Final Results

RNS Number : 0521P

JPMorgan US Discovery IT PLC

18 March 2009

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US DISCOVERY INVESTMENT TRUST PLC

AUDITED FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2008

2008 was one of the worst years for stock markets which saw records created for all the wrong reasons. Even taking into account the difficult market environment and the tough economic conditions, the Board recognises that the level of underperformance that has been reported in 2008 is totally unacceptable and as a result changes were made towards the end of the year which your Board believes will restore the Company's historically strong track record.

Investment Manager

2008 now marks the third consecutive year in which the investment manager has underperformed the Russell 2000 index and whilst 2008 was clearly an exceptional year, which has seen many talented investment managers fail to outperform, your Board has taken a number of actions which it hopes will result in improved

performance in 2009.We have undertaken a comprehensive review of how the portfolio is run and a new investment team with a strong track record has been put in place. We have modified the investment strategy to give the investment manager greater flexibility in challenging markets. We have also established a

Management Engagement Committee, in line with recommendations from the Association of Investment Companies, the terms of reference of which are on the Company's web site. Finally, we have reduced the notice period for the termination of the Company's management agreement from twelve months to six months.

Glenn Gawronski has assumed responsibility for managing the portfolio and he reports to you in his Investment Manager's Report. He is part of a close knit team of four who have built up a strong track record by investing in US smaller companies. Before joining JPMorgan Asset Management he worked as a credit analyst, a useful discipline when analysing companies in this environment. The appointment was made in November 2008 which gave him and his team the opportunity to restructure the portfolio before the end of the year and position

it better for these challenging markets.

Looking back on the Chairman's Statement for the six months to 30th June 2008 it is barely credible that the outlook for financial markets and the economy could deteriorate further, but that is precisely what happened. At the time of writing in August, markets were grappling with the consequences of inflationary pressures (oil

prices having hit over $140 a barrel) and the inability of central banks to tackle inflation given the severity of the crisis in credit markets. At the same time there was confidence that the US administration could contain the problems in the financial services sector and the dollar had held steady at around $1.98 to the pound. In September, however, we experienced what can only be described as a meltdown of the financial system. First the US Government had to protect US householders by nationalising Fannie Mae and Freddie Mac to contain the worst of the fallout in the mortgage market. Then Lehman Brothers was allowed to file for bankruptcy - this

was a significant event as investors had not expected the US administration to allow a financial institution to fail because of the potential impact on markets and the economy. On the day Lehman filed for bankruptcy Merrill Lynch had to be taken over by BankAmerica and AIG, the US insurer, was bailed out by the Federal Reserve.

Every financial institution was affected by these events and any feeling by investors that value was building in the stock markets was destroyed. Another consequence of these events was a pricking of the bubble in commodity prices which saw the oil price fall from its highs of over $140 to below $40 and worries shifted from inflation to

fears of deflation. Central banks have acted promptly by aggressively cutting interest rates.However markets are haunted by the fear that we will experience a 1930s style depression with unemployment set to soar and an extremely difficult outlook for the consumer.

Investment Performance

The financial turmoil described above created an extremely difficult environment in which to invest, with the only positive for UK investors in US stocks coming from the strength of the US dollar relative to sterling over the past five months. In uncertain markets smaller cap stocks, which are less liquid, tend to be very volatile as investors look to reduce their exposure to what they perceive as higher risk assets. This background contributed to your investment manager having a very difficult year both in terms of stock and sector selection (explained in detail in the Investment Manager's Report). Over the year the Company's net asset value ('NAV') and share price fell by 32.1% and 33.5% respectively. In dollar terms our benchmark index, the Russell 2000 fell by 33.8%, but following the substantial rise in the US dollar the Russell 2000 in sterling terms only fell by 8.6%.

Investment Strategy

In conjunction with the investment review that was undertaken at the end of our financial year and the change of investment manager the Board refreshed the investment mandate to give the investment manager greater flexibility relative to our smaller companies' benchmark. Eleven years ago the Company changed its investment objective to: Capital growth from investing in US micro cap companies which are defined as companies with a market capitalisation of $50m-500m. Your Board now believes that to achieve the best returns to shareholders from the micro and smaller cap companies in the US, the investment manager needs to have the ability to invest fully within our benchmark, the Russell 2000. This index is rebalanced annually to represent the bottom 10% by market capitalisation of all quoted companies in the US. The current weighted average market capitalisation of its constituents is roughly $880 million.Whilst most investments are likely to be below this figure, as that is

where the greatest opportunities exist, the change of strategy will give the investment manager and his team the flexibility to go above $500 million in order to take advantage of the best ideas in the small and micro cap universe.

