Final Results

RNS Number : 3626P

JPMorgan Smaller Cos IT PLC

23 October 2012

 



STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST JULY 2012

The Directors of JPMorgan Smaller Companies Investment Trust plc announce the Company's results for the year ended 31st July 2012. The following comprises extracts from the Company's Annual Financial Report for the year ended 31st July 2012. 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

Global equity markets remained volatile throughout the Company's financial year ended 31st July 2012, driven by concerns over policy responses to the Euro zone crisis and increasing signs of a slowdown in growth.

Notwithstanding the Company's strong performance over the long term, this year presented a very challenging environment for the UK smaller companies sector. Over the year, the Company's net asset value produced a negative total return of 7.5%. The share price produced a negative total return of 15.0% reflecting the widening of the share price discount from 16.5% to 23.7% over the year. These compare with a negative total return of 6.2% produced by the benchmark index, the FTSE Small Cap Index (excluding investment trusts) over the same period.

In the second half of the financial period the performance improved with the net asset value total return of 5.6%, compared to the benchmark net asset value of 5.7%.

Since the year end, equity markets have continued to rally and performance has improved significantly, with the net asset value per share rising 10.0% to 645.4p, and the share price 14.7% to 513.8p at 22nd October 2012. By comparison, the Company's benchmark has risen 11.9%. The current level of discount is 20.4%.

The Investment Manager's Report provides a detailed commentary on the Company's investment strategy and performance.

Revenue and Dividends

Net revenue after taxation for the year was £1,666,000 (2011: £1,600,000) and revenue return per share, calculated on the average number of shares in issue, was 9.01p (2011: 8.50p). The Directors are recommending a final dividend of 9.0p per share (2011: 8.5p), costing £1,645,000 (2011: £1,579,000). If approved, the dividend will be paid on 7th December 2012 to shareholders on the register on 16th November 2012.

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 may 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 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.

Share Buy backs

At last year's AGM, shareholders granted the Directors authority to repurchase the Company's shares for cancellation, such authority to expire at the earlier of 27th May 2013 or the conclusion of the AGM in 2012. During the financial year the Company repurchased a total of 355,024 ordinary shares for cancellation for a total consideration of £1,566,000, representing 1.9% of the issued share capital at the beginning of the year. This has added approximately 2.1p 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

This year in line with suggested best practice, the Directors commissioned an independent firm specialising in board reviews to carry out the annual evaluation of the Board. The evaluation was comprehensive and covered a range of topics including size and composition of the Board, Board information and processes, shareholder engagement and training and accountability, as well as the effectiveness of the Audit Committee, the Nomination Committee, the Chairman and the Directors. The report was very complimentary about the effectiveness, composition and mix of skills on the Board.

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 UK Corporate Governance Code. The need to refresh the Board and its Committees is kept under constant review. Furthermore, the Board has adopted corporate governance best practice and all remaining Directors will also stand for annual re-appointment. The Nomination Committee recommends to shareholders that we should all be re-appointed.

The Nomination Committee has reviewed the fees paid to Directors, which had remained unchanged since 2010. Cognisant of this fact, the strong medium to long term performance of the Company and the increased regulatory requirements that have been or are soon to be introduced, the Committee has recommended that they be increased. Details of the new fee levels can be found in the Directors' remuneration report in the Annual Report and Accounts. The aggregate level of fees payable in any one year remains below the maximum stipulated in the Articles of Association of £150,000.

Annual General Meeting

The Company's twenty second AGM will be held on Tuesday, 27th November 2012 at 2.00 p.m. at The Armourers' Hall, 81 Coleman Street, London EC2R 5BJ. 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 overall investment environment remains exceptionally difficult. Smaller companies' valuations continue to be volatile and liquidity in markets remains poor. In the short term market values can be affected significantly by Central Bank policy decisions, and by the political processes which are uncomfortably unpredictable.

