Final Results

RNS Number : 8829Z

JPMorgan US Smaller Co. IT

22 March 2012

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2011

Chairman's Statement

Performance

In a year in which most asset classes had negative returns and US small cap experienced one of its worst quarters on record, I am pleased to report that our net asset value (NAV) per share rose by 1.3% in 2011. This return also compared favourably with our benchmark index, the Russell 2000, which fell by 3.8% in sterling terms. Our share price fell by 1.8% over this same period, reflecting a small widening of the discount.

These figures mask some difficult periods during 2011 for equity markets as government finances on both sides of the Atlantic caused concern. In August an agreement was reached to raise the US debt ceiling but, without the offset of tax increases or budget cuts, Standard & Poor's downgraded the US credit rating and markets reacted badly. During the three month period to 30th September 2011 the more volatile small cap stocks were hit particularly hard, with the Russell 2000 index falling by 19.5% (in sterling terms) which was the fourth worst quarter on record for the index. During the fourth quarter of 2011 equity markets rallied to recover some lost ground as investors were attracted by valuations on companies with strong cash flows and sound balance sheets. US markets also benefited from the flight of capital from Europe as well as signs of economic recovery in the US.

This year's report marks the third anniversary of Glenn Gawronski and his team assuming responsibility for managing the portfolio and it is a great pleasure to be able to report that over this three year period our NAV has increased by over 74.4% which compares with the Russell 2000 index increase of 41.7%.

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 2011 as markets became more turbulent (as also occurred in the latter part of 2010) the daily management of the discount proved difficult as both markets and currencies were volatile and more importantly our shares lacked liquidity. As a result the discount widened on very low volumes in September, before narrowing back to 9.5% at the year end.

For the past several years, the Board has been authorised at the AGM to repurchase the Company's shares for cancellation. The Board continues to seek this authority so that we can maintain support of a stable discount. During the year the Company repurchased 100,987 shares for cancellation, representing 1.9% 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 April 2011 an agreement was signed with Scotiabank to provide a revolving credit facility of US$10 million. As at 31st December 2011, this had all been drawn and the portfolio was 105% geared.

Auditor Review

During the year the Board undertook a competitive tender process to review the provision of audit services. Following this process it was agreed that Grant Thornton UK LLP should replace Ernst & Young LLP.

Company Broker

The Board has recently undertaken a comprehensive review of its broking arrangements. Following this review, the Board has appointed Numis as Company broker as it was felt that Numis, as a research-based firm, would have a good understanding of our Company's investment philosophy and assist in broadening the shareholder base.

Manager

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

Annual General Meeting

We are changing the location of our AGM to, we hope, a more convenient location for our shareholders. It will be held at 20 Moorgate, London EC2R 6DA on Tuesday, 1st May 2012 at 2.30 p.m. The Investment Manager will give a presentation to shareholders in which he will review the past year and comment on the outlook for the current year. Following the meeting some refreshments will be served which will provide shareholders with the opportunity to meet the Directors and the Investment Manager and ask any questions on the portfolio and performance.

Outlook

The immediate outlook for US markets will be influenced by the forthcoming US Presidential elections in November as the recent failure of the bi-partisan 'super committee' to agree on budget cuts triggered automatic cuts in spending of US$100 billion. These automated cuts are deferred until after the election but it means that in the immediate aftermath the new US administration will need to address the burgeoning budget deficit, something it has failed to do on countless occasions.

Longer term the biggest issue facing investors will be sub-par economic growth and the process of de-leveraging (debt repayment) that many of the developed economies, in particular the US, need to undergo; the challenge will be to figure out how that impacts economies and markets. We continue to believe that Glenn Gawronski and his team are well equipped to cope with these challenges through their disciplined investment process and focus on balance sheet strength. 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 the team will be able to exploit opportunities produced by volatile markets.

Davina Walter

Chairman                                                                                                                    

22nd March 2012

Investment Manager's Report

Market Review

2011 was a challenging, up-and-down year, with the Russell 2000 Index ultimately finishing down 3.8%, in sterling terms, for the year. The start to the year was promising, as the Russell 2000 index found itself slightly above its pre-financial crisis peak at the end of April. Much of the strength early in the year reflected strong economic data points which reinforced confidence that both a US and global recovery was taking place. A reversal ensued as the precarious state of government finances on both sides of the Atlantic dominated the headlines in August and September, resulting in steep declines in global markets. European politicians continued to wrangle over the proper steps to resolve the solvency challenge faced by crisis-stricken countries, while Standard & Poor's downgrade of the US credit rating to AA+ from AAA set off speculation that a US and global recession was more likely. As of the 3rd October low in the US equity market, the Russell 2000 was off 30% from its late April highs and down 22% in the calendar year, on pace to see its second worst annual drop on record. Beginning in early October, investors regained an appetite for risk, as US data suggested that the crisis in Europe had yet to affect the domestic economy. Additionally, it became more evident that Eurozone countries were likely to work together, although a timeline and exact steps for resolution remained uncertain. The Russell 2000 Index bounced 22% from its 2011 low through year end, bringing the full year decline to just under 4%.

