Final Results

RNS Number : 7552T

JPMorgan Smaller Cos IT PLC

01 October 2010

 



STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31^ST JULY 2010

The Directors of JPMorgan Smaller Companies Investment Trust plc announce the Company's results for the year ended 31st July 2010. The following comprises extracts from the Company's Annual Financial Report for the year ended 31st July 2010. The full Annual Report and Accounts, including the Notice of the Annual General Meeting will be available to be viewed on or downloaded from the Company's website at www.jpmsmallercompanies.co.uk shortly.

Chairman's Statement

Investment Performance

The year ended 31st July 2010 saw a recovery in the global economy following the fiscal and monetary stimulus provided by governments in the major economies. The Company recorded a total return on net assets of 29.5%, a strong outperformance of the total return of the benchmark, the FTSE Small Cap index (excluding investment trusts) of +15.6%. The total return to shareholders was +30.2%. The Company's excellent performance is welcome following two years of exceptionally difficult markets. The net asset value in the second half was ahead modestly (by 3%), and was some 7% above the benchmark. As shown in the performance attribution table below, the most significant contributor to this performance was the Investment Managers' stock selection and asset allocation helped by gearing to a smaller degree.

The Company's share price increased from 289p at 31st July 2009 to 368p at 31st July 2010, amounting to a rise of 27.3% during the year. It is also satisfactory to report that performance since the year-end has remained good. As at 28th September 2010 the net asset value per share was 525.6p, the share price 412.0p and the discount 21.6%.

The Investment Managers' report analyses the performance and gives a detailed commentary on the investment strategy and portfolio construction. The Board is pleased with the Investment Managers' performance over the past twelve months and after a further substantive review continues to support the approach of selecting stocks, based on their financial strength, quality of management and growth potential.

Revenue and Dividends

Net revenue after taxation for the year was £1,723,000 (2009: £2,261,000) and revenue return per share, calculated on the average number of shares in issue, was 8.92p (2009: 11.43p). £340,000 (2009: £627,000) relating to recovery of VAT on management fees from previous years is included in the net revenue after taxation.

The Directors are recommending a final dividend of 8.5p per share, an increase of 6.3% costing £1,610,000, compared with the final dividend of 8.0p per share paid in 2009. The Company also paid a special dividend of 3.0p per share in 2009 which was as a result of the VAT recovery. If approved, the dividend will be paid on 10th December 2010 to shareholders on the register on 12th November 2010.

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 has again 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 JPMorgan Asset Management (UK) Limited 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.

Share Buy backs

At last year's Annual General Meeting, shareholders granted the Directors authority to repurchase the Company's shares for cancellation, such authority to expire at the earlier of 27th May 2011 or the conclusion of the Annual General Meeting in 2010. During the financial year the Company repurchased a total of 672,199 ordinary shares for cancellation for a total consideration of £2,386,000, representing 3.4% of the issued share capital at the beginning of the year. This has added approximately 3.2p 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 aiming to reduce the volatility of the discount. To date the Board believes this mechanism continues to be helpful and proposes and recommends that powers to repurchase up to 14.99% of the Company's shares for cancellation be renewed for a further period.

Gearing

The appropriateness and quantum of gearing is regularly discussed between the Board and the Investment Manager. An increased borrowing facility of £10 million was put in place with ING Bank in April this year upon expiry of the previous £8 million facility, with the aim of enhancing returns; of this, £7 million has been drawn throughout the year. This represented a gearing level of 6.0% of net assets at 31st July 2010.

Board of Directors

At the Nomination Committee held earlier this year, the Board carried out a further internal evaluation of the Directors, the Chairman, the Board itself and its Committees. This is an important process and an effective means of evaluating the continuing efficacy of the Board. In accordance with the Company's Articles of Association, Andrew Robson 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.

Annual General Meeting

The Company's twentieth Annual General Meeting will be held on Wednesday 24th November 2010 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 Managers 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.

Long Term Performance

The forthcoming AGM is the twentieth the Company will have held, and it is interesting to note that the net asset value total return has risen 613.4% since the inception of the Company in 1990, a compound growth rate of 10.3% per annum - comfortably outstripping the Company's benchmark (ahead by 500.6%, a compound growth rate of 9.4%).

