Final Results
JPMorgan US Discovery IT PLC
18 March 2008
JPMORGAN US DISCOVERY INVESTMENT TRUST plc
Stock Exchange Announcement
The Board of JPMorgan US Discovery Investment Trust plc announces the Company's
results for the year ended 31st December 2007. Commenting on the results the
Chairman has made the following statement:
US equity markets were very volatile over the year to 31st December 2007 and
companies in the microcap universe were particularly affected. In this
difficult environment the Company had a disappointing year: net assets fell by
6.4%, while the return to shareholders declined by 7.6% as a result of a
short-term widening of the discount to 11.3% at the year end.
During the year the Company's benchmark, the Russell 2000 Index in sterling
terms, declined by only 3.5%. This reflects the generally better performance of
those stocks in the Index whose market capitalisation is too large for the
Company's microcap remit. Over the same period the newer Russell Microcap Index
declined by 9.6%. The Board is monitoring the performance of this Index, which
may prove more applicable than our existing benchmark.
Within the Company's portfolio, the detrimental effect of volatile markets was
exacerbated by disappointing stock selection. The Board carried out a careful
appraisal of the Manager's investment process and team and is satisfied that the
investment philosophy remains fundamentally sound.
Microcap Investment Strategy
The Board has consistently reminded shareholders that investment in microcap
companies should be judged over the longer-term. While with a 7.7% increase over
the past three years absolute returns have been less than satisfactory in the
shorter term, since the Company adopted its microcap mandate in 1998 they have
been strong, with the net asset value almost doubling.
Discount Management
In my statement last year, I announced a policy aimed at reducing the volatility
of the discount and establishing a long-term level of discount below 9.0% on
average. I am pleased to say that we have made some good progress: the Company's
shares traded at an average 9.4% discount over the financial year.
At the Annual General Meeting in 2007, shareholders authorised the Company to
repurchase its shares for cancellation or alternatively to hold them in
Treasury. Any shares held in Treasury would only be reissued at a discount of
less than 5% and the aggregate dilution associated with all reissues would not
exceed 0.5% of the net asset value over the full period of the authority.
During the year the Company repurchased 1,768,000 shares for cancellation,
representing 17.4% of the shares in issue at the beginning of the year, and
bought a further 541,000 shares into Treasury. The authority to repurchase the
Company's shares was renewed at Extraordinary General Meetings held in November
2007 and February 2008. No shares were re-issued from Treasury during the year.
Resolutions to renew the authorities to repurchase shares, allot new shares and
to re-issue shares from Treasury will be put to shareholders at this year's
Annual General Meeting.
Currency Hedging
The Board has the authority to reduce or eliminate the exposure of the portfolio
to changes in the value of the US dollar against sterling. This process is known
as 'hedging' and can be achieved in a number of ways. The Board review the
policy on this matter regularly; to date we have not carried out any hedging and
have no plans to do so in the immediate future.
Gearing
Over the year under review gearing averaged at 109% and remained within the
range set by the Board of 95%-115% (+/-2.5% for market movements). The Company's
US$28 million revolving credit facility with The Royal Bank of Scotland plc
matured at the end of January 2008 and was replaced with a similar facility for
a further 364 days. This facility will continue to allow the Manager freedom to
actively manage gearing within the limits set by the Board.
VAT on Management Fees
In November 2007, following the joint action by the Association of Investment
Companies and JPMorgan Claverhouse Investment Trust plc, HM Revenue & Customs
confirmed that VAT should not be charged on investment trust management fees.
This outcome is positive for the investment trust industry as a whole as it
removes the disadvantage at which investment trusts were placed compared with
unit trusts and open-ended investment companies. In the Company's case, however,
this judgement has little or no impact as it has been in the fortunate position
of being able to recover most of the VAT suffered in past years.
Corporate Governance
At the forthcoming Annual General Meeting, the Board will propose the adoption
of new Articles of Association which will incorporate amendments to the current
Articles to reflect the provisions of the Companies Act 2006 (the '2006 Act')
which came, or will come, into effect in 2007 and 2008. The principal changes
relate to electronic communication with shareholders, shareholder meetings and
resolutions, directors' indemnities, transfers of shares and directors'
conflicts of interest. It is anticipated that shareholders will be asked to
approve further changes to the Articles at the AGM in 2009, as the 2006 Act will
not be fully in force until October 2009.
Board of Directors
The Directors carried out their annual evaluation of the Board and its
Committees, the Directors and the Chairman in February. This was considered to
be an effective means of evaluating their continuing effectiveness.