Investment Performance

For the year to 31st December 2011, the total return on net assets was 1.3%, which compares with our benchmark, the Russell 2000 Index, which fell 3.8%, both in sterling terms. The Company's outperformance was driven almost entirely by stock selection. Most sectors contributed positively to the outperformance for the year, most notably Consumer Discretionary and Technology. Gains across sectors were only modestly offset by underperformance in Energy and Utilities.

2011 was a tough year for small cap investors, as the small caps lagged the large caps with a loss of 4.2% versus a rise of 1.5% for the Russell 1000, both in US dollar terms, marking the first year since 2007 that larger caps performed better than smaller. Within the Russell 2000 Index, higher market caps and higher quality names tended to outperform for the year, aiding active managers in their pursuit of outperformance relative to their benchmarks.

Portfolio Positioning

Throughout 2011, we meaningfully increased our exposure to the Consumer Discretionary sector, resulting in a sizeable overweight position relative to the benchmark. We also increased our exposure to the Health Care sector, but remain underweight in that sector. Additions to these sectors have been at the expense of most other sectors, especially Consumer Staples and Energy. We continue to be underweight Technology, which in some ways is indicative of our investment process and style. Within Technology, we have a difficult time finding companies that possess a sustainable competitive advantage, particularly in light of the rapid change in this 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.

Portfolio Highlights

The most significant contributors to performance were Epoch Holding Corp. and Papa Johns International. Epoch, an investment advisory and investment management company, contributed positively to overall results with a return of 48% during the year. Its shares outperformed as the company grew its assets under management by 34% during the year, despite declines in most global equity markets. Papa John's, which operates and franchises pizza delivery and carry-out restaurants in the United States and international markets, contributed positively with a return of 36% during the year. The company's shares outperformed as it posted strong results throughout the year, including solid same-store sales gains.

The significant detractors to performance were Greenhill & Co. and Janus Capital Group. Greenhill, an independent investment bank that provides financial advice on mergers, acquisitions and restructurings to corporations, partnerships and governments around the world, contributed negatively as the shares fell 55% during the year. Full year results disappointed relative to initial expectations given a weak overall advisory environment. Janus Capital, a global asset management firm offering individual investors and institutional clients asset management services, contributed negatively with a fall of 51% over the year. Results were negatively impacted by a 13% drop in assets under management and challenging relative investment performance in key fundamental equity strategies.

Market Outlook

Looking forward, we suspect macro economic events will continue to dominate headlines and the trajectory of the market will take several twists and turns. A resolution to the European debt crisis continues to unfold and global markets are still susceptible to any news that veers away from forward progress. We are encouraged that US GDP forecasts continue to move upwards, supported by an improving trend in leading economic indicators. The upcoming US Presidential elections are a wildcard, which could result in high-profile political manoeuvrering or government inaction. Fundamentals for most companies continue to improve, albeit at a more muted pace and the risk/reward trade-off on most stocks remains fairly balanced. We continue to believe that stock selection remains critical and plan to stay disciplined with regards to our investment strategy.

Glenn Gawronski

Investment Manager                                                                                                   

22nd March 2012

Principal Risks

With the assistance of the Manager, JPMorgan Asset Management (UK) Limited ('JPMAM'), 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 excessive concentration of sector selection or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, which may result 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. 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 Manager, who attends all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Investment Manager employs the Company's gearing tactically, within a strategic range set by the Board. In addition to regular Board reviews of investment strategy, the Board holds a separate meeting devoted to strategy each year.

•   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'). Details of the Company's approval are given under 'Business of the Company' above. Should the Company breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio could 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, since 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 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 2006 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 in the Report & Accounts.

•   Operational: disruption to, or failure of, JPMAM's accounting, dealing or payments systems or the custodian's records may prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by JPMAM and its associates and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance report in the Report & Accounts.

•   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 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's loan facility is denominated in US dollars.

     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.

     The Board has the authority to reduce or eliminate the exposure to fluctuating currencies through the use of currency hedging. It reviews its policy on this matter regularly; to date no hedging has been carried out and there are no plans to do so in the immediate future.

