Half-year Report

RNS Number : 5636H

JPMorgan US Smaller Co. IT

18 August 2016

 

STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN US SMALLER COMPANIES INVESTMENT TRUST PLC

UNAUDITED HALF YEAR RESULTS

FOR THE SIX MONTHS ENDED 30TH JUNE 2016

Chairman's Statement

Performance

Whilst I am delighted to report an increase of 20.5% in the Company's net asset value (NAV) during the six months' period to 30th June 2016, especially as it represents substantial outperformance of our benchmark index, the Russell 2000 index in sterling terms, which rose 12.6%, it is a source of frustration that this strong return has not been reflected in our share price which increased less than 2.0%. The discount as at 30th June 2016 was distorted further by the sharp fall in sterling against the US dollar following the Brexit vote on 23rd June, which had a positive impact on our NAV as none of the US dollar assets are hedged.

Discount and Premium

With the Company's share price increasing by only 1.4% during the first six months of 2016, compared to the 20.5% increase in NAV, the shares' discount (the share price in relation to the NAV per share) has widened substantially. We have experienced fairly steady selling of our shares and minimal buying, despite the strong outperformance and positive returns achieved by the JPMAM investment team. Investors have been cautious through much of 2016, firstly about the impact of slowing growth in China and then about the prospect of the Brexit vote. These worries were further compounded by investor concerns around growth and the politics in the US, as well as the fact US smaller companies are seen as riskier assets. Given the widening discount over the past six months, it might not appear that the Board is committed to keeping a stable discount. We have however been reluctant to buy in shares aggressively at a time when our Investment Managers have made such effective use of the Company's capital. Buybacks may exacerbate the illiquidity in our shares which is often quoted as a concern for prospective and existing shareholders. As we have written in the past, aligning our share price movement with the change in the NAV is always going to be a challenge but this particular period has felt one of the most challenging. The relationship between our share price and the NAV is monitored on a daily basis by the Board and our professional advisers, and to help with the management of the discount, we have in place the authority to repurchase up to 14.99% of the Company's issued share capital. This authority has been used during the first six months of 2016 and a total of 1,425,000 shares have been purchased into Treasury.

Board Succession Planning

At the recent Annual General Meeting the Board set out its succession plans and as part of that undertaking we will be starting the process of recruiting a new director as we plan for the next retirement.

Outlook

At the time of writing this statement investor sentiment remains cautious, especially for riskier asset classes such as US smaller companies as they do not offer the compensation of attractive dividend yields. We are also seeing a contentious presidential election as well as entering the holiday period which in the past has produced volatile markets as bad news (or good) can trigger sharp moves on light volumes. There is clearly much uncertainty in markets and reasons to be cautious over the short term, however these set-backs often produce good investment opportunities for long term patient investors. We would also expect the investment team's focus on balance sheet strength and intrinsic value to provide some protection to the Company's portfolio. Over the longer term the US economy has demonstrated its ability to create exciting growth prospects in the small cap sector and our Company should continue to take advantage of these opportunities.

Davina Walter

Chairman                                                                                                                                        18th August 2016

Investment Managers' Report

Performance

The Company's net asset value grew by 20.5% over the first six months of 2016. The return was ahead of the benchmark, the Russell 2000 Index in sterling terms, which rose by 12.6%. The majority of the added value was driven by our stock picking which is highlighted in more detail in the following paragraphs. The contribution of the portfolio's gearing was minimal during this period.

In terms of key drivers of relative performance, the portfolio benefited from strong stock selection within healthcare and producer durables. Within healthcare, IDEXX Laboratories was the top contributor in the sector. The company, which provides diagnostic testing products and reference lab services to veterinary practices worldwide, reported sales, operating margin and earnings per share above expectations driven by better than expected organic growth. We continue to hold the name in our portfolio as we believe the company is well positioned to gain further share in the attractive companion animal market.

In the producer durables sector, our position in Toro contributed to returns. Shares of Toro surged during the first quarter as the company reported on positive earnings and gross margins. The management's tone on guidance was upbeat across its various segments (landscape contractor, golf and snow and ice control equipment). Strong pre-season bookings in the landscape contractor space was a key upside surprise in the first quarter which indicated that the customer segment felt optimistic as well, and its rental segment continued to be strong.

In contrast, underweights in the utilities sector as well as weak stock selection in the financial services sector partially offset the positive contribution to returns. In the financial services sector, our modest position in Greenhill & Co, an investment bank, weighed on returns. While the company reported better than expected earnings, sentiment towards independent boutique advisors has soured given macro headwinds, including higher stock market volatility, tighter credit markets and political uncertainty from the US election and Brexit, which will likely pressure merger and acquisition transactions in the intermediate term.

