Final Results

RNS Number : 1270R

JPMorgan Smaller Cos IT PLC

22 October 2013

 



STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN SMALLER COMPANIES INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST JULY 2013

The Directors of JPMorgan Smaller Companies Investment Trust plc announce the Company's results for the year ended 31st July 2013. The following comprises extracts from the Company's Annual Financial Report for the year ended 31st July 2013. 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

This is my first report to you as Chairman following the retirement of Strone Macpherson on 1st June 2013.

I am delighted to report that the UK equity market, and especially smaller companies, experienced a strong recovery during this financial year following last year's challenging environment. The total return on the Company's net assets was +46.3%. The benchmark index, the FTSE Small Cap Index (excluding investment trusts) returned +48.5% over the same period. The share price produced a total return of +57.0% reflecting a narrowing of the share price discount from 23.7% to 18.3%.

The last 12 months has further contributed to the Company's long-term record, with a total return of +293.2% over the ten years to 31st July 2013, outperforming the benchmark by 189%.

Since the year end, equity markets have continued their strong run, with the net asset value per share increasing 5.9% to 895.4p, and the share price 12.5% to 777.2p at 18th October 2013. By comparison, the Company's benchmark has risen 9.7%. The current level of discount is 13.2%.

In her report, the Investment Manager has provided further detail on portfolio performance and attribution, together with a commentary on markets.

Revenue and Dividends

Net revenue after taxation for the year was £1,892,000 (2012: £1,666,000) and revenue return per share, calculated on the average number of shares in issue, was 10.38p (2012: 9.01p). The Directors are recommending a final dividend of 9.50p per share (2012: 9.00p), costing £1,731,000 (2012: £1,640,000). If approved, the dividend will be paid on 6th December 2013 to shareholders on the register on 15th November 2013.

The level of income received each year varies according to the Company's gearing, its investment stance and economic conditions. It is the Company's policy to distribute substantially all the available income each year, and shareholders should note that the Company's dividends may vary accordingly.

Gearing

Gearing is regularly discussed between the Board and the Investment Manager. A new increased borrowing facility of £15 million was negotiated with Scotiabank in April this year upon expiry of the previous £10 million facility with ING Bank. This facility is highly flexible and can be used tactically as investment opportunities present themselves, with the aim of enhancing returns. The loan was fully drawn at the year end, representing a gearing level of 8.4% of net assets at 31st July 2013. Since then, the facility with Scotiabank has been further increased by £4 million to £19 million to take advantage of further investment opportunities in rising markets.

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 26th May 2014 or the conclusion of the AGM in 2013. During the financial year the Company repurchased a total of 63,656 ordinary shares for cancellation for a total consideration of £307,000, representing 0.4% of the issued share capital at the beginning of the year.

The Board's objective remains to use the share repurchase authority to manage imbalances between the supply and demand of the Company's shares, with the intention of 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.

Alternative Investment Fund Managers Directive ('AIFMD' or the 'Directive')

Shareholders may have read about the AIFMD which came into force on 22nd July 2013, with provision for transitional arrangements until 22nd July 2014, by which time the Company must register and comply with the regulations. As we move towards full implementation, the Board expects to enter into arrangements with the Manager, JPMAM, to act as the Company's Alternative Investment Fund Manager, at no additional cost. The Company will also be required to appoint a Depositary to comply with the Directive, which will result in a small increase in costs.

Board of Directors

As previously reported, Strone Macpherson retired from the Board on 1st June 2013 having been the Chairman of the Company since its foundation in 1990. Shareholders have been handsomely rewarded during his tenure, and I would like to record the Board's heartfelt thanks to him for his service to the Company.

I have succeeded him as Chairman of the Board, having served as a Director since October 2005. I also assumed the role of Chairman of the Nomination Committee and Andrew Robson has replaced me as Chairman of the Audit Committee.

In accordance with the UK Corporate Governance Code, the Board has decided that all Directors will stand for re-election every year.

Annual General Meeting

The Company's twenty third AGM will be held on Tuesday, 26th November 2013 at 2.30 p.m. at Holborn Bars, 138-142 Holborn, London EC1N 2NQ. 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 markets have delivered welcome, but unusually high returns over the last twelve months, well in excess of the average increase in company earnings. The Board is encouraged to note the signs of an improving global economic environment, but there continue to be problems that are yet to be resolved. Following such strong returns it becomes more likely that there will be a period of volatility, whilst earnings catch up with company valuations. Despite some short‑term uncertainty, the Board remains confident that the strategy being pursued by the Investment Manager will deliver good long-term returns.

Michael Quicke

Chairman

22nd October 2013

Investment Manager's Report

Market Background

This year proved to be a great period for equities, and in particular for smaller companies. The key concerns of investors, such as the pace of the US recovery, the Eurozone crisis and recession and fears of a rapid slowdown in Chinese growth, all receded over the last 12 months.

