Annual Financial Report

RNS Number : 2212D

JPMorgan US Smaller Co. IT

18 March 2011

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2010

Chairman's Statement

Performance

2010 has been a particularly rewarding year for investors in US smaller companies and I am pleased to report that our investment manager has had another good year. The Russell 2000 rose by 26.8% whilst UK investors benefited from a slightly stronger dollar which produced an increase of 30.5% in sterling terms. As a result of strong stock selection the Net Asset Value (NAV) of the Trust rose by 33.2% and the return to shareholders (share price) rose by 32.3%.

Looking at these performance figures it is easy to forget quite how poor market sentiment was during much of 2010 as markets absorbed concerns over economic recovery, implications of sovereign debt defaults along with a number of major natural disasters. The main consequence of all these factors was volatile markets as investors responded to the bad news over the short term but then looked at current valuations and saw long term opportunities. The US smaller companies' sector, which has a strong domestic bias, benefited from the signs that the US economy was recovering, albeit at subdued levels, and handsomely outperformed the US large companies, the S&P500 rose by only 15% (in US dollar terms).

Events during 2010

Two important events occurred during 2010. The first was our name change to 'JPMorgan US Smaller Companies Investment Trust plc' to reflect more accurately the Company's investment objective to achieve long term capital growth through investing in US smaller companies. It was felt that the word 'Discovery' was confusing and implied that the Company was investing in early stage companies and unquoted investments. The other event was that at the Annual General Meeting (AGM) shareholders voted unanimously in favour of the Company continuing in its current form for a further five years, endorsing the Board's view that small cap investing in the US will continue to be a rewarding area.

Discount Management

The Board is pleased to report that we were able to maintain a relatively stable share price discount to NAV for the year as a whole by using our share buyback authority. During the latter part of 2010, though, the daily management of the discount proved difficult as markets and currencies were volatile and more importantly our shares lacked liquidity with the result that the discount widened on very low volumes. The Board remains committed to a stable discount, targeting a figure of around 9% over the long term, but there is a need to balance the short term of buying shares back for cancellation with the long term liquidity implications.

For the past several years, shareholders have given the Board the powers to repurchase the Company's shares for cancellation. The Board continues to seek this authority so that we can continue to support a stable discount. During the year the Company repurchased 217,500 shares for cancellation, representing 4.0% of the shares in issue at the beginning of the year.

Currency Hedging

Our underlying assets are denominated in US dollars and through the fact we report all valuations in sterling for calculating the NAV we are exposed to fluctuations in the US dollar/sterling exchange rate. The Board has the authority to reduce or eliminate the exposure to fluctuating currencies through the use of currency hedging. We review our policy on this matter regularly but to date we have not carried out any hedging and have no plans to do so in the immediate future.

Gearing

In March 2010 an agreement was signed with ING to provide a revolving credit facility of US$8million. As at 31st December 2010, US$7million was drawn and since the facility was put in place actual gearing has ranged between 0% and 6.4%. The use of gearing was accretive to performance.

Board of Directors

The Directors carried out their annual evaluation of the Board, its Committees, the Directors and the Chairman in January. This was considered to be an efficient way to evaluate their continuing effectiveness.

Currently the Company's Articles of Association allow a Director's appointment to run for a maximum three year term before they have to stand for re-election. The Board has recently reviewed this and decided to adopt the new UK Corporate Governance Code which requires directors of all FTSE 350 companies to stand for annual election. This change will be put into effect immediately and therefore all Directors will seek re-election at the AGM in April. Alan Kemp, who chairs the audit committee, has been a Director more than nine years. The Board does not believe that length of service in itself should disqualify a Director from seeking re-election nor does it believe it compromises his independence. In proposing Alan's re-election the Board has taken into account the ongoing requirements of the Combined Code, including the need to refresh the Board and its Committees. Alan is a very experienced investment professional who continues to make a strong contribution to the Board as well as chairing the Audit Committee and the Board recommends to shareholders that he should be re-elected.

Manager

At the end of the year the Management Engagement Committee carried out a formal detailed review of the Manager. This covered investment management, company secretarial, administrative and marketing services provided to the Company by JPMorgan Asset Management (UK) Limited ('JPMAM') and included the investment performance record, fee structure, management processes, investment style, resources and risk control mechanisms. After full consideration, the Board concluded that the continued appointment of the Manager on the terms agreed for provision of those services was in the interests of shareholders as a whole.