Outlook

Although your Board is delighted to be reporting on a good year for your Company, a range of economic concerns including sovereign debt in Europe, fiscal austerity, consumer deleveraging and lack of credit in the system remain in place to cause market concern in the short term. Despite this unsettled backdrop, the Investment Managers are well placed to identify high quality UK listed and AIM companies (many having interesting international exposure) which should deliver good performance for the Company in the longer term.

Strone Macpherson

Chairman

1st October 2010

Investment Managers' Report

Market Background

The stockmarket recovery which began in Spring 2009 correctly presaged the end of the recession and the start of global economic recovery. Over the first half of your Company's financial year, quantitative easing brought about improvement in a number of the major economies, and we saw the benefits in a significant rebound in macro-economic data.

In the second quarter of 2010, these data points became less strong in the West and in particular in the US, although the Asia-Pacific region continued to recover strongly. Stockmarkets became concerned over the possibility of a so-called double-dip, i.e. a return to recession, in the US, Europe and the UK. This and the growing risk of a sovereign default led to an increase in market volatility, and caused the market to remain range-bound.

In the UK, concerns over the deficit led to the weakness of sterling. This continued until the UK Election. The forming of the coalition government, with its strong message on budget reduction, put an end to sterling's slide, despite clear indications that interest rates in the UK are likely to remain very low for some time.

Portfolio Construction

Your Company enjoyed a strong year of recovery last year. The FTSE Small Cap Index (ex Investment Trusts) rebounded 15.6% over the year, but your Company produced significantly greater returns, with a net asset value increase of 29.5%. The return to shareholders rose to 30.2% this year as the discount to NAV narrowed slightly to 22.1% at the year end. As can be seen from the table below, while sector selection and gearing were both positive contributors, the large majority of this outperformance came from stock selection.

Performance attribution

	12 months to		12 months to		12 months to
	31st July 2010		31st July 2009		31st July 2008
Contributions to total return	%	%	%	%	%	%
Benchmark return		15.6		-11.0		-35.5
Asset allocation	2.8		-2.6		5.3
Stock selection	10.6		-6.4		3.3
Gearing/cash	0.4		0.1		-1.9
Investment Manager contribution		13.8		-8.9		6.7
Portfolio total return		29.4		-19.9		-28.8
Management fees/other expenses	-1.1		-1.1		-1.1
Repurchase of shares for cancellation	0.9		0.2		0.8
VAT Recovery	0.3		0.5		-
Other effects		0.1		-0.4		-0.3
Return on net assets		29.5		-20.3		-29.1
Impact of decrease/increase in discount		0.7		-2.9		-0.6
Return to shareholders		30.2		-23.2		-29.7

Source: Xamin/JPMAM/Morningstar. All figures are on a total return basis.

In terms of sectors, the stand-out performers were Oil & Gas Producers, Industrial Engineering, Real Estate and the underweight position in Pharmaceutical & Biotechnology. Turning to stocks, a number of long term holdings performed very strongly, such as Senior (aerospace company), International Personal Finance, and Chloride, which was bid for. A newer addition to the portfolio, Cove Energy, (an oil company focussed on Mozambique), was another significant contributor. On the negative side, two of the key detractors from performance were bid stocks we did not own, Care UK and Scott Wilson. Of our holdings the main disappointment was Intec Telecoms, which had a large profit warning. We still own stock in this company and it has now had a bid approach.

Last year we discussed the significant shifts that we had made to the portfolio as the outlook changed. We continued to make further changes throughout this year. The two key changes were our significant increased interest in Oil & Gas Producers and the ongoing reduction in exposure to real estate stocks. As mentioned above, both of these decisions proved very timely. Other changes have included an increased position in the Chemicals sector, and a smaller increase in Mining. These were funded by a reduction in our Food Producers holdings and in the Software sector.

We have also discussed for some time our views of the likely re-emergence of mergers and acquisitions or bid activity and we have seen this appear over the year. Examples in the portfolio that have completed include Delta & Chloride, but a number of other holdings are currently in discussion with potential buyers, as current market valuations make them attractive targets.

Market Outlook

Stockmarkets are currently range-bound, due to the two way split between those who believe we are heading into a double dip, and those who believe that we are currently in a natural pause in the pace of recovery, as the benefits of re-stocking and inventory build wear off.

The delicate balance between these two views has caused markets to become focussed on the very short term, reacting excessively to each new economic data point. Your fund managers are of to the latter view. This is backed up by broad macro data on world industrial production, (now back above its pre-recession peak), world trade metrics and global air freight numbers (again above pre-recession peak).