Discount Management

One area of success that your Board is pleased to report is that we were able to maintain a stable discount to NAV through most of the year, despite huge volatility in stock markets, by using share buyback powers to pursue this end. During the year under review your Company's discount to NAV averaged 8.8%, which was in line with our stated policy of a long term level of discount that is on average below 9% and compares with the average discount in the North American smaller companies investment trust sector of 28.4%. The share buybacks also had a

positive effect on NAV, adding 3.1% to performance. There is a reporting anomaly in the accounts in terms of the discount to NAV used for 31st December 2008 as the London markets closed well before New York markets opened and your Company was standing at 8.9% discount at that time, however the US dollar and Russell 2000 both rose strongly that day, which boosted the NAV by around 4% giving rise to a year end discount of 13.6%.

At the Annual General Meeting in 2008, your Board was authorised to repurchase the Company's shares for cancellation or alternatively hold them in Treasury for re-issue at a limited discount to net asset value to enhance the liquidity of the Company's shares. During the year the Company repurchased 1,769,113 shares for cancellation, representing 22.5% of the shares in issue at the beginning of the year, and bought 200,000 shares into Treasury. No shares were issued during the year. A total of 591,000 shares were cancelled from Treasury during the year. Since the year end, a further 50,000 shares have been bought into Treasury and a further 96,000 shares cancelled from Treasury.

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. We review our 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

The Company's US$28 million revolving credit facility with The Royal Bank of Scotland plc matured at the end of January 2009 and the Board is currently seeking to put a new borrowing facility in place to allow the investment managers to manage the gearing actively in order to enhance returns to shareholders.

VAT repayment on Management Fees

Following the decision by the European Court of Justice in June 2007 that VAT should not be charged on investment trust companies' management fees, the Company has received reimbursement of VAT and interest totalling £397,000.

Board of Directors

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

Having served as a Director for more than nine years, in accordance with best practice, Alan Kemp will stand for annual re-election at this year's AGM. The Board does not believe that length of service in itself should disqualify a Director from seeking re-election and in proposing his re-election it 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

During the year the newly formed Management Engagement Committee carried out a formal detailed 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, 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 these services is in the interests of shareholders as a whole following the changes that have been made (as discussed above).

Annual General Meeting

This year's Annual General Meeting will be held at The Library, JPMorgan, 60 Victoria Embankment, London EC4Y OJP on Thursday 23rd April 2009 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. The meeting will be followed by a buffet lunch, providing shareholders the opportunity to meet the Directors and the investment manager.

Outlook

At the time of writing, the outlook for world economies is bleak and there are genuine and well-founded fears that the recession could be deep and prolonged which would see high levels of unemployment and a further deterioration in consumer confidence. However, it is worth remembering that the US economy went into a recession first and is likely to emerge first. Also, stock markets have taken a battering, particularly in the asset class that your investment manager invests in, which has produced some genuine investment opportunities for those

prepared to do the analysis.

Davina Walter

Chairman 18th March 2009

Investment Manager's Report

Market Performance

Looking back, 2008 will most certainly be remembered as one of the worst years of all time for the US equity markets, with the S&P 500 Index down 37.0%, the Russell 2000 Index down 33.8% and the Russell Micro Cap Index down 40.4%, in US dollar terms.

While small caps, as represented by the Russell 2000, outperformed large caps (small comfort in absolute terms), micro cap stocks fared much worse. Relative liquidity was the dominant factor in this respect and this was mirrored in all other assets classes, as investors fled risk.

Investment Performance

Investment performance for the Company was extremely disappointing. While market conditions were obviously very hostile, some portfolio specific mistakes exacerbated an already very challenged market.

There were essentially two major tilts to the portfolio that drove its underperformance during 2008: a bias towards the smaller end of the micro cap universe and a tilt towards growth. For the 2008 calendar year, the smallest

market capitalisation stocks (less than $250 million) within the Russell 2000 Index were the worst performers, down 43.4%. Likewise, those companies with the highest long-term earnings growth (greater than 20%) were also down the most, falling by 41.5%.