Annual General Meeting

This year's AGM will be held at The Library, JPMorgan, 60 Victoria Embankment, London EC4Y OJP on Wednesday 27th April 2011 at 12.00 noon. The investment manager will give a presentation to shareholders, reviewing the past year and commenting on the outlook for the current year.

Outlook

The downside of small cap investing is that it is deemed to be a risky area of investment and therefore highly volatile. The upside of this view is that small cap can be very rewarding for those investors that can take a long term view. By way of illustration much has been written about how disappointing equities have been over the past 10 years, however the Russell 2000 has shown an annualised return of 6.3% (in US dollar terms) over this period, beating all measures of inflation unlike US large caps which have only returned 1.8% (in US dollar terms) annualised. With such a huge economy and large consumer base in the US the small cap sector will continue to create exciting growth opportunities and we believe that Glenn Gawronski and his team will be able to apply their investment process and exploit such opportunities created by volatile markets.

Davina Walter

Chairman                                                                                                                     18th March 2011

Investment Manager's Report

Market Review

Equity markets were strong out of the gate in 2010, as the Russell 2000 Index surged 15% from January through April, continuing the rally off of the March 2009 bottom. Subsequently, the markets suffered a sizable correction as investor worries regarding the sustainability of the US economic recovery bubbled to the surface. Poor US macroeconomic data, including sluggish GDP growth and stubbornly high unemployment levels inspired little confidence. Meanwhile, by early April the European sovereign debt crisis appeared to be accelerating and fears of contagion weighed on investor sentiment. This period of uncertainty and unease from April through August saw a 16% retreat in the Russell 2000 index. Ultimately, it was Federal Reserve Chairman Ben Bernanke who halted the slide in equity markets during a speech in late August that suggested that the central bank was prepared to act to stimulate further the US economy if signs of weakness emerged. The plan to engage in quantitative easing, buying debt securities to keep interest rates low and reflate the US economy, sparked a very powerful rally in the equity markets. Investors who quickly adapted and embraced a "Don't Fight the Fed" mentality were handsomely rewarded as the Russell 2000 Index advanced a hefty 30% from early September through year end. For the year, the index increased 30.5%, in sterling terms.

Investment Performance

For the year ended 31st December 2010, the total return on net assets was 33.2%, which was 270 basis points better than our benchmark, the Russell 2000 index, which rose 30.5%, both in sterling terms. The Company's outperformance was driven by a combination of stock selection and through financial leverage, as we had a slightly geared portfolio through most of the year.

Though 2010 was the second good year for investors' returns, it proved more difficult for active managers in their quest to achieve excess returns relative to their benchmarks. A combination of high correlations between stocks (attributable to investor preoccupation with macroeconomic events, especially in Europe) and a moderate level of volatility made it somewhat difficult for active managers to outperform their indices through stock selection. Investors who emphasise valuation in their process found 2010 especially trying, while growth and momentum investors were rewarded.

Portfolio Positioning

We assumed responsibility for the portfolio in late 2008 and have reshaped it, while remaining true to our bottom-up, fundamental approach to investing. Since then we have expanded the number of stocks in the portfolio, reducing its concentration, while simultaneously upgrading the portfolio from a quality standpoint. We have vastly reduced our sector weightings in Technology (from 27.0% to 10.7%) and Auto & Transportation (from 6.8% to 2.9%). On the other hand, we have increased our exposure to the Financial Services (from 15.5% to 25.2%) and Utilities (from zero to 2.2%) sectors. Currently, we are materially overweight in Financials and slightly underweight in Utilities. We have found some opportunities in the Energy sector and are now overweight in that sector.

Our sector weights remain a by-product of our bottom-up investment analysis and our disciplined approach to portfolio construction. We adhere to a consistent investment process which focuses on identifying companies that possess a sustainable competitive advantage, have a durable business model and are overseen by a competent management team with a track record of success. Finally, we seek to acquire equity stakes in these businesses when they trade at a discount to what we would deem to be their intrinsic value.

