Final Results

RNS Number : 1701G

JPMorgan Smaller Cos IT PLC

17 October 2008

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

RESULTS FOR THE YEAR ENDED 31ST JULY 2008

    Chairman's Statement

Investment Performance

The period under review has been extremely difficult for investment managers generally, with the UK stock market in particular experiencing some of the biggest challenges seen in recent times. This is reflected in the Company's portfolio returns for the year. However, despite the volatile conditions, it is pleasing to report that the Company has again outperformed its benchmark index by a significant margin. Over the year to 31st July 2008 the Company recorded a negative total return on net assets of 29.1%, which compares favourably with the negative total return of the benchmark, the FTSE Small Cap Index (excluding investment trusts) of 35.5%. The negative return to shareholders was 29.7%.

Since the year end, conditions in the world markets have remained exceptionally volatile. As at 14th October 2008, the net asset value per share was 359.57p, the share price 309p and the discount 14%.

Revenue and Dividends

Net revenue after taxation for the year was £1,785,000 (2007: £1,172,000) and revenue return per share, calculated on the average number of shares in issue, was 8.67p (2007: 5.22p). The Directors are recommending a final dividend of 7.00p per share up by 40.0% (2007: 5.00p), costing £1,402,000 (2007: £1,062,000). If approved, the dividend will be paid on 12th December 2008 to shareholders on the register on 14th November 2008.

Each year the level of income received varies according to the Company's gearing, its investment stance and market conditions and, whilst it is the Company's policy to distribute substantially all the available income each year, shareholders should note that the Company's dividends will vary accordingly.

Investment Manager

The Company's objective is to provide shareholders with capital growth from a portfolio of investments in UK smaller companies. The Board carried out a formal review of the capabilities and services of the Manager during the year. This covered the investment management, company secretarial, administrative and marketing services provided to the Company by JPMorgan Asset management (UK) Limited ('JPMAM') and further included their investment performance record, management processes, investment style and resources. We have concluded that JPMAM remains the most appropriate Manager of the Company's assets and that the ongoing appointment of the existing Investment Manager is in the best interests of shareholders.

Since the year end, the Board has been advised that Sarah-Jane Morley will no longer be on the team managing the Company's portfolio as she will be relocating to South Africa. We will be sorry to lose Sarah-Jane and wish her all the best. Kent Kwan has now joined the investment management team to work alongside Georgina Brittain.

Continuation Vote

The Company's Articles of Association require that shareholders vote on the continuation of the Company at every third Annual General Meeting ('AGM'). The fifth of these votes falls this year. The Board has evaluated the performance and progress of the Company over the last year and, in particular, the three years since the last continuation vote was passed.

The table below shows that the Company has consistently outperformed the Company's benchmark, the FTSE Small Cap Index over these periods, and was ranked 4 out of 10 funds in the UK Smaller Companies Funds Sector as measured by the Association of Investment Companies (AIC) since July 2005. 

1st August 2007                 1st August 2005

            to 31st July 2008                 to 31st July 2008

Total Return

Share price                                      -29.7%                           +25.1%

Net asset value                               -29.1%                           +24.2%

Benchmark                                     -35.5%                           -13.6%

In the period since the last continuation vote the net asset value outperformance each year against the benchmark has been as follows:-

1st August to 31st July

2005-2006                                                 +19.5%

2006-2007                                                 +14.0%

2007-2008                                                 +6.4%

The Directors have confidence in the long-term growth prospects for UK smaller companies and in the ability of the Manager to continue to take advantage of this potential. The strength of the Manager is borne out by the Company's consistent out-performance of the benchmark over the last ten consecutive years with a return on net assets of 161.1% (5 years: 101%) compared with the benchmark return of 27.1% (5 years: 17.7%). The directors nonetheless have continued to evaluate other investment strategies and methodologies for securing good long term performance for shareholders, but are not yet satisfied of their merits. They therefore recommend that shareholders vote in favour of the resolution at the AGM on 28th November 2008, as they intend to do so in respect of their own holdings.