We did take advantage of the opportunities created by the market volatility during the review period to add a few new names to the portfolio at attractive valuations. New names include Proto Labs which is a software-enabled manufacturer of custom metal, plastic and rubber parts used in the design of new products. The company has a strong balance sheet and an enviable return on invested capital, as well as a strong competitive position. We expect it to leverage its strong competitive position into many years of strong profitable growth and believe the shares trade at a discount to their intrinsic value.

In terms of our overall positioning, we remain focused on finding companies with durable franchises, good management teams and stable earnings that trade at a discount to intrinsic value. Not much has changed in terms of sector exposure over this period and the consumer discretionary, producer durables and materials & processing are the largest overweight sectors. In contrast, our largest underweights are focused in technology, financial services and health care.

In terms of the Company's level of gearing, which was 8.4% as of 30th June 2016, it has decreased slightly from six months ago, when it was 9.8%. As always, we will look to add or trim our gearing opportunistically.

Market Review

US equity markets thus far in 2016 have experienced modest gains with the S&P 500 Index gaining 3.8% and the Russell 2000 returning 2.2% in US dollar terms. However, behind these numbers, investors have suffered a wild ride, with the market dropping 11% early in the year before a powerful rally reversed the losses, only to end the reporting period on another volatile note.

The opening weeks of 2016 were dominated by investors concerned about the outlook for economic growth worldwide, particularly China and the emerging markets. Commodity prices plunged again and stock markets around the world followed. Markets appeared to be discounting an imminent recession in the US too, with credit spreads widening alarmingly. However, economic data from the US suggested that growth was actually continuing at a modest but steady pace, while the Federal Reserve (the 'Fed') repeatedly provided a soothing commentary on the future direction of monetary policy. Selling pressures from short term investors abated, shorts were covered, stock prices recovered and even commodity prices showed signs of life.

While geopolitical events dominated the headlines, June economic releases were generally favourable. The third estimate of first quarter 2016 GDP showed that the real economy grew at a seasonally adjusted annual rate of 1.1% in the first quarter, higher than the second estimate of 0.8%. The employment situation remains healthy along with rising wages, which bode well for US economic growth, of which approximately 70% of US GDP is driven by consumption.

Recovering commodity prices, a stabilising US dollar, signs of continued US economic growth and the realisation that the "Brexit" is a political problem rather than a financial crisis contributed to equity markets recovering the majority of losses during the first half of the year.

While the market's resilience is impressive, the tone of the market remains defensive. As bond yields declined further and investors searched for safe havens, the utilities and consumer staples sectors were the major beneficiaries year-to-date within the Russell 2000, followed by the materials & processing sector, which advanced from the recovery in commodity prices. The financial services sector in the Russell 2000 resisted the negative impact of the Brexit results much better than their larger peers as their businesses tend to be more domestic oriented with limited exposure to both the UK and Europe.

Market Outlook

As we noted in previous commentaries, we continue to remain constructive on the outlook for US equities. Despite sluggish earnings growth, increasingly gloomy forecasts for global economic growth and a noticeable apathy towards equities on the part of so many investors, equity market indices such as the S&P 500 sit just a few percentage points from all-time highs. Equity valuations do look rather full in conventional price/earnings terms, but the risk premium on offer versus bonds still looks very generous. After all, 65% of the stocks in the S&P 500 now yield more than a ten-year Treasury bond. Based on our company level research analysis, we think earnings growth will improve somewhat into 2017, as the drags from the US dollar strength and energy weakness fade from here and the domestic economy continues to expand, leading to modest positive returns.

Within the market, the contrast between the haves and have-nots is increasingly stark. For almost two years now, investors have focused on stocks seen as the least risky; dividend payers in relatively stable businesses. Unmistakable evidence of risk aversion is everywhere. Companies with the strongest balance sheets sell at a 20% premium to the market and the weakest more than a 20% discount.

Recent economic reports continue to indicate ongoing growth in the US economy, marginally increasing the probability that the Fed will raise rates in September. Further out, it is too early to predict the impact of the forthcoming US Presidential elections on markets and the wider economy but it is reasonable to expect some volatility in markets ahead of 9th November, which may delay the Fed's decision.

Don San Jose

Dan Percella

Investment Managers                                                                                                                     18th August 2016

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its half year report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company remain unchanged and fall into the following broad categories: investment and strategy; loss of investment team or investment manager; discount; market; political and economic; accounting, legal and regulatory; corporate governance and shareholder relations; operational; cybercrime; foreign currency; going concern; and financial.. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st December 2015.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operation existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i) the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 30th June 2016, as required by the UK Listing Authority Disclosure and Transparency Rules 4.2.4R; and

(ii)     the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•   select suitable accounting policies and then apply them consistently;

•   make judgements and accounting estimates that are reasonable and prudent;

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

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

and the Directors confirm that they have done so.