In accordance with the Company's Articles of Association, the Directors retiring
by rotation at this year's AGM are Mark Ansell and Christopher Galleymore. A
Nomination Committee of the Board has met to consider their qualifications and
performance and, in view of the valuable contribution they make to the Board's
deliberations, the Committee recommends to shareholders that Mark Ansell and
Christopher Galleymore should be re-elected.
In addition, having served as Directors for more than nine years, Alan Kemp and
I are also standing for re-election. The Board does not believe that length of
service in itself should disqualify a Director from seeking re-election and in
proposing our re-election it has taken into account the ongoing requirements of
the Combined Code, including the need to refresh the Board and its Committees.
Manager
During the year the Board also carried out a detailed formal review of the
Manager. This covered the investment management, company secretarial,
administrative and marketing services provided to the Company by JPMorgan Asset
Management (UK) Limited ('JPMAM') and included their investment performance
record, investment style, management processes, 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 these services is in the
interests of shareholders as a whole.
Annual General Meeting
This year's Annual General Meeting will be held at The Library, JPMorgan, 60
Victoria Embankment, London EC4Y OJP on 24th April 2008 at 12 noon.
Outlook
As outlined in the Investment Manager's report, the expectation for growth in US
corporate profits is low and the odds of a US economic recession have increased.
Nevertheless, we believe much of this negative outlook has already been
reflected in the share prices of many of the stocks within the microcap universe
and that a number of excellent opportunities are beginning to appear in the
high-quality companies in which the Company invests.
Robin Lewis
Chairman 18th March 2008
Investment Manager's Report
Market Review
It was definitively a year of two halves. During the first half of the year,
markets moved up as investors remained optimistic that the economy would
experience a soft landing and maintain moderate growth. But in mid summer the
combination of the emerging sub-prime mortgage crisis and the unwinding of a
number of high profile and highly leveraged hedge funds put enormous pressure on
the stockmarket and on smaller stocks in particular. After a strong rally, the
market came under increased pressure once again in November as increasingly
heavier than expected losses from major financial institutions, the continued
deterioration of the US housing market and higher energy and commodity prices
all pointed to increased odds of a US recession. This anxiety has continued
through the beginning of 2008.
Investment Performance
In this environment the Company's focus on the microcap universe has been
challenging as the less liquid portions of the market were hit hardest, in part
due to the continued liquidation of quantitatively driven hedge funds and in
part due to the high level of uncertainty in markets more generally. For the
year the Company's NAV declined 6.4% compared with the Russell 2000 Index's
decline of 3.5% and the Russell Microcap Index's fall of 9.6% (both in sterling
terms).
By broad sector, the Company outperformed in two of the sectors in which our
stock selection has historically led to an overweight position, Information
Technology and Healthcare, while underperforming in our largest broad sector
exposure, Consumer Discretionary. In the latter's case, while most of our
portfolio investments have very distinct and differentiated competitive
advantages, the market environment was particularly hostile to anything
connected to the consumer.
Longer term numbers solid but pressured by 2007's performance
As emphasised in previous years' commentary, investment in microcap companies in
the US is most appropriately judged against a longer time horizon. The
opportunity to profit as an investor in this universe is presented by a
combination of market inefficiency due to lack of research and relative
illiquidity. By doing our own research and being patient we have historically
been able to generate strong returns, but not every year, as market conditions
fluctuate.
Over the past three years to 31st December 2007, the Company's returns remain
positive and increased by 7.7%, compared to the Russell 2000's 16.5%, but are
better over five years and since inception.
That said, 2007's underperformance relative to the small cap universe has
reduced our previously strong longer-term relative performance numbers. While
this is partially a function of our focus on microcap companies, we are not
satisfied with this performance and have taken steps to eliminate less
attractive investments in favour of our highest conviction names.
Investment Highlights
Four of the top contributing stocks more than doubled. HemoSense and Third Wave
Technology, both healthcare stocks, increased 285% and 101%, respectively.
HemoSense, a manufacturer of handheld blood coagulation monitoring systems,
advanced from market share gains and ultimately getting acquired. DNA diagnostic
provider Third Wave benefited from new management, strong results, a growing
market, and evidence that a product is potentially superior to the incumbent's.
Concur Technologies and Vocus, both on-demand software companies, also more than
doubled, advancing 125% and 105%, respectively. Both achieved significantly
stronger than expected revenue and earnings growth, while completing strategic
acquisitions which expanded their market opportunities. Property services
provider Firstservice, a company purchased in 2004, increased 51% from a
combination of better-than-expected results and multiple expansion.