Bottom-up stock selection led to significant portfolio exposure in companies in the Technology and Consumer Discretionary sectors and poor stock selection here and in certain Healthcare positions contributed to the majority of underperformance. On the positive side, stock selection in the Auto & Transportation sector and a portfolio underweight to the Producer Durables sector positively contributed to results.

Actions we have taken to improve performance and restructure the portfolio

Re-establishing the Company's investment performance record is the key priority and upon taking over the management of the Company in November, we made a number of changes to reduce the concentration of risk in the portfolio at both the stock and sector level, and to eliminate individual investments which either did not meet our quality profile or where we felt there might be enterprise risk. At the sector level, this resulted in a reduction in the significant overweight exposure to Consumer Discretionary and a meaningful narrowing in the underweight position in Financial Services (although not by adding regional banks about which we remain very cautious).

We added 25 new names, which at year end made up about 30% of the Company's portfolio and eliminated completely 13 holdings, with the difference being made up by reductions of position sizes that were too big relative to their risk and return profile.

The result of these changes has been to improve both the quality of the franchises that we are invested in and to reduce some of the portfolio construction risks that had weighed on the 2008 results.

Portfolio Structure and Strategy

Our investment strategy is clear and uncomplicated. We seek to identify as early as possible companies with sustainable competitive advantages, high quality business models and managements and to buy them at a discount to their intrinsic value.

With a universe that covers over 3,000 micro-cap companies and over 1,900 small-cap companies, including many different specialist niches that exist within it, our process is highly research intensive.

The structure of the portfolio is derived very much from the bottom-up.

Market Outlook

While 2008 was the worst calendar year for the markets since the Great Depression, 2009 looks set up to be one of the worst for the global economy in decades. The urgency with which the fiscal stimulus currently in the system

needs to be enacted cannot be overstated, but it is likely to be months before planning and political barriers are cleared and the money is deployed. In the meantime, private sector deleveraging will continue to savage economic growth and we expect GDP to contract in the first two quarters of the year, with only a mild recovery in the second half.

The good news is that financial markets tend to discount future economic problems well in advance and after a year like 2008, we think that they have already gone a long way towards doing so. As investors look forward to the

impact of fiscal measures and as more areas of the secondary financial markets are likely to come under direct central bank support, a nervous recovery in risk assets is our base case for 2009. As risk premia come down, this will favour equities and the less liquid parts of the market, just as the past 12 months have punished these categories.

Glenn Gawronski

Investment Manager 18th March 2009

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 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under 'Business of the Company' above. Were the Company to breach Section 842, 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 842 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 1985 and 2006 and, as its shares are listed on the London Stock Exchange, the UKLA Listing Rules. A breach of the Companies Act 1985 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules could result in the Company's shares being suspended from listing which in turn would breach Section 842. The Board relies on the services of its Company Secretary, JPMAM, and its professional advisers to ensure compliance with the Companies Act 1985 and 2006 and the UKLA Listing Rules.

• 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.

• 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.

• 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 note 21 of the Company's Report & Accounts.

Related Parties Transactions

During the financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Directors' Responsibilities

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 2009

JPMorgan US Discovery Investment Trust plc

Audited figures for the year ended 31st December 2008

Income Statement  

	(Unaudited) Year ended 31st December 2008			(Audited) Year ended 31st December 2007
	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000
Losses from investment held at fair value through profit or loss	-	(20,814)	(20,814)	-	(5,703)	(5,703)
Net foreign currency gains	-	5	5	-	442	442
Income from investments	130	-	130	264	-	264
Other interest receivable and similar income	167	-	167	21	-	21
	_______	________	_______	_______	________	_______
Gross return/(loss)	297	(20,809)	(20,512)	285	(5,261)	(4,976)
Management fee	(48)	(430)	(478)	(86)	(773)	(859)
Performance fee writeback	-	431	431	-	472	472
VAT recovered	228	13	241	-	-	-
Other administrative expenses	(287)	-	(287)	(271)	-	(271)
	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activities before finance costs and taxation	190	(20,795)	(20,605)	(72)	(5,562)	(5,634)
Finance costs	(5)	(43)	(48)	(47)	(425)	(472)
	_______	_______	_______	_______	_______	_______
Net return/(loss) on ordinary activitiesbefore taxation	185	(20,838)	(20,653)	(119)	(5,987)	(6,106)
Taxation	(19)	-	(19)	(39)	-	(39)
	______	_______	_______	______	_______	_______
Net return/(loss) on ordinary activities after taxation	166	(20,838)	(20,672)	(158)	(5,987)	(6,145)
	=====	=====	=====	=====	=====	=====
Return/(loss) per share (note 2)	2.53p	(317.85)p	(315.32)p	(1.72)p	(65.12)p	(66.84)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.  