Since November 2008, our strategy has outperformed the Russell 2000 Index. The majority of the out-performance has resulted from superior stock selection, though sector weights have contributed positively as well. As we sold out of some holdings and added new positions, we shifted the portfolio away from companies that possessed severe enterprise risk due to impaired balance sheets and/or inconsistent cash flows. Investments were made in companies that generate sustainable earnings and more consistent cash flows as a result of our investment process. This is illustrated by the change in the risk profile since 2008 (as measured by Barra), as the portfolio has lower earnings variation, lower leverage, lower volatility and a higher earnings yield.

Market Outlook

Since early 2009, we have witnessed a spectacular rally in equities. After back to back annual gains in 2009 and 2010, the Russell 2000 Index is up a staggering 130%, in US Dollar terms, from the March 2009 lows. With the Russell Index currently hovering around 800, the index remains less than 7% below the all time highs reached in July 2007. At this point in the cycle, it is fair to say that the easy money has been made. As we reflect on the current environment, we have concerns about the strength of the US recovery and are painfully aware of the structural challenges that the US must overcome, namely persistently high unemployment levels, rising budget deficits and a lack of political will to reduce government spending and/or increase taxes. However, we still favour equities as an asset class over bonds in this environment. Equities have an earnings yield of 6% to 7% (depending on the index) versus the US 10 year Treasury rate of roughly 3.6%. Furthermore, given that the Federal Reserve continues to demonstrate that it stands ready to stimulate the economy and support the stock market at the first sign of weakness, the potential for inflation is real and perhaps even desired. Equities are a better hedge against rising inflation than bonds and thus are the more appropriate asset class for the current environment, in our view.

Looking ahead, we expect the market to grind higher from these levels, but future gains will likely be more muted relative to the past two years. As the economy continues to recover and with stock valuations relatively reasonable, we suspect stock selection will be more critical. We plan to remain disciplined with regards to our investment strategy: identifying companies with a sustainable competitive advantage, durable business models and solid management teams who have a track record of value creation. We will continue to buy stakes in these companies at valuations that we believe are below their intrinsic value. Our sector weights will continue to reflect our bottom-up investment analysis and disciplined approach to portfolio construction.

Glenn Gawronski

Investment Manager                                                                                                    18th March 2011

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 underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount to NAV. The Board manages these risks by diversification of investments through its investment restrictions and guidelines, which are monitored and reported on by the Manager. 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 show statistical measures of the Company's risk profile. The investment managers employ the Company's gearing tactically, within a strategic range set by the Board.

• 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 implementation 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 Corporation Tax Act 2010 ('Section 1158'). Were the Company to breach Section 1158, it might lose investment trust status and, as a consequence, 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 & Transparency Rules ('DTRs'). A breach of the Companies Act 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 could 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.

• 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 within the Annual Report.

• Operational: Disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records could 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 within the Annual Report.

• Foreign currency: The Company has exposure to foreign currency as part of the risk reward inherent in a company that invests overseas. The income and capital value of the the Company's investments can be affected by exchange rate movements as the majority of the Company's assets and income are denominated in currencies other than sterling which is the reporting currency. The Company may be exposed to currency risk due to exchange rate movement in the period between investment trade date and the date of settlement. This exposure is short term and therefore the risk is not significant.

• Financial: The financial risks faced by the Company include market price risk, interest rate risk, foreign currency risk, liquidity risk and credit risk. Further details are disclosed 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 financial statements have been prepared in accordance with applicable UK accounting standards, and 

         give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b)     the Annual Report, 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

Davina Walter

Chairman

18th March 2011

Income Statement

for the year ended 31st December 2010

		2010			2009
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair
value through profit or loss	-	13,106	13,106	-	9,970	9,970
Net foreign currency gains/(losses)	-	298	298	-	(238)	(238)
Income from investments	847	-	847	259	-	259
Other interest receivable and similar income	6	-	6	63	-	63
Gross return	853	13,404	14,257	322	9,732	10,054
Management fee	(48)	(429)	(477)	(36)	(325)	(361)
Peformance fee	-	(95)	(95)	-	(200)	(200)
Other administrative expenses	(286)	-	(286)	(279)	-	(279)
Net return on ordinary activities
before finance costs and taxation	519	12,880	13,399	7	9,207	9,214
Finance costs	(9)	(83)	(92)	(1)	(7)	(8)
Net return on ordinary activities
before taxation	510	12,797	13,307	6	9,200	9,206
Taxation	(127)	-	(127)	(41)	-	(41)
Net return/(loss) on ordinary activities
after taxation	383	12,797	13,180	(35)	9,200	9,165
Return/(loss) per share (Note 2)	7.09p	236.89p	243.98p	(0.62)p	161.82p	161.20p