However, your Company has invested in a good spread of well positioned, well financed companies, with both UK and international exposure, which also have strong growth prospects. Your Board remains confident that the manager has an excellent approach to UK smaller company investment and the long term returns for the Company are testament to this sound approach.

Strone Macpherson

Chairman                                                                                                                                                               23rd October 2012

Investment Manager's Report

Market Background

A dramatic decline in equity markets at the start of your Company's financial year, due to concerns over a faltering US recovery, a slowdown in Chinese growth, and on-going Eurozone crises, was followed by an almost equally dramatic rebound, largely driven by policy responses around the world. Throughout the year, each of these areas of concern has again been the subject of focus; macro data has been and remains the key driver of equity markets.

The optimistic growth forecasts for the UK proved to be incorrect, and after two quarters of negative growth, the UK re-entered recession. Forecast GDP growth for 2013 is anaemic at less than 1%. Global growth forecasts were also downgraded, but remain on a positive trajectory, with 2.2% GDP forecasts for 2012, rising to 2.6% for 2013.

Portfolio

Against this volatile equity backdrop, your benchmark declined by 6.2% for the year. It is disappointing to report that your fund underperformed this decline, producing a net asset value total return of -7.5%.

This underperformance is especially disappointing when we consider what went right for the portfolio in the year. Two of our largest positions were taken over during the period at significant premia to the prevailing share prices. Both of these were oil companies, Cove Energy and Nautical Petroleum, which we had owned for some time. Our original purchase price for Cove was 20p in 2009, and the company was taken over by the Thai state-owned oil company, PTT, for 240p. We first acquired stock in Nautical Petroleum around the 45p to 55p level; Cairn Energy bought the company at 450p/share. Other successful holdings within the portfolio included Anite, the telecoms testing company, and other long term positions such as Ashtead, Oxford Instruments and Elementis. We also benefitted from additional mergers and acquisitions activity ('M&A'), including take-overs of WSP, Hamworthy and Umeco.

So where did the underperformance relative to the benchmark take place? The explanation is threefold. First, as discussed in the Interim Report, the dramatic fall in equities in August of last year, especially our holding in the FTSE 250 Index, hurt the Fund's performance. Second, two large stocks within our benchmark index which we did not hold, Pace and IP Group, produced very strong returns, which hurt performance on a relative basis. And third, while we did manage to avoid a number of significant underperformers, a few stocks within the portfolio performed very poorly in the year. Key amongst these were Exillon Energy, an oil exploration & production ('E&P') company, which disappointed on production figures and was harshly de-rated, and Cape, provider of blue-collar insulation and industrial services to the oil and gas, mining and construction industries, which had a number of profit warnings. It is our belief that the share price declines of both of these companies were excessive, and we bought more shares in both. Both of these share prices have subsequently begun to recover.

Changes to the portfolio have not been huge over the last year. We retain large sector overweights in Chemicals, Electronic & Electrical Equipment and Software, and remain significantly underweight in General Retail and Travel & Leisure. New holdings within the fund include Greencore, a supplier of convenience food to supermarkets, Sportingbet, an internet betting and gaming operator, and 888 Holdings, another online gaming company.

IPOs (initial public offerings) have been rare during the year. We have participated in a couple, buying positions in Snoozebox (portable hotel accommodation) and Eland (oil in Nigeria), and we reinvested some of the oil acquisition proceeds into other small oil E&P companies. We also significantly increased our holding in Carclo, a technology-led plastics business.

Market Outlook

It is easy to be negative on the direction of stockmarkets. Concerns about the state of the global economy abound. In addition to the enduring Eurozone crisis, the fragility of the US recovery, and the sluggish UK economy (with its stubbornly high deficit), additional new concerns have come into focus, including the so-called fiscal cliff in the US (the ending of various tax cuts and tax breaks, due December 2012), the change of Chinese leadership, and the slowdown in the stronger European economies.