In the UK, revisions to the GDP data proved that there never had been a double dip recession, as had been feared. In spite of the Government's austerity measures, the economic indicators gradually improved over the year, notably over this summer, leading to the recent OECD increase in its forecast for UK GDP growth from 0.8% to 1.5% for 2013, and similar for 2014. These positive signals, allied to continuing low interest rates, led to a notable improvement in investor sentiment.

Portfolio

Against this positive backdrop for UK equities, your fund produced a total net asset value return of +46.3%. This compares to the benchmark return for the year to July of +48.5%. Whilst in the second half of the year your company outperformed the benchmark, we had a disappointing first six months, relative to the benchmark, as reported in the Interim Report. However, the discount of the share price against the net asset value narrowed, producing a strong return to shareholders of +57.0%.

As the attribution table on page 5 of the Annual Report and Accounts demonstrates, gearing was a positive contributor through the year, while sector selection significantly detracted. Key negatives included the overweight position in the Oils sector where, despite high oil prices, oil stocks went out of favour and performed very poorly. As can be seen in the Portfolio Analysis on page 12 of the Annual Report and Accounts, we believe this derating has been overdone, and maintain an overweight position. Other negatives included the Electronic & Electrical equipment sector, and General Retailers.

On the positive side was the Real Estate sector, where our investment in a number of very undervalued property stocks, which were sitting at large discounts to their asset values, were successful. Other contributing sectors included Support Services, where our long-term holdings in the education services and software company Tribal Group and the plant hire rental company, Ashtead, continued to perform well. We also benefitted from our underweight position relative to the benchmark in the Mining Sector.

During the year, as the recovery in the UK and Europe gradually unfolded, we made certain significant changes to the portfolio. Most notable was the closure of the large underweight position in Consumer Services. While we remain concerned about the decline in real wages, it is our belief that consumer confidence is the more important indicator. In addition, we increased our overweight position in the Technology Sector, and reduced the position in Basic Materials, going from overweight to underweight relative to the benchmark. By making these changes to the shape of the portfolio, we have sought to increase our exposure to UK growth and recovery. We also increased our European exposure, adding to stocks such as Brammer, a European distributor, and participating in the IPO of HellermanTyton, a cable equipment company with exposure to European and UK industrial customers.

Outlook

Much commentary is currently focussed on the US, and the timing of the withdrawal of monetary stimulus. This has caused some stockmarket volatility, but we see this as a positive signal that economic recovery in the US is properly underway. In the UK, whilst we are fully aware of the on‑going economic headwinds - too much debt, both at the Government and personal level; high unemployment; low productivity; real incomes continuing to decline as inflation remains above wage increases - we do believe that the UK recovery is underway.

Recent UK PMI data (purchasing managers' indices, which survey thousands of companies) have been positive for manufacturing, services and construction, resulting in the composite PMI now being at an all time peak. These data points are now at a level, according to past evidence, consistent with strong economic and earnings growth. This strong signal for growth also suggests that the gradual rebalancing of the UK economy away from its overdependence on the services sector is taking place. Such a rebalancing would be very healthy for future growth prospects.

These positive signs have begun to lead to an uptick in consumer confidence, aided by an improvement in the housing market. The clear signal sent by the new Governor of the Bank of England indicates that UK interest rates will remain very low for some time to come. All of these indications are positive for UK equities. As is customary, the stockmarket has anticipated this - the UK Small Cap Index (on a total return basis) was at an all time high at the year end. However, while volatility in share prices is likely to remain an on-going feature, we firmly believe it is right to remain positive. Stockmarkets have moved ahead in anticipation of the improving corporate newsflow. The next leg of share price growth will require upgrades to profits - and the strengthening economic background should help to provide that. To complete the picture, there are two final pieces of the jigsaw that need to fall into place, namely an increase in business investment, and the return of real wage growth. As and when these two occur, the trajectory of the recovery should be secure - and share prices will be higher than they are now.

Georgina Brittain

Investment Manager

22nd October 2013

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 on pages 23 to 27 of 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 on page 26 of 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 21 on pages 45 to 49 of the Annual Report and Accounts.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the annual report and accounts in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and estimates that are reasonable and prudent;

•     state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The accounts are published on the www.jpmsmallercompanies.co.uk website, which is maintained by the Company's Manager, JPMorgan Asset Management (UK) Limited ('JPMAM'). The maintenance and integrity of the website maintained by JPMAM is, so far as it relates to the Company, the responsibility of JPMAM. The work carried out by the auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditors accept no responsibility for any changes that have occurred to the accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge:

•     the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return or loss of the Company; and

•     the Directors' 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 it faces.