•   Financial: The financial risks faced by the Company include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. Further details are disclosed in note 21 within the Annual 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, which have been prepared in accordance with United Kingdom Generally 
Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law)UK accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

b)         the Annual Report, 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 it faces.

For and on behalf of the Board

Davina Walter

Chairman

22nd March 2012

Income Statement

for the year ended 31st December 2011

			2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair
value through profit or loss		-	1,493	1,493	-	13,106	13,106
Net foreign currency (losses)/gains		-	(194)	(194)	-	298	298
Income from investments		719	-	719	847	-	847
Other interest receivable and similar income		-	-	-	6	-	6
Gross return		719	1,299	2,018	853	13,404	14,257
Management fee		(58)	(522)	(580)	(48)	(429)	(477)
Peformance fee		-	(348)	(348)	-	(95)	(95)
Other administrative expenses		(357)	-	(357)	(286)	-	(286)
Net return on ordinary activities
before finance costs and taxation		304	429	733	519	12,880	13,399
Finance costs		(10)	(92)	(102)	(9)	(83)	(92)
Net return on ordinary activities
before taxation		294	337	631	510	12,797	13,307
Taxation		(107)	-	(107)	(127)	-	(127)
Net return on ordinary activities
after taxation		187	337	524	383	12,797	13,180
Return per share (note 2)		3.57p	6.42p	9.99p	7.09p	236.89p	243.98p

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 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
Repurchase and cancellation of the Company's own shares	(25)	25	(844)	-	(844)
Net return on ordinary activities	-	-	337	187	524
At 31 December 2011	1,291	1,851	53,648	(4,160)	52,630

Balance Sheet

at 31st December 2011

	2011	2010
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	55,241	53,444
Investments in liquidity funds held at fair value through profit or loss	2,700	2,911
	57,941	56,355
Current assets
Debtors	126	181
Cash and short term deposits	1,655	1,225
	1,781	1,406
Creditors: amounts falling due within one year	(6,828)	(4,681)
Net current liabilities	(5,047)	(3,275)
Total assets less current liabilities	52,894	53,080
Provisions for liabilities and charges	(264)	(130)
Net assets	52,630	52,950
Capital and reserves
Called up share capital	1,291	1,316
Capital redemption reserve	1,851	1,826
Capital reserves	53,648	54,155
Revenue reserve	(4,160)	(4,347)
Total equity shareholders' funds	52,630	52,950
Net asset value per share  (note 3)	1,019.2p	1,005.8p

The Company's registration number is 552775.

Cash Flow Statement

for the year ended 31st December 2011

		2011	2010
		£'000	£'000
Net cash outflow from operating activities		(497)	(117)
Returns on investments and servicing of finance
Interest paid		(94)	(82)
Net cash outflow from returns on investments and servicing of finance		(94)	(82)
Capital expenditure and financial investment
Purchases of investments		(33,895)	(43,042)
Sales of investments		33,994	41,692
Other capital charges - handling fees		(3)	(5)
Net cash inflow/(outflow) from capital expenditure and
financial investment		96	(1,355)
Net cash outflow before financing		(495)	(1,554)
Financing
Draw down of short term bank loan		1,835	4,779
Repurchase and cancellation of the Company's own shares		(844)	(2,031)
Net cash inflow from financing activity		991	2,748
Increase in cash		496	1,194

Notes to the Accounts

for the year ended 31st December 2011

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 accounts have been prepared on a going concern.

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

2.         Return per share

            The revenue return per share is based on the earnings attributable to the ordinary shares of £187,000 (2010: £383,000) and on the weighted average number of shares in issue during the year of 5,245,193 (2010: 5,402,148).

            The capital return per share is based on the capital return attributable to the ordinary shares of £337,000 (2010: £12,797,000) and on the weighted average number of shares in issue during the year of 5,245,193 (2010: 5,402,148).

            The total return per share is based on the total return attributable to the ordinary shares of £524,000 (2010: £13,180,000) and on the weighted average number of shares in issue during the year of 5,245,193 (2010: 5,402,148).

3.         Net asset value per share

	Net asset value per share		Net assets attributable
	2011	2010	2011	2010
	pence	pence	£'000	£'000
Ordinary shares	1,019.2	1,005.8	52,630	52,950

            The net asset value per share is based on the net assets attributable to the ordinary shareholders of £52,630,000 (2010: £52,950,000) and on the 5,163,623 (2010: 5,264,610) shares in issue at the year end.

4.         Status of announcement

2010 Financial Information

The figures and financial information for 2010 are extracted from the published Annual Report and Accounts for the year ended 31st December 2010 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.

2011 Financial Information

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

22nd March 2012

For further information:

Jonathan Latter,

JPMorgan Asset Management (UK) Limited                                       020 7742 4000

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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