However, against these negatives (and due to their existence) unprecedented liquidity has been put into the global system. In recent weeks we have seen the US Federal Reserve launch 'QE3', its third round of quantitative easing, which is open-ended in size and duration, and in addition the Fed has promised interest rates close to zero until 2015. In Europe we have seen the European Central Bank promise to do 'whatever it takes' to solve the Eurozone crisis; the plan now is to buy the shorter-dated bonds of those European countries in difficulty, as long as they agree to certain conditions. In China, there has been a new and massive commitment to infrastructure spend.

These actions by central banks underline just how fragile the economic outlook remains. But significantly they have also reduced the likelihood of a dramatic sell-off in equity markets. The question is how much of this bad news is already built into share prices. Valuations of equities are so low relative to history that despite this turmoil stockmarkets have rallied significantly this calendar year. Since 1st January 2012 up to the time of writing, the small cap index has risen by 25%.

All of this volatility confirms our long-term approach to investing. We look to invest in well-situated, well-financed companies with strong growth potential and we believe that numerous opportunities currently exist. We continue to be excited by the available opportunities, and aim to be fully invested up to our gearing limit. While the economic backdrop remains tough, these well-positioned companies should continue to grow and to outperform. The significant amount of M&A we have seen last year should also continue, as it is apparent that where equity markets are undervaluing opportunities, corporate buyers are willing to step in and make acquisitions.

Georgina Brittain

Investment Manager                                                                                                                                             23rd October 2012

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:

•        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, 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 affect 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 report 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 and Disclosure and Transparency Rules ('DTRs'). 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 or DTRs 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 Act and the UKLA Listing Rules and DTRs.

•        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 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 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 22 of 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.

Statement of 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 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                                                                                                                                               23rd October 2012

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.

For further information please contact:

Divya Amin

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary                                                                         020 7742 4000

Income Statement

for the year ended 31^st July 2012

		2012			2011
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at
fair value through profit or loss		-	(10,786)	(10,786)	-	32,758	32,758
Income from investments		2,593	-	2,593	2,511	-	2,511
Other interest receivable and similar
income		1	-	1	14	-	14
Gross return/(loss)		2,594	(10,786)	(8,192)	2,525	32,758	35,283
Management fee		(459)	(459)	(918)	(472)	(472)	(944)
Other administrative expenses		(348)	-	(348)	(333)	-	(333)
Net return/(loss) on ordinary activities
before finance costs and taxation		1,787	(11,245)	(9,458)	1,720	32,286	34,006
Finance costs		(120)	(120)	(240)	(117)	(117)	(234)
Net return/(loss) on ordinary activities
before taxation		1,667	(11,365)	(9,698)	1,603	32,169	33,772
Taxation		(1)	-	(1)	(3)	-	(3)
Net return/(loss) on ordinary activities
after taxation		1,666	(11,365)	(9,699)	1,600	32,169	33,769
Return/(loss) per share (note 3.)		9.01p	(61.47)p	(52.46)p	8.50p	170.90p	179.40p

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 2012

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st July 2010	4,735	18,360	1,931	61,846	2,588	89,460
Repurchase and cancellation of the
Company's own shares	(75)	-	75	(1,499)	-	(1,499)
Net return on ordinary activities	-	-	-	32,169	1,600	33,769
Dividend appropriated in the year	-	-	-	-	(1,604)	(1,604)
At 31st July 2011	4,660	18,360	2,006	92,516	2,584	120,126
Repurchase and cancellation of the
Company's own shares	(89)	-	89	(1,566)	-	(1,566)
Net (loss)/return on ordinary activities	-	-	-	(11,365)	1,666	(9,699)
Dividend appropriated in the year	-	-	-	-	(1,579)	(1,579)
At 31st July 2012	4,571	18,360	2,095	79,585	2,671	107,282