While significant macro economic risks remain in place - the sovereign debt crisis, consumer deleveraging, lack of credit in the system, to name some among many - the valuation placed on equities reflects a large part of these risks. There is a dissonance between estimate momentum (companies upgrading their outlooks and forecasts) and stock markets. As fundamental stock pickers, we place great emphasis on the view from the ground, that is companies' own outlooks - and indeed on their actions. The growing level of corporate confidence is evidenced by the notable pick up in mergers and acquisitions activity.

Our focus remains on high quality companies with strong balance sheets that are capable of growing despite the unsettled backdrop. Currently, we are still finding a large number of these companies to invest in, often on very lowly ratings with good dividend yields. As they continue to produce strong earnings, over time we would expect these companies to see valuation re-ratings, which should lead to significant performance.

Georgina Brittain

Kent Kwan

Investment Managers

1st October 2010

Principal 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:

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.

• Discount:A disproportionate widening of the discount relative to the Company's peers could result in loss of value for shareholders. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow.

• Political:Changes in financial or tax legislation, including in the European Union, may adversely effect the Company. The Manager makes recommendations to the Board on accounting, dividend and tax policies, and seeks external advice where appropriate.

• 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 section in the Annual Report and Accounts.

• 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 1158 of the Income and Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Business of the Company' above. Should the Company breach Section 1158, 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 1158 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 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules may 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, JPMAM, and its professional advisers to ensure compliance with the Companies Acts 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 section in the Annual Report and Accounts.

• Financial:The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk. Bank counterparties are subject to daily credit analysis by the Manager and regular consideration at meetings of the Board. In addition the Board receives regular reports on the Manager's monitoring and mitigation of credit risks on share transactions carried out by the Company. Further details are disclosed in note 21 of the Notes to the Accounts in the Annual Report and Accounts.

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

Statement under the Disclosure & Transparency Rules 4.1.12

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 and Accounts, 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

1st October 2010

Income Statement

for the year ended 31st July 2010

		2010			2009
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair
value through profit or loss		-	19,117	19,117	-	(22,301)	(22,301)
Income from investments		2,185	-	2,185	2,403	-	2,403
Other interest receivable and similar
income		170	-	170	176	-	176
Gross return/(loss)		2,355	19,117	21,472	2,579	(22,301)	(19,722)
Management fee		(373)	(373)	(746)	(299)	(299)	(598)
VAT recoverable		178	20	198	488	466	954
Other administrative expenses		(340)	-	(340)	(361)	-	(361)
Net return/(loss) on ordinary activities
before finance costs and taxation		1,820	18,764	20,584	2,407	(22,134)	(19,727)
Finance costs		(96)	(96)	(192)	(141)	(141)	(282)
Net return/(loss) on ordinary activities
before taxation		1,724	18,668	20,392	2,266	(22,275)	(20,009)
Taxation		(1)	-	(1)	(5)	-	(5)
Net return/(loss) on ordinary activities
after taxation		1,723	18,668	20,391	2,261	(22,275)	(20,014)
Return/(loss) per share (note 3)		8.92p	96.65p	105.57p	11.43p	(112.61)p	(101.18)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 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 31st July 2010

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2008	5,006	18,360	1,660	68,853	2,156	96,035
Repurchase and cancellation of the Company's own shares	(103)	-	103	(1,014)	-	(1,014)
Net (loss)/return on ordinary activities	-	-	-	(22,275)	2,261	(20,014)
Dividends appropriated in the year	-	-	-	-	(1,991)	(1,991)
At 31st July 2009	4,903	18,360	1,763	45,564	2,426	73,016
Repurchase and cancellation of the Company's own shares	(168)	-	168	(2,386)	-	(2,386)
Net return on ordinary activities	-	-	-	18,668	1,723	20,391
Dividends appropriated in the year	-	-	-	-	(1,561)	(1,561)
At 31st July 2010	4,735	18,360	1,931	61,846	2,588	89,460

Balance Sheet

at 31st July 2010

		2010	2009
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		94,396	78,143
Investment in liquidity fund held at fair value through profit or loss		1,305	1,290
Total investments		95,701	79,433
Current assets
Debtors		734	1,536
Cash and short term deposits		271	100
		1,005	1,636
Creditors: amounts falling due within one year		(7,246)	(8,053)
Net current liabilities		(6,241)	(6,417)
Total assets less current liabilities		89,460	73,016
Total net assets		89,460	73,016
Capital and reserves
Called up share capital		4,735	4,903
Share premium		18,360	18,360
Capital redemption reserve		1,931	1,763
Capital reserves		61,846	45,564
Revenue reserve		2,588	2,426
Shareholders' funds		89,460	73,016
Net asset value per share (note 4)		472.3p	372.3p

Company registration number: 2515996.