And Lowlights
The three worst performers in the portfolio all declined in excess of 50% and
each was partially impacted by the hostile consumer market environment.
Ashworth, a manufacturer of branded apparel for golfers, stumbled in its
turnaround strategy and its stock was crushed by the negative consumer
sentiment. Youbet.com, an online horse wagering company was caught in the middle
of a rights dispute between the track owners and their content distributor and
Smith & Wesson missed numbers as consumers pulled back from the hunting market
in what was also an unseasonally warm winter.
Portfolio Structure and Strategy
The Company has a consistent portfolio strategy - to identify as early as
possible the most attractive investments in the US microcap universe. To us,
attractive means companies with sustainable competitive advantages versus their
competitors, high quality business models and managements, and significant
growth profiles, yet relatively undiscovered due to little or no Wall Street
following. With a universe of over 2,500 companies, including many different
specialist niches that exist within it, our process is highly research
intensive. Consequently, the structure of the portfolio is derived from the
bottom up.
Since the change in the mandate when the Company began investing in the US
microcap universe, the portfolio structure has been dominated by individual
stock selection, with any sector biases being a derivative of the stock
selection process.
This bottom up stock selection process has led us to hold a small overweight
position of the Healthcare sector and a continually significant overweight
position in the Consumer Discretionary and Technology sectors, as these sectors
provide us with the greatest number of companies with the higher-growth,
higher-quality business models we desire. Notably, these sectors encompass a
wider range of companies than the typical consumer and technology company,
including business services, education and corrections. We also continue to
favour Materials & Processing and Utilities due to the unattractiveness of these
cyclical, low returns on capital companies.
Market Outlook
For the past two years we had been comfortable with, but not excited by,
valuations and looked for continued economic growth. We saw the biggest risks to
equities as an increase in inflation and a rise in interest rates.
The outlook for 2008 is much different. The fallout from last summer's turn in
the credit cycle has further to go and spillovers into the broad economy are
still in their early stages. Consequently, our expectation for growth in US
corporate profits is low and we see the odds of a recession as increased.
However, every cloud has a silver lining and ours is a decline in interest rates
and attractive valuations. We believe many stocks are priced as if we are in a
recession and provide an excellent entry point for investment in the
high-quality companies we seek.
Christopher Jones
Investment Manager 18th March 2008
For further information:
Jonathan Latter
For and on behalf of
JPMorgan Asset Management (UK) Limited - Secretary
020 7742 6000
JPMorgan US Discovery Investment Trust plc
Audited figures for the year ended 31st December 2007
Income Statement
(Audited) (Audited)
Year ended 31st December 2007 Year ended 31st December 2006
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses from investments held
at fair value through profit
or loss - (5,703) (5,703) - (3,425) (3,425)
Net foreign currency gains - 442 442 - 1,178 1,178
Income from investments 264 - 264 293 - 293
Other interest receivable and
similar income 21 - 21 7 - 7
_______ ________ _______ _______ ________ _______
Gross return/(loss) 285 (5,261) (4,976) 300 (2,247) (1,947)
Management fee (86) (773) (859) (97) (874) (971)
Performance Fee writeback - 472 472 - 903 903
Other administrative expenses (271) - (271) (260) - (260)
_______ _______ _______ _______ _______ _______
Net loss on ordinary
activities before finance
costs and taxation (72) (5,562) (5,634) (57) (2,218) (2,275)
Finance costs (47) (425) (472) (52) (466) (518)
_______ _______ _______ _______ _______ _______
Net loss on ordinary
activities before taxation (119) (5,987) (6,106) (109) (2,684) (2,793)
Taxation (39) - (39) (43) - (43)
______ _______ _______ ______ _______ _______
Net loss on ordinary
activities after taxation (158) (5,987) (6,145) (152) (2,684) (2,836)
===== ===== ===== ===== ===== =====
Loss per share (note 2) (1.72)p (65.12)p (66.84)p (1.49)p (26.42)p (27.91)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. The 'Total' column represents all the information that is required
to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL').
For this reason a STRGL has not been presented.