VAT

In June 2007, the European Court of Justice ruled in favour of the action brought by the Association of Investment Companies and JPMorgan Claverhouse that VAT should not be charged on management fees paid by investment trust companies. As a result, VAT has not been charged on the Company's management fees since 1st October 2007. This represents a cost saving to the Company and the Board is taking steps to recover the VAT paid in previous years to the extent it can. However, the process is not straightforward and it may take some time for the Company to recover the amounts due.

Share Buy backs

At last year's AGM, shareholders granted the Directors authority to repurchase the Company's shares for cancellation, such authority is due to expire at the earlier of 27th May 2009 or the conclusion of the AGM in 2008. During the financial year the Company repurchased a total of 1,223,661 ordinary shares for cancellation for a total consideration of £5,675,000, representing 5.8% of the issued share capital at the beginning of the year. This has added approximately 6.6p per ordinary share to the net asset value for continuing shareholders. 

The Board's objective remains to use the share repurchase authority to manage imbalances between the supply and demand of the Company's shares, thereby reducing the volatility of the discount. To date the Board believes this mechanism has been helpful and therefore proposes and recommends that powers to repurchase up to 14.99% of the Company's shares for cancellation be renewed for a further period.

Board of Directors

At the Nomination Committee held earlier this year, the Board carried out an evaluation of the Directors, the Chairman, the Board itself and its Committees. The Board takes this review seriously and views it as an effective means of evaluating the continuing efficacy of the Board. In accordance with the Company's Articles of Association, Michael Quicke will retire by rotation at this year's AGM and will offer himself for re-election. The Nomination Committee having considered his qualifications, performance and contribution to the Board and its committees, confirm that he continues to be effective and demonstrates commitment to his role and the Board recommends to the shareholders that he be re-elected. In accordance with the Company's Articles of Association, and having served as Directors for more than nine years, both Richard Fitzalan Howard and I offer ourselves for re-election on an annual basis. The Board does not believe that length of service in itself should disqualify a Director from seeking re-election and, in proposing our re-elections, it has taken into account the ongoing requirements of the Combined Code, including the need to refresh the Board and its Committees. The Nomination Committee recommends to shareholders that we should therefore be re-elected.

Corporate Governance

The Board has put in place procedures to monitor the Company's compliance with the Combined Code and the AIC Code on Corporate Governance.

Annual General Meeting

The Company's eighteenth AGM will be held on Friday 28th November 2008 at 12.00 noon at The Library, 60 Victoria Embankment, London EC4Y 0JP. In addition to the formal part of the meeting, there will be a presentation from the Investment Manager who will answer questions on the portfolio and performance. Shareholders who are unable to attend the AGM in person are encouraged to use their proxy votes.

Outlook

The current uncertainty in the financial sector globally continues to sap investors' confidence. The immediate outlook for the UK economy provides little encouragement and continues to look difficult for the second half of 2008 and beyond as markets absorb the increasing likelihood of a much more difficult period for the whole economy. 

However, a large number of smaller company stocks are significantly undervalued, with some now reaching distress levels. This presents us with opportunities to invest in stocks at very attractive values. Whilst the journey to recovery may be quite long, the Board, and the Investment Manager, are optimistic that the portfolio is well positioned when investor interest in the smaller companies' market returns and valuations bounce back from their current low levels.

    Strone Macpherson

    Chairman  

    17th October 2008

    Investment Manager's Report

Market Background

The end of the bull run in stockmarkets that began in 2003 coincided with the start of the financial year. As the year progressed, it gradually became clear that the unwinding of past financial excesses was going to be a much longer and more painful process than most commentators had initially envisaged. Overstretched bank balance sheets, lack of liquidity in the inter-bank market and deleveraging on a global basis, combined with slowing global growth and rising inflation, led stockmarkets to suffer steep declines.