Cash Flow Statement

for the year ended 31st July 2010

		2010	2009
		£'000	£'000
Net cash inflow from operating activities		1,501	2,569
Returns on investments and servicing of finance
Interest paid		(199)	(303)
Net cash outflow from returns on investments and servicing of finance		(199)	(303)
Capital expenditure and financial investment
Purchases of investments		(78,839)	(76,939)
Sales of investments		81,733	80,741
Other capital charges		(22)	(21)
Net cash inflow from capital expenditure and financial investment		2,872	3,781
Dividends paid		(1,561)	(1,991)
Net cash inflow before financing		2,613	4,056
Financing
Net repayment of loans		-	(3,000)
Repurchase and cancellation of the Company's own shares		(2,442)	(1,055)
Net cash outflow from financing		(2,442)	(4,055)
Increase in cash and cash equivalents		171	1

Notes to the Accounts

for the year ended 31st July 2010

1.         Accounting policies

             Basis of accounting

             The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the AIC in January 2009.

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

             The accounts have been prepared on a going concern basis.

             The policies applied in these accounts are consistent with those applied in the preceding year.

             The Company has a dormant and wholly owned subsidiary, Fleming Smaller Companies Securities Limited. Consolidated accounts have not been prepared as exemption under Section 405 of the Companies Act 2006 has been exercised due to the immateriality of the subsidiary.

2.         Dividends

             Dividends paid and proposed

	2010	2009
	£'000	£'000
Unclaimed dividends refunded to the Company1	(8)	-
2009 final dividend of 8.0p (2008: 7.0p)	1,569	1,400
Special interim dividend in respect of the year ended 31st July 2009 of 3.0p	-	591
Total dividends paid in the year	1,561	1,991
Final dividend proposed of 8.5p (2009: 8.0p)	1,610	1,569

             ¹Represents dividends which remain unclaimed after a period of 6 years and thereby become the property of the Company.

             The final dividend has been proposed in respect of the year ended 31st July 2010 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 ending 31st July 2011.

3.         Return/(loss) per share

             The revenue return per share is based on the earnings attributable to the ordinary shares of £1,723,000 (2009; £2,261,000) and on the weighted average number of shares in issue during the year of 19,316,003 (2009: 19,780,588).

             The capital return per share is based on the capital return attributable to the ordinary shares of £18,668,000 (2009: loss of £22,275,000) and on the weighted average number of shares in issue during the year of 19,316,003 (2009: 19,780,588).

             Total return per share is based on the total return attributable to the ordinary shares of £20,391,000 (2009: loss of £20,014,000) and on the weighted average number of shares in issue during the year of 19,316,003 (2009: 19,780,588).

4.         Net asset value per share

             Net asset value per share is based on the funds attributable to ordinary shareholders and on 18,940,023 (2009: 19,612,222) ordinary shares in issue at the year end.

Status of announcement

2009 Financial Information

The figures and financial information for 2009 are extracted from the published Annual Report and Accounts for the year ended 31st July 2009 and do not constitute the statutory accounts for that year.  The Annual Report and Accounts has been delivered to the Registrar of Companies and included 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.

2010 Financial Information

The figures and financial information for 2010 are extracted from the Annual Report and Accounts for the year ended 31st July 2010 and do not constitute the statutory accounts for the year.  The Annual Report and Financial Statements includes the Report of the Independent Auditors which is unqualified and does 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.

Annual Report and Accounts

The Annual Report and Accounts will be posted to shareholders on  * October 2010 and will shortly be available on the Company's website (www.jpmsmallercompanies.co.uk ) or in hard copy format from the Company's Registered Office, Finsbury Dials, 20 Finsbury Street, London EC2Y 9AQ. 

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at the Company's website, www.jpmsmallercompanies.co.uk

For further information please contact:

Divya Amin

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary                                                                020 7742 6000

 

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