JPMorgan US Discovery Investment Trust plc
Audited figures for the year ended 31st December 2007
Reconciliation of Movements in Shareholders' Funds (Audited)
Called up Capital
Share redemption Capital Revenue
capital reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000
At 31st December 2005 2,540 602 97,437 (4,551) 96,028
Total loss from ordinary activities - - (2,684) (152) (2,836)
_______ ________ _______ _______ ________
At 31st December 2006 2,540 602 94,753 (4,703) 93,192
Repurchase and cancellation of shares (442) 442 (14,492) - (14,492)
Purchase of shares into treasury - - (4,644) - (4,644)
Total loss from ordinary activities - - (5,987) (158) (6,145)
_______ ________ _______ _______ ________
At 31st December 2007 2,098 1,044 69,630 (4,861) 67,911
===== ===== ===== ===== =====
JPMorgan US Discovery Investment Trust plc
Audited figures for the year ended 31st December 2007
Balance sheet
(Audited) (Audited)
31st December 2007 31st December 2006
£'000 £'000
Fixed assets
Investments at fair value through profit or loss 70,093 104,813
Current assets
Debtors 806 231
Cash and short term deposits 982 132
_______ _______
1,788 363
Creditors: amounts falling due within one year (3,518) (11,764)
Derivative financial instrument
Forward currency contract at fair value through profit of loss (21) -
_______ _______
Net current liabilities (1,751) (11,401)
_______ _______
Total assets less current liabilities 68,342 93,412
Provision for liabilities and charges (431) (220)
_______ _______
Total net assets 67,911 93,192
===== =====
Capital and reserves
Called up share capital 2,098 2,540
Capital redemption reserve 1,044 602
Capital reserve 69,630 94,753
Revenue reserve (4,861) (4,703)
_______ _______
Shareholders' funds 67,911 93,192
===== =====
Net asset value per share (note 3) 865.1p 917.3p
===== =====
JPMorgan US Discovery Investment Trust plc
Audited figures for the year ended 31st December 2007
Cash Flow Statement
(Audited) (Audited)
31st December 2007 31st December 2006
£'000 £'000
Net cash outflow from operating activities (1,538) (2,019)
Returns on investments and servicing of finance
Interest paid (473) (530)
_______ _______
Net cash outflow from returns on investments and servicing of
finance (473) (530)
Capital expenditure and financial investment
Purchase of investments (39,342) (69,697)
Sales of investments 68,588 62,139
Other capital charges - handling fees (15) (7)
_______ _______
Net cash inflow/(outflow) from capital expenditure and
financial investment 29,231 (7,565)
_______ _______
Net cash inflow/(outflow) before financing activity 27,220 (10,114)
Financing
Repurchase of shares (15,995) -
(Repayment)/drawdown of short term loans (10,838) 9,068
_______ _______
Net cash (outflow)/ inflow from financing (26,833) 9,068
_______ _______
Increase/(decrease) in cash for the year 387 (1,046)
===== =====
Notes to the Accounts
1. Accounting policies
The accounts are prepared in accordance with the Companies Act 1985, United
Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the
Statement of Recommended Practice 'Financial Statements of Investment Trust
Companies' (the 'SORP') issued by the AIC in December 2005. All of the Company's
operations are of a continuing nature. The preliminary announcement is prepared
on the same basis as set out in the previous years annual account.
2. Loss per share
(Audited) (Audited)
Year ended Year ended
31st December 2007 31st December 2006
£'000 £'000 Loss per share is based on the following:
(158) (152) Revenue loss
(5,987) (2,684) Capital loss
_______ ______
(6,145) (2,836) Total loss
====== =====
9,194,230 10,159,480 Weighted average number of shares in issue
(1.72)p (1.49)p Revenue loss per share
(65.12)p (26.42)p Capital loss per share
_______ ______
(66.84)p (27.91)p Total loss per share
====== =====
3. Net asset value per share
Net asset value Net assets
per share attributable
2007 2006 2007 2006
pence pence £'000 £'000
Ordinary shares 865.1 917.3 67,911 93,192
Net asset value per share is based on the net assets attributable to the
ordinary shareholders of £67,911,000 (2006: £93,192,000) and on the 7,850,480
(2006: 10,159,480) shares in issue at the year end, excluding shares held in
treasury.
4. Status of preliminary announcement
The financial information set out in this preliminary announcement does not
constitute the Company's statutory accounts for the years ended 31 December 2006
or 2007. The statutory accounts for the years ended 31 December 2006 and 2007
have been reported on by the Company's auditors. The auditors reports for both
years were unqualified and contained no statement under s237(2) or s237(3) of
the Companies Act 1985. The statutory accounts for the year ended 31 December
2006 have been delivered to the Registrar of Companies and statutory accounts
for the year ended 31 December 2007 will be delivered in due course.
18th March 2008
JPMORGAN ASSET MANAGEMENT (UK) LIMITED
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