In the UK, this was accompanied by a marked slowdown in the economy.While a number of banks began to repair their balance sheets with rights issues, lending criteria continued to become markedly harsher. This lack of liquidity exacerbated problems in the slowing housing market.While interest rates were cut from 5.75% to 5%, as the year progressed the Monetary Policy Committee was constrained by rising inflation from cutting interest rates more aggressively to compensate. As this economic backdrop played itself out through-out the year, investor confidence in the equities market evaporated, and markets fell.

Hardest hit was the smaller companies market.With little exposure to the strong commodities upswing, and large exposure to the worsening domestic economy, forecasts were downgraded and money was removed from the sector, leading to a swift and savage derating of the smaller companies arena.

Portfolio

The financial year to July 31st 2008 was a torrid year for the smaller companies market. The FTSE Smaller Companies (ex Investment Trusts) Index declined by over one third, falling -35.5%. Your company outperformed its benchmark over the period, producing a return on net assets of -29.1%. This was despite having gearing in place throughout the period which reduced outperformance by 1.9%.

Stock selection was an important part of this relative outperformance. A number of large positions in the portfolio produced very strong performance, despite the market backdrop. These included Aveva (technology stock),Wellstream (oil services), Chloride (uninterruptible power supplier) and Chemring (defence stock). Corporate activity was a feature over the year. Although the portfolio did not own a number of companies which were taken over in the period, such as Whatman and Northgate Information Systems, it benefitted significantly from the take-outs of Nord Anglia Education, Foseco, Imperial Energy (on-going) and Tradus.

Sector selection was the major contributor to the relative outperformance. There were no notable areas of sector underperformance, while on the positive side were the overweight positions in Oil Equipment, Services & Distribution and Aerospace & Defense. The strongest sector performance, however came from the holdings in the General Retailers sector.While the sector has been a very poor performer, due to concerns over consumer spending, our stock selection was extremely strong, including Game Group, CVS and Tradus, and we avoided holding a number of weak retailers which fell in value by over 75%.

The positioning of the portfolio did not change significantly throughout the period, as we had already introduced a non-domestic bias into the portfolio, underweighting exposure to the consumer and focussing the portfolio more on international businesses with strong end markets. Industrials therefore remained a very large position within the portfolio. The one marked change over the year was the move in Financials. Having been underweight previously, we moved significantly more so at the end of 2007, selling out of a number of real estate and speciality financial holdings. The overarching emphasis continued to be on stock selection, and in the difficult investment climate much effort was placed on avoiding the significant losers, in addition to owning the winners.

The investment process underlying the fund, as discussed in the last annual report, remains unchanged. The methodology uses a quantitative screen which breaks down the individual stocks in the investible universe and ranks them according to four factors: value, earnings momentum, price momentum and growth. After fundamental research to check the data, the balance sheet and the market environment, our aim is to construct the portfolio around stocks which demonstrate these tilts. This aims to ensure not only that the portfolio is constructed around our underlying philosophy of fast-growing cheap stocks with good newsflow, but also that the portfolio has both growth and value characteristics, which academic evidence has demonstrated to be the two long-term drivers of outperformance in the stockmarkets. This quantitative approach is the starting point for the stock selection that is the bedrock of the portfolio; it is then overlaid by the fund managers' extensive knowledge of individual companies and their markets and their own research efforts.

Market Outlook

We continue to face a period of global and domestic economic uncertainty. The global outlook hinges on a number of factors: the current commodity cycle pullback, allied to the recent strength in the dollar; the extent to which China's growth slows post the Beijing Olympics; and the ability of the USA to avoid recession.

In the UK, the economic picture continues to deteriorate. Falling house prices, huge pressure on the consumer's wallet, and the importance of financial and business services to the domestic economy all point to a further slowdown in growth. The latest Bank of England growth forecasts show the economy slowing to close to zero annual growth early next year.