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

	Called up	Capital
	share	redemption	Capital	Revenue
	capital	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000
At 31 December 2008	1,508	1,634	36,028	(4,695)	34,475
Repurchase and cancellation of the Company's own shares	(23)	23	(614)	-	(614)
Repurchase of shares into Treasury	-	-	(1,627)	-	(1,627)
Cancellation of shares held in Treasury	(114)	114	-	-	-
Total return/(loss) on ordinary activities	-	-	9,200	(35)	9,165
At 31 December 2009	1,371	1,771	42,987	(4,730)	41,399
Repurchase and cancellation of the Company's own shares	(55)	55	(1,629)	-	(1,629)
Net return on ordinary activities	-	-	12,797	383	13,180
At 31 December 2010	1,316	1,826	54,155	(4,347)	52,950

Balance Sheet

at 31st December 2010

	2010	2009
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	53,444	40,860
Investments in liquidity funds held at fair value through profit or loss	2,911	1,148
	56,355	42,008
Current assets
Debtors	181	59
Cash and short term deposits	1,225	43
	1,406	102
Creditors: amounts falling due within one year	(4,681)	(578)
Net current liabilities	(3,275)	(476)
Total assets less current liabilities	53,080	41,532
Provision for liabilities and charges	(130)	(133)
Net assets	52,950	41,399
Capital and reserves
Called up share capital	1,316	1,371
Capital redemption reserve	1,826	1,771
Capital reserves	54,155	42,987
Revenue reserve	(4,347)	(4,730)
Shareholders' funds	52,950	41,399
Net asset value per share (Note 3)	1,005.8p	755.2p

Cash Flow Statement

for the year ended 31st December 2010

	2010	2009
	£'000	£'000
Net cash outflow from operating activities	(117)	(110)
Returns on investments and servicing of finance
Interest paid	(82)	(8)
Net cash outflow from returns on investments and servicing of finance	(82)	(8)
Capital expenditure and financial investment
Purchases of investments	(43,042)	(29,863)
Sales of investments	41,692	29,975
Other capital charges - handling fees	(5)	(8)
Net cash (outflow)/inflow from capital expenditure and financial investment	(1,355)	104
Net cash outflow before financing	(1,554)	(14)
Financing
Draw down of short term bank loan	4,779	-
Repurchase of shares into Treasury	-	(1,627)
Repurchase and cancellation of the Company's own shares	(2,031)	(212)
Net cash inflow/(outflow) from financing activity	2,748	(1,839)
Increase/(decrease) in cash and cash equivalents	1,194	(1,853)

Notes to the Accounts

for the year ended 31st December 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', issued by the

Association of Investment Companies in January 2009. All of the Company's operations are of a

continuing nature.

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

2.         Return/(loss) per share

            The revenue return per share is based on the earnings attributable to the ordinary shares of £383,000 (2009: £35,000 loss) and on the weighted average number of shares in issue during the year of 5,402,148 (2009: 5,685,496).

            The capital return per share is based on the capital return attributable to the ordinary shares of £12,797,000 (2009: £9,200,000) and on the weighted average number of shares in issue during the year of 5,402,148 (2009: 5,685,496).

            The total return per share is based on the total return attributable to the ordinary shares of £13,180,000 (2008: £9,165,000) and on the weighted average number of shares in issue during the year of 5,402,148 (2009: 5,685,496).

3.         Net asset value per share

Net asset value per share		Net assets attributable
	2010	2009	2010	2009
	pence	pence	£'000	£'000
Ordinary shares	1,005.8	755.2	52,950	41,399

            The net asset value per share is based on the net assets attributable to the ordinary shareholders of £52,950,000 (2009: £41,399,000) and on the 5,264,610 (2009: 5,482,110) shares in issue at the year end.

4.   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 December 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 December 2010 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.jpmussmallercompanies.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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