
Interest paid		(2,030)	(2,214)
Net cash outflow from returns on investments and servicing of finance		(2,030)	(2,214)
Capital expenditure and financial investment
Purchases of investments		(198,285)	(178,413)
Sales of investments		240,526	191,288
Transaction costs		(1,566)	(1,579)
Other capital charges		(9)	(8)
Net cash inflow from capital expenditure and financial investment		40,666	11,288
Dividends paid		(4,079)	(4,079)
Net cash  inflow before financing		39,057	9,885
Financing
Repurchase of ordinary shares		(20,324)	(11,691)
(Repayment)/drawdown of short term loans		(18,800)	300
Net cash outflow from financing		(39,124)	(11,391)
Decrease in cash and cash equivalents		(67)	(1,506)

  Notes to the Accounts

for the year ended 30th June 2008

1.    Accounting policies

(a)    Basis of accounting

This announcement is 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.   The information contained in this announcement is prepared on the same basis and uses the same accounting policies as the audited financial statements for the year ended 30 June 2007.

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

The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 30th June 2007 or 2008. The statutory accounts for the years ended 30th June 2007 and 2008 have been reported on by the Company's auditors. The auditors reports for both years were unqualified and contained no statement under s237(2) or s237(3) of the Companies Act 1985. 

The statutory accounts for the year ended 30th June 2007 have been delivered to the Registrar of Companies and statutory accounts for the year ended 30th June 2008 will be delivered in due course.

2.    Dividends

	2008	2007
	£’000	£’000
(a)           Dividends paid and proposed
Unclaimed dividends refunded to the Company	(14)	—
2007 final dividend of 9.5p (2006: 8.5p)1	2,643	2,587
Interim of 5.5p (2007: 5.0p)	1,450	1,492
Total dividends paid in the year	4,079	4,079
Final dividend proposed of 11.0p (2007: 9.5p)	2,851	2,777

The final dividend has been proposed in respect of the year ended 30th June 2008 and is subject to approval at the forthcoming Annual General Meeting. In accordance with the accounting policy of the Company, this dividend will be reflected in the accounts for the year ended 30th June 2009.

3.    Return/(loss) per ordinary share

The revenue return per share is based on the earnings attributable to the ordinary shares of £4,785,000 (2007: £4,689,000) and on the weighted average number of shares in issue during the year of 27,127,678 (2007: 30,188,673).

The capital loss per share is based on the capital loss attributable to the ordinary shares of £63,711,000 (2007: return of £44,030,000) and on the weighted average number of shares in issue during the year of 27,127,678 (2007: 30,188,673).

Total loss per share is based on the total loss attributable to the ordinary shares of £58,926,000 (2007: return £48,719,000) and on the weighted average number of shares in issue during the year of 27,127,678 (2007: 30,188,673).

4.    Net asset value per share 

Net asset value per ordinary share is based on total shareholders' funds attributable to ordinary shareholders of £150,912,000 (2007: £233,651,000) and on 25,919,180 shares in issue at the year end, excluding shares held in Treasury (2007: 29,232,000).

 

END

 

 

FR LIMFTMMITBAP