With a cash-strapped Government unable to create any significant fiscal stimulus, the silver lining is the sharp pullback in commodity prices, notably the oil price. This and the slowdown in growth should bring inflation down sharply from its current high levels, allowing for the Monetary Policy Committee to cut rates again, as it did in the first part of 2008. History suggests that both inflation and the interest rate cycle are key for investors. If we are correct in our assumptions on both, recovery in the stockmarket should follow. 

While the economic backdrop is gloomy, and forecasts are continuing to fall in several sectors, valuations in a number of stocks are now reaching distressed levels, and there are pockets of extraordinary value emerging.While private equity firms are finding it difficult to raise debt in the current environment, trade buyers have begun to appear. This confirms our view that a large number of stocks are now significantly undervalued, and the recent sharp fall in sterling is likely to encourage this tendency. Thus, although the smaller companies market is currently trendless and friendless, we expect investor interest to return, and valuations to bounce from their compelling level. The timing of any recovery is uncertain, but the stockmarket will pre-empt any recovery on the ground.

    Georgina Brittain

    Investment Manager

    17th October 2008

     Principle Risks

With the assistance of the Manager, the Board has drawn up a risk matrix, which identifies the key risks to the Company. These key risks fall broadly under the following 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.

JPMorgan Asset Management (UK) Limited (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 reviews data which shows statistical

measures of the Company's risk profile. The Investment Manager employs the Company's gearing tactically, within a strategic range set by the Board. The Board usually holds a separate meeting devoted to strategy each year.

• 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 found in the Annual Report.

• Market: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 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 implication and results of the investment process with the Manager.

• 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 its

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 1985 could result in the Company and/or the Directors being fined or the subject of criminal

proceedings. 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 and the UKLA

Listing Rules.

• 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 found in the Annual Report.

• Financial: The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. Details of these risks are disclosed in the Notes to the Accounts in the Annual Report.

Related Parties Transactions

During the financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Directors' Responsibilities

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

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

b) the Annual Report, to be published shortly, 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

Strone Macpherson
Chairman
17th October 2008

For further information please contact:

Divya Amin, 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.jpmsmallercompanies.co.uk

      JPMorgan Smaller Companies Investment Trust plc

      Unaudited figures for the  year ended 31st July 2008

     Income Statement  

	(Unaudited) Year ended 31st July 2008			(Audited) Year ended 31st July 2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses) /gains from investments held at fair value through profit or loss	-	(41,818)	(41,818)	-	35,973	35,973
Net foreign currency gains/(losses)	-	1	1	-	(2)	(2)
Income from investments	2,943	-	2,943	2,519	-	2,519
Other interest receivable and similar income	34	-	34	21	-	21
Gross return /(loss)	2,977	(41,817)	(38,840)	2,540	35,971	38,511
Management fee	(533)	(533)	(1,066)	(697)	(697)	(1,394)
Other administrative expenses	(314)	-	(314)	(351)	-	(351)
Net return/(loss) on ordinary activities before finance costs and taxation	2,130	(42,350)	(40,220)	1,492	35,274	36,766
Finance costs	(335)	(335)	(670)	(319)	(319)	(638)
Net return/(loss) on ordinary activities before taxation	1,795	(42,685)	(40,890)	1,173	34,955	36,128
Taxation	(10)	-	(10)	(1)	-	(1)
Net return/(loss) on ordinary activities after taxation	1,785	(42,685)	(40,900)	1,172	34,955	36,127
Return/(loss) per ordinary share     ( note 2)	8.67p	(207.22)p	(198.55)p	5.22p	155.62p	160.84p

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.  