For and on behalf of the Board
Michael Quicke
Chairman

22nd October 2013

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 31st July 2013

	2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	47,532	47,532	-	(10,786)	(10,786)
Net foreign currency gains	-	1	1	-	-	-
Income from investments	2,910	-	2,910	2,593	-	2,593
Other interest receivable and similar income	27	-	27	1	-	1
Gross return/(loss)	2,937	47,533	50,470	2,594	(10,786)	(8,192)
Management fee	(546)	(546)	(1,092)	(459)	(459)	(918)
Other administrative expenses	(403)	-	(403)	(348)	-	(348)
Net return/(loss) on ordinary activities before finance costs and taxation	1,988	46,987	48,975	1,787	(11,245)	(9,458)
Finance costs	(98)	(98)	(196)	(120)	(120)	(240)
Net return/(loss) on ordinary activities before taxation	1,890	46,889	48,779	1,667	(11,365)	(9,698)
Taxation	2	-	2	(1)	-	(1)
Net return/(loss) on ordinary activities after taxation	1,892	46,889	48,781	1,666	(11,365)	(9,699)
Return/(loss) per share  (note 3)	10.38p	257.26p	267.64p	9.01p	(61.47)p	(52.46)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 2013

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
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
Repurchase and cancellation of the Company's own shares	(16)	-	16	(307)	-	(307)
Net return on ordinary activities	-	-	-	46,889	1,892	48,781
Dividend appropriated in the year	-	-	-	-	(1,640)	(1,640)
At 31st July 2013	4,555	18,360	2,111	126,167	2,923	154,116

Balance Sheet

at 31st July 2013

	2013	2012
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	166,550	115,302
Investment in liquidity fund held at fair value through profit or loss	1,700	800
Total investments	168,250	116,102
Current assets
Debtors	1,157	2,736
Cash and short term deposits	328	286
	1,485	3,022
Creditors: amounts falling due within one year	(15,619)	(11,842)
Net current liabilities	(14,134)	(8,820)
Total assets less current liabilities	154,116	107,282
Net assets	154,116	107,282
Capital and reserves
Called up share capital	4,555	4,571
Share premium	18,360	18,360
Capital redemption reserve	2,111	2,095
Capital reserves	126,167	79,585
Revenue reserve	2,923	2,671
Total equity shareholders' funds	154,116	107,282
Net asset value per share (note 4)	845.9p	586.8p

Company registration number: 2515996.

Cash Flow Statement

for the year ended 31st July 2013

	2013	2012
	£'000	£'000
Net cash inflow from operating activities	1,402	1,280
Returns on investments and servicing of finance
Interest paid	(267)	(237)
Net cash outflow from returns on investments and servicing of finance	(267)	(237)
Taxation recovered	9	-
Capital expenditure and financial investment
Purchases of investments	(98,241)	(61,115)
Sales of investments	93,096	62,199
Other capital charges	(11)	(9)
Net cash (outflow)/inflow from capital expenditure and financial investment	(5,156)	1,075
Dividends paid	(1,640)	(1,579)
Net cash (outflow)/inflow before financing	(5,652)	539
Financing
Net drawdown of loans	6,000	-
Repurchase and cancellation of the Company's own shares	(307)	(1,566)
Net cash inflow/(outflow) from financing	5,693	(1,566)
Increase/(decrease) in cash and cash equivalents	41	(1,027)

Notes to the Accounts

for the year ended 31st July 2013

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.

2.   Dividends

      Dividends paid and proposed

		2013	2012
		£'000	£'000
	2012 final dividend of 9.0p (2011: 8.5p)	1,640	1,579
	Total dividends paid in the year	1,640	1,579
	Final dividend proposed of 9.5p (2012: 9.0p)	1,731	1,645

      The final dividend proposed in respect of the year ended 31st July 2012, amounted to £1,645,000. However, the actual payment amounted to £1,640,000 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 2013 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 2014.

3.   Return/(loss) per share

      The revenue return per share is based on the earnings attributable to the ordinary shares of £1,892,000 (2012: £1,666,000) and on the weighted average number of shares in issue during the year of 18,225,982 (2012: 18,488,809).

      The capital return per share is based on the capital return attributable to the ordinary shares of £46,889,000 (2012 loss: £11,365,000) and on the weighted average number of shares in issue during the year of 18,225,982 (2012: 18,488,809).

      Total return per share is based on the total return attributable to the ordinary shares of £48,781,000 (2012 loss: £9,699,000) and on the weighted average number of shares in issue during the year of 18,225,982 (2012: 18,488,809).

4.   Net asset value per share

      Net asset value per share is based on the funds attributable to ordinary shareholders and on 18,219,372 (2012: 18,283,028) ordinary shares in issue at the year end.

5.   Status of announcement

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.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31st July 2013 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.morningstar.co.uk/uk/NSM.

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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