For and on behalf of the Board

Davina Walter

Chairman                                                                                                                                        18th August 2016

Statement of Comprehensive Income

for the six months ended 30th June 2016

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th June 2016			30th June 2015			31st December 2015
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at
fair value through profit or loss	-	21,509	21,509	-	4,615	4,615	-	5,007	5,007
Net foreign currency (losses)/gains	-	(946)	(946)	-	158	158	-	(688)	(688)
Income from investments	1,037	-	1,037	893	-	893	1,718	-	1,718
Interest receivable	15	-	15	4	-	4	10	-	10
Gross return	1,052	20,563	21,615	897	4,773	5,670	1,728	4,319	6,047
Management fee	(60)	(540)	(600)	(67)	(607)	(674)	(135)	(1,216)	(1,351)
Other administrative expenses	(217)	-	(217)	(206)	-	(206)	(407)	-	(407)
Net return on ordinary activities
before finance costs
and taxation	775	20,023	20,798	624	4,166	4,790	1,186	3,103	4,289
Finance costs	(9)	(77)	(86)	(5)	(43)	(48)	(11)	(99)	(110)
Net return on ordinary activities
before taxation	766	19,946	20,712	619	4,123	4,742	1,175	3,004	4,179
Taxation	(148)	-	(148)	(122)	-	(122)	(246)	-	(246)
Net return on ordinary activities
after taxation	618	19,946	20,564	497	4,123	4,620	929	3,004	3,933
Return per share (note 3)	1.11p	35.82p	36.93p	0.89p	7.35p	8.24p	1.66p	5.35p	7.01p

No interim dividend has been declared in respect of the six months ended 30th June 2016 (2015: nil).

All revenue and capital items in the above statement derive from continuing operations.

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 return per share represents the profit per share for the period/year and also the total comprehensive income per share.

Statement of Changes in Equity

for the six months ended 30th June 2016

	Called up		Capital
Six months ended	share	Share	redemption	Capital	Revenue
30th June 2016	capital	premium	reserve	reserves1	reserve1	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000
At 31st December 2015	1,424	8,046	1,851	93,889	(1,405)	103,805
Repurchase of shares into Treasury	-	-	-	(2,475)	-	(2,475)
Net return on ordinary activities	-	-	-	19,946	618	20,564
At 30th June 2016	1,424	8,046	1,851	111,360	(787)	121,894
Six months ended
30th June 2015
(Unaudited)
At 31st December 2014	1,424	7,936	1,851	90,471	(2,334)	99,348
Shares issued from Treasury	-	60	-	196	-	256
Net return on ordinary activities	-	-	-	4,123	497	4,620
At 30th June 2015	1,424	7,996	1,851	94,790	(1,837)	104,224
Year ended
31st December 2015
(Audited)
At 31st December 2014	1,424	7,936	1,851	90,471	(2,334)	99,348
Shares issued from Treasury	-	110	-	414	-	524
Net return on ordinary activities	-	-	-	3,004	929	3,933
At 31st December 2015	1,424	8,046	1,851	93,889	(1,405)	103,805

¹ These reserves form the distributable reserves of the Company and may be used to fund distributions of profits to investors via dividend payments.

Statement of Financial Position

at 30th June 2016

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2016	30th June 2015	31st December 2015
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through
profit or loss	132,089	114,057	113,980
Current assets
Debtors	233	352	180
Cash and cash equivalents1	4,788	2,911	3,298
	5,021	3,263	3,478
Current liabilities
Creditors: amounts falling due within one year2	(15,211)	(13,096)	(13,653)
Derivative financial liabilities	(5)	-	-
Net current liabilities	(10,195)	(9,833)	(10,175)
Total assets less current liabilities	121,894	104,224	103,805
Net assets	121,894	104,224	103,805
Capital and reserves
Called up share capital	1,424	1,424	1,424
Share premium	8,046	7,996	8,046
Capital redemption reserve	1,851	1,851	1,851
Capital reserves	111,360	94,790	93,889
Revenue reserve	(787)	(1,837)	(1,405)
Shareholders' funds	121,894	104,224	103,805
Net asset value per share (note 4)	222.0p	185.5p	184.3p

¹ This line item combines the two lines of 'Investments in liquidity funds held at fair value through profit or loss' and 'Cash and short term deposits' in the financial statements for the year/period ended 31st December 2015 and 30th June 2015 into one.