Balance Sheet

at 31st July 2012

		2012	2011
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		115,302	128,948
Investment in liquidity fund held at fair value through profit or loss		800	-
Total investments		116,102	128,948
Current assets
Debtors		2,736	212
Cash and short term deposits		286	1,313
		3,022	1,525
Creditors: amounts falling due within one year		(11,842)	(1,347)
Net current (liabilities)/assets		(8,820)	178
Total assets less current liabilities		107,282	129,126
Creditors: amounts falling due after more than one year		-	(9,000)
Net assets		107,282	120,126
Capital and reserves
Called up share capital		4,571	4,660
Share premium		18,360	18,360
Capital redemption reserve		2,095	2,006
Capital reserves		79,585	92,516
Revenue reserve		2,671	2,584
Total equity shareholders' funds		107,282	120,126
Net asset value per share (note 4.)		586.8p	644.5p

Company registration number: 2515996.

Cash Flow Statement

for the year ended 31st July 2012

		2012	2011
		£'000	£'000
Net cash inflow from operating activities		1,280	1,198
Returns on investments and servicing of finance
Interest paid		(237)	(174)
Net cash outflow from returns on investments and servicing of finance		(237)	(174)
Capital expenditure and financial investment
Purchases of investments		(61,115)	(70,393)
Sales of investments		62,199	71,533
Other capital charges		(9)	(19)
Net cash inflow from capital expenditure and financial investment		1,075	1,121
Dividends paid		(1,579)	(1,604)
Net cash inflow before financing		539	541
Financing
Net drawdown of loans		-	2,000
Repurchase and cancellation of the Company's own shares		(1,566)	(1,499)
Net cash (outflow)/inflow from financing		(1,566)	501
(Decrease)/increase in cash and cash equivalents		(1,027)	1,042

Notes to the Accounts

for the year ended 31st July 2012

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 had a dormant and wholly owned subsidiary, Fleming Smaller Companies Securities Limited which was dissolved on 21st February 2012. Consolidated accounts were not prepared in the prior year as exemption under Section 405 of the Companies Act 2006 had been exercised due to the immateriality of the subsidiary.

2.      Dividends

         Dividends paid and proposed

	2012	2011
	£'000	£'000
2011 final dividend of 8.5p (2010: 8.5p)	1,579	1,604
Total dividends paid in the year	1,579	1,604
Final dividend proposed of 9.0p (2011: 8.5p)	1,645	1,584

         The final dividend proposed in respect of the year ended 31st July 2011, amounted to £1,584,000. However, the actual payment amounted to £1,579,000 due to shares repurchased and cancelled after the Balance Sheet date but prior to the share register Record Date.

         The final dividend has been proposed in respect of the year ended 31st July 2012 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 2013.

3.      Return/(loss) per share

         The revenue return per share is based on the earnings attributable to the ordinary shares of £1,666,000 (2011: £1,600,000) and on the weighted average number of shares in issue during the year of 18,488,809 (2011: 18,823,179).

         The capital loss per share is based on the capital loss attributable to the ordinary shares of £11,365,000 (2011 return: £32,169,000) and on the weighted average number of shares in issue during the year of 18,488,809 (2011: 18,823,179).

         Total loss per share is based on the total loss attributable to the ordinary shares of £9,699,000 (2011 return: £33,769,000) and on the weighted average number of shares in issue during the year of 18,488,809 (2011: 18,823,179).

4.      Net asset value per share

         Net asset value per share is based on the funds attributable to ordinary shareholders and on 18,283,028 (2011: 18,638,052) ordinary shares in issue at the year end.

Status of announcement

2011 Financial Information

The figures and financial information for 2011 are extracted from the published Annual Report and Accounts for the year ended 31st July 2011 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.

2012 Financial Information

The figures and financial information for 2012 are extracted from the Annual Report and Accounts for the year ended 31st July 2012 and do not constitute the statutory accounts for the year.  The Annual Report and Accounts 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 Registrar of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the annual report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.hemscott.com/nsm.do.

The annual report is also available on the Company's website at www.jpmsmallercompanies.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

END

 

 

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