JPMorgan US Discovery Investment Trust plc

Audited figures for the year ended 31st December 2008

Reconciliation of Movements in Shareholders' Funds (Unaudited)

	Called up share capital £’000	Capital redemption reserve £’000	Capital reserves £’000	Revenue reserve £’000	Total £’000
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)
Net loss from ordinary activities	-	-	(5,987)	(158)	(6,145)
	_______	________	_______	_______	________
At 31st December 2007	2,098	1,044	69,630	(4,861)	67,911
Repurchase and cancellation of shares	(442)	442	(11,429)	-	(11,429)
Purchase of shares into Treasury	-	-	(1,335)	-	(1,335)
Net (loss)/return from ordinary activities	-	-	(20,838)	166	(20,672)
	_______	________	_______	_______	________
At 31st December 2008	1,508	1,634	36,028	(4,695)	34,475
	=====	=====	====	=====	=====

JPMorgan US Discovery Investment Trust plc

Audited figures for the year ended 31st December 2008

Balance sheet

	(Unaudited) 31st December 2008	(Audited) 31st December 2007
	£’000	£’000
Fixed assets
Investments at fair value through profit or loss	32,121	70,093
Current assets
Debtors	951	806
Cash and short term deposits	2,132	982
	_______	_______
	3,083	1,788
Creditors: amounts falling due within one year	(729)	(3,518)
Derivative financial instrument
Forward currency contract at fair value	-	(21)
	_______	_______
Net current assets/(liabilities)	2,354	(1,751)
	_______	_______
Total assets less current liabilities	34,475	68,342
Provision for liabilities and charges	-	(431)
	_______	_______
Total net assets	34,475	67,911
	=====	=====
Capital and reserves
Called up share capital	1,508	2,098
Capital redemption reserve	1,634	1,044
Capital reserve	36,028	69,639
Revenue reserve	(4,695)	(4,861)
	_______	_______
Shareholders’ funds	34,475	67,911
	=====	=====
Net asset value per share (note 3)	586.2p	865.1p

JPMorgan US Discovery Investment Trust plc

Unaudited figures for the year ended 31st December 2008

Cash Flow Statement

	(Unaudited) 31st December 2008	(Audited) 31st December 2007
	£’000	£’000
Net cash inflow/(outflow) from operating activities	195	(1,538)
Returns on investment and servicing of finance
Interest paid	(49)	(473)
	_______	_______
Net cash outflow from returns on investments and servicing of finance	(49)	(473)
Capital expenditure and financial investment
Purchase of investments	(33,015)	(39,342)
Sales of investments	49,946	68,588
Other capital charges – handling fees	(7)	(15)
	_______	_______
Net cash inflow from capital expenditure and financial investment	16,924	29,231
	_______	_______
Net cash inflow before financing	17,070	27,220
Financing
Repurchase of shares	(15,905)	(15,995)
Repayment of short term loans	-	(10,838)
	_______	_______
Net cash outflow from financing activity	(15,905)	(26,833)
	_______	_______
Increase in cash for the year	1,165	387
	=====	=====

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 Association of Investment Companies ('the AIC') in January 2009. All of the Company's operations are of a continuing nature.

2. Return/(loss) per share

	(Unaudited)		(Audited)
	Year ended		Year ended
	31st December 2008		31st December 2007
	£’000		£’000
Return/(loss) per share is based on the following:
Revenue return/(loss)           Capital loss	166 (20,838)		(158) (5,987)
	_______		_______
Total loss	(20,672)		(6,145)
	======		======
Weighted average number of shares in issue	6,555,908		9,194,230
Revenue return/(loss) per share	2.53p		(1.72)p
Capital loss per share	(317.85)p		(65.12)p
	_______		_______
Total loss per share	(315.32)p		(66.84)p
	======		======

3. Net asset value per share   
 

	Net asset value per share		Net assets attributable
	2008 pence	2007 pence	2008 £,000	2007 £,000
Ordinary shares	586.2	865.1	34,475	67,911

Net asset value per share is based on the 5,881,367 (2007: 7,850,480) shares in issue at the year end, excluding shares held in Treasury.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

 

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