² At 30th June 2016, the Company had drawn down US$20.0 million (GBP £15.0 million equivalent) on its loan facility with Scotiabank.

Statement of Cash Flows

for the six months ended 30th June 2016

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2016	30th June 2015	31st December 2015
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest (note 5)	(400)	(904)	(1,506)
Dividends received	897	823	1,494
Interest received	15	4	10
Overseas tax recovered	8	16	16
Interest paid	(66)	(51)	(110)
Net cash inflow/(outflow) from operating activities	454	(112)	(96)
Purchases of investments	(11,742)	(13,225)	(27,297)
Sales of investments	15,261	9,575	23,705
Settlement of forward currency contracts	(8)	-	2
Net cash inflow/(outflow) from investing activities	3,511	(3,650)	(3,590)
Repurchase of shares into Treasury	(2,475)	-	-
Shares issued from Treasury	-	256	524
Drawdown of short term bank loans	-	3,289	3,289
Net cash (outflow)/inflow from financing activities	(2,475)	3,545	3,813
Increase/(decrease) in cash and cash equivalents	1,490	(217)	127
Cash and cash equivalents at start of period	3,298	3,171	3,171
Exchange movements	-	(43)	-
Cash and cash equivalents at end of period	4,788	2,911	3,298
Increase/(decrease) in cash and cash equivalents	1,490	(217)	127
Cash and cash equivalents consist of:
Cash and short term deposits	3	1	5
Cash held in JPMorgan US Dollar Liquidity Fund	4,785	2,910	3,293
Total	4,788	2,911	3,298

Notes to the Financial Statements

for the six months ended 30th June 2016

1.    Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st December 2015 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.   Accounting policies

The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in November 2014.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 30th June 2016.

In March 2016, the FRC published amendments to FRS 102 concerning fair value hierarchy disclosures. These amendments are effective for accounting periods beginning on or after 1st January 2017. The Company has elected to adopt these amendments early in these interim financial statements. Full disclosure is given in note 6.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st December 2015.

3.   Return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2016	30th June 2015	31st December 2015
	£'000	£'000	£'000
Return per share is based on the following:
Revenue return	618	497	929
Capital return	19,946	4,123	3,004
Total return	20,564	4,620	3,933
Weighted average number of shares in issue	55,679,115	56,128,939	56,159,613
Revenue return per share	1.11p	0.89p	1.66p
Capital return per share	35.82p	7.35p	5.35p
Total return per share	36.93p	8.24p	7.01p

4.   Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	30th June 2016	30th June 2015	31st December 2015
Net assets (£'000)	121,894	104,224	103,805
Number of shares in issue	54,900,928	56,175,928	56,325,928
Net asset value per share	222.0p	185.5p	184.3p

5.   Reconciliation of net return on ordinary activities before finance costs and taxation to net cash outflow from operations before dividends and interest

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th June 2016	30th June 2015	31st December 2015
	£'000	£'000	£'000
Net return on ordinary activities before finance
costs and taxation	20,798	4,790	4,289
Less: capital return on ordinary activities before
finance costs and taxation	(20,023)	(4,166)	(3,103)
Decrease in accrued income and other debtors	-	71	42
(Decrease)/increase in accrued expenses	(25)	(27)	3
Management fee charged to capital	(540)	(607)	(1,216)
Overseas withholding tax	(156)	(138)	(262)
Dividends received	(897)	(823)	(1,494)
Interest received	(15)	(4)	(10)
Realised loss on foreign currency transactions	(16)	(12)	(30)
Realised gain on liquidity fund	474	12	275
Net cash outflow from operations before dividends
and interest	(400)	(904)	(1,506)

6.   Fair valuation of investments

The fair value hierarchy analysis for financial instruments held at fair value at the period end is as follows:

	(Unaudited)		(Unaudited)		(Audited)
	Six months ended		Six months ended		Year ended
	30th June 2016		30th June 2015		31st December 2015
	Assets	Liabilities	Assets	Liabilities	Assets	Liabilities
	£'000	£'000	£'000	£'000	£'000	£'000
Level 1: Quoted prices for identical instruments in
active markets	132,089	-	114,057	-	113,980	-
Level 2: Prices of recent transactions for identical instruments1	-	(5)	-	-	-	-
Total value of financial instruments	132,089	(5)	114,057	-	113,980	-

¹Forward currency contracts.

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited, Secretary

020 7742 4000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmussmallercompanies.co.uk

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 FUNDS LIMITED

ENDS

A copy of the Half Year Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM

The Half Year Report will also shortly be 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.

 

END

 

 

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