     JPMorgan Smaller Companies Investment Trust plc

     Unaudited figures for the year ended 31st July 2008

 Reconciliation of Movements in Shareholders' Funds  (Unaudited)

	Called up Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31st July 2006	5,757	18,360	909	92,075	1,225	118,326
Shares bought back and cancelled	(445)	-	445	(9,817)	-	(9,817)
Net return from ordinary activities	-	-	-	34,955	1,172	36,127
Dividends appropriated in the year	-	-	-	-	(979)	(979)
At 31st July 2007	5,312	18,360	1,354	117,213	1,418	143,657
Shares bought back and cancelled	(306)	-	306	(5,675)	-	(5,675)
Net (loss)/ return from ordinary activities	-	-	-	(42,685)	1,785	(40,900)
Dividends appropriated in the year	-	-	-	-	(1,047)	(1,047)
At 31st July 2008	5,006	18,360	1,660	68,853	2,156	96,035

     JPMorgan Smaller Companies Investment Trust plc

     Unaudited figures for the year ended 31st July 2008

BALANCE SHEET	(Unaudited) 31st July 2008	(Audited) 31st July 2007
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	101,394	154,170
Investments in liquidity funds at fair value through profit or loss	4,535	-
	_______	_______
Total investments	105,929	154,170
Current assets
Debtors	237	984
Cash at bank and in hand	99	-
	_______	_______
	336	984
Creditors : amounts falling due within one year	(10,230)	(11,497)
	_______	_______
Net current liabilities	(9,894)	(10,513)
	_______	_______
Total assets less current liabilities	96,035	143,657
	_______	_______
Total net assets	96,035	143,657
	=====	=====
Capital and reserves
Share capital	5,006	5,312
Share premium	18,360	18,360
Capital redemption reserve	1,660	1,354
Capital reserves	68,853	117,213
Revenue reserve	2,156	1,418
	_______	_______
Shareholders' funds	96,035	143,657
	=====	=====
Net asset value per ordinary share (note 3)	479.6p	676.1p

JPMorgan Smaller Companies Investment Trust plc

Unaudited figures for the year ended 31st July 2008

CASH FLOW STATEMENT
	31st July 2008	31st July 2007
	£'000	£'000
Net cash inflow from operating activities	1,443	932
Returns on investments and servicing of finance
Interest paid	(788)	(586)
	_______	______
Net cash outflow from returns on investments and servicing of finance	(788)	(586)
Capital expenditure and financial investment
Purchases of investments	(101,301)	(93,340)
Sales of investments	108,539	100,856
Other capital charges	(13)	(15)
	_______	______
Net cash inflow from capital expenditure and financial investment	7,225	7,501
Dividends paid	(1,047)	(979)
Net cash inflow before financing	6,833	6,868
Financing
Net (repayment)/drawdown of loans	(1,000)	2,000
Repurchase of ordinary shares	(5,578)	(9,817)
	_______	______
Net cash outflow from financing	(6,578)	(7,817)
	_______	______
Increase/(decrease) in cash for the year	255	(949)
	=====	====

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' issued by the AIC in December 2005.

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

2. Return/(loss) per ordinary share

	(Unaudited) 31st July 2008	(Audited) 31st July 2007
	£'000	£'000
Return per share is based on the following:
Revenue return	1,785	1,172
Capital (loss)/return	(42,685)	34,955
Total (loss)/return	(40,900)	36,127
Weighted average number of shares in issue	20,598,483	22,462,361
Revenue return per ordinary share	8.67p	5.22p
Capital (loss)/return per ordinary share	(207.22)p	155.62p
Total (loss)/return per ordinary share	(198.55)p	160.84p

3. Net asset value per ordinary share

The net asset value per ordinary share is based on the funds attributable to ordinary shareholders and on 20,025,322 (2007: 21,248,983) ordinary shares in issue at the year end.

4. Status of announcement

The financial information set out in the announcement does not constitute the company's statutory accounts for the years ended 31 July 2008 or 2007. The financial information for the year ended 31 July 2007 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under s237(2) or (3) Companies Act 1985. The audit of the statutory accounts for the year ended 31 July 2008 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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